Did Truss Get It Right On Tax…?

…sort of!

Cutting through all of the political hyperbole and potentially poor timing of the previously announced tax cuts and freezes proposed by ‘Liz and Kwasi’ as I’ll now refer to them, I think the real underlying question which needs asking is “What sort of country do we want to live in? One controlled by a large and well-funded state, or a smaller state with more reliance on the private sector?”

Another way of looking at this is whether, through lower taxation, an extra, say, 10p in the £1 in our pockets could be better spent. Assuming the extra cash finds its way back into the economy through being spent in the private sector by the taxpayer, could this be better than being handed over to the Treasury to fund the state? We place huge trust and reliance on our State to invest our hard-earned taxes wisely, but is the current regime really driving productivity and raising our overall standard of living?

Taking one of the major changes proposed, the removal of the 45% tax rate for those earning over £150k, I would certainly question, again, what the intended outcome of that would be? It could be argued that such earners are already wealthy, so would the removal of an additional 5% income tax actually mean this relatively small group of earners would use that extra disposable income and spend more, thereby stimulating the economy? On the assumption that such earners usually already have the big house, nice cars and holidays, would this extra money instead end up in a pension or savings? Moving further down the earnings bracket, I would have thought the removal of the c62% tax rate on earnings between £100k and £125k owing to the withdrawal of the personal allowance might have had more impact given the increasing number of earners impacted by this policy.

Put another way, tax cuts need to be targeted at those who will spend the saving and hence stimulate growth if the additional ‘retained pay’ were to circulate in the economy.

I’m sure there are those out there who will disagree!

Turning back to the bigger question of a large or small state, through lower taxation, we are effectively putting more faith in the private sector to create more jobs, increase productivity and ultimately raise our overall standard of living.

On a similar note, would Shell (which was sold by the UK Government in 1987 for £7.2bn) have generated the amount of employment, paid billions of taxes to the Exchequer and recently made £23bn in profits, if it were still in public ownership?

Another way of looking at this is asking the question “Would lower tax rates ultimately result in greater tax revenue for the state?”. An economist called Arthur Laffer certainly thought so.  The economic effect is longer-term and has a multiplier effect.  He argued that as a tax cut increases income for taxpayers, they will spend it. The increase in demand creates more business activity, spurring an increase in production and employment. Simple!

I wrote a while ago about the need for longer-term tax policies and a move away from the sensationalist headlines that seem to pervade politics these days. Putting myself in the shoes of a business owner or someone looking to invest in ‘UK PLC’, I genuinely believe that the certainty of longer-term tax policy, twinned with lower taxes would drive investment in this country and hence stimulate the sort of industrial renaissance that the Brexiteers made us believe would happen once we’d left the EU. We’re a long way from that at the moment.

People don’t mind paying higher taxes if our living standards are better, but if anything, they seem to be getting worse and we are one of the highest taxed countries in the world.

With £300bn spent on supporting incomes throughout COVID, the disruption COVID caused to global supply chains, a war in Ukraine stimulating a massive spike in wholesale energy prices and rampant global inflation, Liz and Kwasi frankly had no chance. That said, I wouldn’t be surprised to see them back.

Written By Matt Hodgson, Partner at Claritas Tax.