Tuesday, November 10, 2015

George Osborne's Fundamental Mistake

It is, or ought to be, true that a citizen who is full time employment should be paid enough to live on. 

So, unlike many on the so-called progressive wing of British politics, I am not in principle a supporter of tax credits. To me. the fiendishly complicated system devised by Gordon Brown was not a "leg up to the poor" but a subsidy to corporations who would not or could not pay a fair and sustaining wage. So when the British Finance Minister announced in his Budget that he intended to phase out tax credits and institute a much higher minimum wage- the so called "living wage", I did not leap to the defence of the expensive bureaucracy that the tax credit system has created. 

However, George Osborne enjoys the game of politics far too much to want to play fair. 

His agenda of the abolition of tax credits has now been subsumed into a wider ideological battle. In principle Osborne believes in a small state. He has a stated preference for simpler and lower taxes and less government activity overall, for what it is worth, that is a valid intellectual position. However in his policies Osborne actually going against both of his publicly stated preferences. First of all, despite the mess of the tax credit system and the wider welfare system, it is not the most urgent problem in UK government finances- the largest item in UK public spending remains the 20% spent on pensions, which contains egregious and unsustainable waste and not the 15% spent on welfare for the poorest. 

The fact is that "austerity" is hitting the wrong target: Mr. Osborne is working for the interests of the Tory-voting better off, and his clumsy handling of taper relief on tax credits is going to cause real problems. The fact is that Mr. Osborne says he wants to reduce the size of the state, but is partisan and unfair about what parts he would like to reduce, and his political games will end up costing the government more in benefits than it will gain from winding up tax credits. This is rightly being attacked from across the political spectrum- including Conservatives. Even if you do not believe in the tax credit system, and I for one do not, Osborne's tactics seem ultimately inept and self defeating.

Yet there is still worse. Mr. Osborne, as we note, has said he is in favour of a simpler tax code. However this budget has actually added still more pages onto the morbidly obese UK tax code. The nearly 17,000 pages of the UK tax code make it by far the longest tax code in the world and almost all of it is designed to disguise the fact that it is a profoundly regressive tax system. The cost of administration of revenue collection is over £20 billion a year, with tax credits about the same.  The totally of over £40 billion a year is about 7% of total tax revenue just on administration. The HMRC has more staff than the entire British Army. The Department of Work and Pensions and the HMRC combined are nearly twice the size of our entire armed forces or about the same as the rest of the civil service put together.

The fact is that the cost of government administration of the UK employment market is vast, bloated and deeply unsustainable.

But there is worse.

The fact is that the UK tax code has become a thieves charter. City of London has attracted huge flows of extremely questionable money and, for example, London Property has become a safety deposit box for every Russian criminal oligarch or Arab despot. These assets are held through off-shore companies because we will not tax either the property or the acquiring company. Shady deals at the limits of legality are disguised as tax avoidance schemes, when they are actually money laundering of criminally gotten gains pure and simple. When we learn that even the HMRC itself has placed the ownership of its own buildings "off shore" , it should tell you how much the system needs complete reform. Transparency is minimal and accountability is non-existent, and that is precisely because of the way the UK tax code has been set up. Arguably it is the very goal of such a system- it is certainly not to provide open and sustainable revenues for the UK government.

Mr. Osborne, instead of tinkering with tax credits, has the opportunity to show some genuine leadership and start to recast this disaster. Unfortunately he is too busy playing partisan political games to capitalize on his opportunity and so will doubtless be remembered as perhaps a less disastrous Chancellor of the Exchequer (UK Finance Minister) than Gordon Brown, but mediocre just the same.

Extremely expensive, deeply inefficient and promoting wholesale crime: the UK tax code is more than just a blunder- it is a full-going, out-and-out disaster.

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