Making the case for higher investment rather than higher taxes

Government has two options in increasing tax revenues. It can hike up tax rates or it can avoid this unpopular and unsustainable option by ensuring there are a higher number of taxpayers. The government’s current policy of creating more low-paid, non-taxable employees is causing tax revenues to fall. That’s why we need far more taxpayers in skilled, high-paid employment. By increasing the number of people in well-paid employment, government will automatically increase tax revenues.

The coalition government has elevated debate on the budget deficit to hallowed status. When George Osborne delivered the annual Mais lecture as shadow chancellor in 2010, he declared his mission to be the “internal and external rebalancing of our economy”, moving us away from an “economic model … based on unsustainable private and public debt. This is no longer discussed. Full, well-paid and productive employment is no longer a policy goal.

Instead political priorities include lower wages, increased part-time and insecure work, shrinking the welfare state and raising taxes – supposedly to reduce the deficit. The middle classes have had to share the pain. Since 2010, millions more pay tax at the higher 40 per cent rate than would have done so under Labour’s 2010 manifesto plans.

The only way to close the deficit gap, it is argued, is to drastically cut government spending and gently increase taxes. Labour’s shadow chancellor colludes in this narrative, upholding cuts to the government’s budget deficit as part of Labour’s own plans, on grounds that the public would not find an alternative approach ‘credible’.

But is that true? Despite savage cuts and fiscal pain, public debt is rising. And the public is aware of this.

Income tax makes up 40 per cent of the government’s total tax take, but receipts from low-paid, insecure and part-time employees are falling. As a result, the budget deficit will be much higher this year than the chancellor’s target, according to the Office for Budget Responsibility.

Yet how are we to raise tax revenues? Britain, after all, is a nation burdened by high levels of private individual, household, corporate and banking debt. At a time of rising economic insecurity, these have not been written off. Corporates, in particular, lack confidence and are hoarding rather than investing cash.

We know from experience and history, in both Europe and the United States, that there are effective policies for reducing the deficit. These include: full, secure employment; rising skill levels which lead to rising incomes and increased productivity; rising profits; and buoyant tax revenues. And despite the existing deficit, these policies can be kickstarted by public investment and spending financed by borrowed or electronic money (also known as quantitative easing (QE) or open market operations by central banks). Such increases in private incomes can only be generated, as John Maynard Keynes once argued, by “public authority … called in aid to create additional current incomes through the expenditure of borrowed or printed money.” As he wrote to President Roosevelt at the height of the Depression in 1933: “The prime mover in the first stage of the technique of recovery [requires] overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and not by taxing present incomes. Nothing else counts in comparison with this” His advice remains relevant today in the context of a society which faces threats such as climate change, necessitating colossal investment in the transformation of the economy away from fossil fuels to clean energy. To tackle this threat, graver than that faced by Roosevelt in 1933, we must overthrow the crude orthodoxy that equates balancing the government’s budget to a household budget and endorses QE for private bank bailouts but not public sector investment. We must discredit economic dogma that prohibits government from borrowing or deploying QE for long-term public investment to stimulate private sector investment in, for example, clean energy. Such action will lead to full employment, high skilled jobs, rising incomes and, most importantly, buoyant tax revenues, with which to repay QE or public debt, and challenge the current status quo.

Ann Pettifor is honorary research fellow at City University’s City Political Economy Research Centre

This article originally appeared in the Winter 2014 edition of the Fabian Review. For more information on the Fabian Society’s tax reform programme, visit http://www.fabians.org.uk/the-future-of-tax