Tax rises – the elephant in the room

Wednesday, October 21, 2009 | Posted by: Richard Jameson
Categories: Protecting your wealth | Tags: recession, economy, capital gains tax, CGT, income tax, Richard Jameson, government, VAT, Gordon Brown, David Cameron, tax manifesto, National Insurance, Nick Clegg, general election

Approximately six weeks ago, plenty of commentators were suggesting the economic outlook had improved and the economy had turned a corner, primarily on the back of strong performance in the stock market. But an elephant has since marched the room – and, if you’ll forgive the pun, it’s a potential jumbo…

The ‘state of the nation’ debate has recently moved on from whether the recession is ending to the matter of how the country is going to pay for the fiscal stimulus in order to balance the public finances.

Politicians avoiding tax increase talk
There’s a £175bn hole to fill, so it will be an urgent priority for the next electoral term.

Before the political party conference season, few politicians uttered the words ‘spending’ and ‘cuts’ in the same sentence. Now, cuts are all over the headlines with parties of all persuasions grabbing a slice of the action. Here’s Gordon Brown, Nick Clegg and David Cameron all chopping for Britain.

Against this background of political noise, it should not be forgotten that there are two ways to balance the books: spending cuts and tax rises. Politicians shy away from discussing tax rises with the justification that they will harm a nascent recovery.

But you cannot get away from the fact that the political parties have not spelled out that taxation must rise and that generally all of us will foot the bill.

Either tax rates will rise or tax measures will be broadened so more of us are caught by them – or a mixture of both. Who wants to be most forthright about this, when there is only bad news to tell?

Where tax rises are likely
Like it or not, the Government’s attempts to plug the gap with a 50% income tax rate on the highest earners will not have a huge impact on making up the shortfall.

What is much more likely to have an impact, and what is far less palatable, is that the basic rate of tax is likely to rise, to reverse the reductions over the past 10 years. Such an increase goes against the grain, though.

National Insurance increases have already been pre-announced but do not rule out further hikes. Lowering income tax rates and increasing National Insurance is akin to giving with one hand and taking with the other. It is a regressive step and one most political parties would want to be seen to reject.

The Conservatives have denied they are looking at a VAT hike to 20%, but VAT is one such tax that is deemed to be progressive.

There is a wide discrepancy between current income tax and capital gains tax, and rumours abound that the Chancellor, Alistair Darling, will replace the rate of 18% with a higher rate of tax, maybe up to 25%.

Election honesty will help businesses plan
Are we likely to understand each party’s plans fully in time for next year’s General Election? The elephant is in the room. We know it’s there and, given what is at stake, it cannot be ignored.

A sensible and coherent explanation as to how long it will take to repay the bill is required, along with which groups will be paying more, so that businesses and individuals can plan for the short and the medium terms with greater confidence.

Image: © Rennett Stowe

Read Grant Thornton’s Tax Manifesto - our proposals for pragmatic tax changes following the 2010 general election. The Tax Manifesto combines economic analysis undertaken in conjunction with Lombard Street Research with the solicited views from a business community of 500 UK Finance Directors.

Read Richard Jameson’sprevious posts on tax planning and wealth management.