Tax is always taxing

There has been a minor explosion of outrage in the knee-jerk political twitter/Facebooksphere telling us that David Cameron's advisor has suggested getting rid of income tax and putting VAT up to 33%. Most of this response seems to be to red top tabloid articles, which we should know better than to rely on, rather than the original blog post from Paul Kirby, so it's worth reading that (rather long and tedious though it is) first.

One thing that is worth emphasising, as the headlines got it wrong, is that Kirby is not 'Cameron's advisor', he is Cameron's former advisor - and to be honest, if he still was an advisor I imagine he'd be given the push for this, as it's political suicide and I am sure Cameron wouldn't touch it with the proverbial bargepole.

Let's see what Kirby's arguments are first. Yes, I know we can immediately see what's wrong with the idea - but the thing I've learned with looking at green issues is that you mustn't have a knee-jerk reaction to keywords, you have to check the substance first, and the same goes for all politics.

Kirby suggests that if we kept all our salaries then we would be in control, deciding what to spend, what to do with it. This is true as far as it goes. Getting rid of income tax with no other change in taxation would be a good thing for us all, if there was some magic way to fund necessary spending without it coming out of our pockets. Cloud cuckoo stuff, yes, but it's an acceptable point. After all, one great thing the Liberal Democrats have done in the coalition is to push through the increase in the point at which income tax cuts in to £10,000. (I know it's fashionable to criticise the LibDems for not doing everything in their election pledges, but that is ridiculously naive. You can't do everything you want in a coalition, and I think the LibDems have done reasonably well under the circumstances.) Not paying income tax is actually a good thing, but you have to go about it the right way. In fact I think we should go a step further and introduce negative income tax for the first chunk of earnings - so the government pays you for every pound you earn up to a certain point - but that's a different debate.

Kirby then suggest replacing the lost revenue by removing all VAT exemptions and putting the VAT rate up to 33%. I have to take his figures as correct that this would balance out the loss from income tax. But does it make sense?

He says that it would encourage people to save more, and would give them more choice over what they did with their money. He does also acknowledge that it would hit those on lower incomes harder (something the second hand reports tend not to carry), and says that to compensate we would have to increase benefits.

But look what the implications are. By removing exemptions there would be just as heavy taxation on essentials as on non-essentials. You can argue that the current exemption system is far too complicated - it is - and has all those silly loopholes - like the 'is a jaffa cake a cake or a biscuit?' argument - it does. But there are very good reasons for having exemptions and Kirby makes no attempt to counter those arguments. A more sensible version of his scheme would keep the exemptions but push up the VAT on luxuries even more.

What he doesn't do, though, is consider the impact on UK business. There's a good reason that businesses are uniformly in favour of reducing (or even getting rid of) VAT, rather than income tax. VAT turns businesses into tax collectors, adding significantly to their administration costs, and it makes their goods less attractive. Ramp up VAT significantly and, yes, people will save more. But they will also stop buying things. And lots of businesses will go bust. Meaning more unemployment. And more benefit payments. Doesn't seem awfully sensible to me.

Also, of course, he fails to address the elephant in the room, the point we all saw at the start. The lower your income, the harder this will hit you. If you earn £10,000 a year you get no positives but your outgoings shoot up by a vast percentage. It simply doesn't work to say that you can give people on low earnings more benefits to compensate, both because of the way Kirby's brand of politics stigmatises benefits (and would immediately be crying for them to be taken away again) and also because benefits are a poor answer that totally corrupt Kirby's argument that people should be able to do what they want with the money they earn, because benefits aren't earned. We should be trying to minimise the need for benefits, not putting in a system that hugely increases dependence on them. It is absolutely bonkers.

However, I still think we should actually thank Paul Kirby for making us think (those of us who are thinking, rather than knee-jerking about this), because there is no doubt that the current system isn't good enough. He's right - we need more opportunity to decide on what we do with our money. Why not, for instance, cut all income tax for the first £20,000 and rebalance the books further up the earnings scale (or even better by getting a decent cut of tax from all company income)? That would mean we all had a good chunk of money to decide exactly how we spent. There's no doubt the tax system can be improved... if we could ever get a government that had the guts to do it.