Recently I had the opportunity to catch up with a mix of clients and colleagues to talk all things tax. The news on the international tax front was somewhat downbeat.
Everywhere you look, especially close to home but increasingly across the Atlantic and in Asia too, governments are searching for more and more tax from fewer and fewer taxpayers. A couple of lucky countries with vast inward investment flows and small populations have no such trouble, yet. But they are the exceptions.
Our macroeconomics team published a report this month on long term fiscal challenges in Europe and it makes for rather grim reading. Administrations across the continent face a choice between higher taxes and lower spending, or a bit of both. And there is no easy way out.
Three things have conspired to bring us to this point. Governments have repeatedly bailed out their economies through the global financial and Eurozone crises, the Covid-19 pandemic, and most recently the fallout from the Russian invasion of Ukraine as energy prices rocketed. The interest rates countries are paying on debt have headed upwards too, driven on by those inflationary pressures; and growth is ever harder to come by as we enter an era of demographic decline: we’re all getting older and more expensive to look after, and there aren’t enough youngsters or immigrants entering the working population to take up the slack.
Remember that famous and rather overquoted “I’m afraid there is no money” letter in 2010? Well there’s even less now. But that’s more than there might be in the future.
What will this mean for your tax bill? It’s not coming down anytime soon. But it’s hard to know where it can really go up either. In the report we explored where taxes might possibly be raised but in many cases they are close to maxed out.
Across social-market Europe payroll taxes and social security contributions accounted for 57 per cent of total revenue in 2021, and are close to as high as they can get before bad things start happening. Labour is stickier than capital but it’s more mobile now than in the past, and excessive taxes on income have an impact on consumer spending.
But nor is there much flexibility in corporate taxation even with a global minimum tax: it simply doesn’t raise enough to fill the gap. The same is true of windfall taxes, special industry levies and other short-term surcharges.
But cut spending instead and a crumbling infrastructure crumbles further. We’ve seen in our school estate in recent weeks what happens when you delay capital spending on national assets.
The Biden administration recognised this with its vastly ambitious Inflation Reduction Act. But most countries without the reserve currency and market depth of the USA have less room for manoeuvre.
As we head towards a generation election, both political parties are starting to think seriously about this bind. More imminently, Jeremy Hunt will have address this dilemma in the November autumn statement. But the party who can command a greater authority on the economy will ultimately find themselves in pole position as people cast their ballot.
There is a huge amount government could do to make our tax system fairer, more straightforward to administer and less distortive, but raising enough revenue to fund the investment the country desperately needs without adversely affecting short term economic growth is the toughest challenge of all.