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The overwhelming case for paying stealth taxes
Samuel Brittan: The Financial Times 25/11/99

There is everything to be said for extracting money from the public as painlessly as honesty allows

Jean-Baptiste Colbert, the famous chief minister of Louis XIV, espoused protection in external economic policy and detailed regulation at home. He therefore enjoys a terrible press among most Anglo-American economists. Indeed the entry on him in The New Palgrave dictionary is a sustained polemic, almost as if he were leading the French delegation at the Seattle trade talks.

But Colbert was also a successful conventional finance minister. The combination of dirigisme with the search for sound finance is familiar to students of present day French policy. Colbert was distinguished from contemporaries not by any originality in his opinions but because he had success in enforcing them.

The best known saying attributed to him is: "The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing." This seems to me an admirable statement of fiscal policy. Why do something the hard way if you can do it the easy way? One needs to be careful about the easy way lest it boomerang in your face. But if it does not, so much the better.

Any government of any party in a modern democracy needs to extract a substantial proportion of the national income as tax revenue. If the revenue can be extracted in a painless way, this is all to the good.

As far as I can discover, the expression "stealth taxes" was first given currency in the present parliament by Malcolm Bruce, the Liberal Democrat economic spokesman. But the modern British pioneers of stealth taxes were previous Tory governments.

The best possible example of a stealth tax is the National Lottery. Because of the lure of huge jackpots, punters were willing in 1998-99 to subscribe £23bn, of which only 50 per cent went in prize money. This enabled the government to cream off 13 per cent in overt taxation and divert 28 per cent to "good causes".

There have been complaints that some of the lottery revenue has been used to finance projects that would otherwise have to be paid for in taxation. But such use of lottery funds was inevitable and is bound to go further. Government is entrusted with choosing the goods and services it thinks the public prefers to provide collectively, rather than individually out of post-tax income.

The discovery of a new source of revenue does not itself change priorities. Eventually, lottery revenues are almost certain to be merged with other tax receipts, as has happened to the Road Fund, National Insurance contributions and other supposedly dedicated revenue sources.

There is, however, one peculiarity about stealth taxes. The government cannot campaign in their favour without underlining that they exist, and thereby causing the hissing to increase. The opposition cannot support them without undermining the basis of its attack. So this is one aspect of policy that only outsiders can defend.

The whole ridiculous points-scoring battle about what has happened to the tax burden could be easily resolved if politicians had the patience to look at source material instead of briefing notes by advisers. The Conservatives have complained that the government has cheated by excluding part of the working families' tax credit and the children's tax credit from its definition of tax revenue.

But anyone who can be bothered to take out the official pre-Budget report and look beyond the propaganda will find in table B7 on page 150 a tabulation in which all the tax credits and the windfall tax on utilities are added back to form "public sector current receipts".

It shows that such receipts are expected to rise from 37.6 per cent of gross domestic product in 1996-97, the last Conservative year, to 39.6 per cent in the current financial year and 39.8 per cent in 2000-2001. This is a net increase over the period of 2.2 percentage points.

Under the Conservatives, the Treasury used a slightly different definition - "general government receipts". The change of definition makes little difference to the trend. These receipts were expected, in the projections left behind by Kenneth Clarke in his last Budget, to rise from 37.8 per cent of GDP in 1996-97 to 38.5 per cent in this fiscal year and 39.3 per cent in 2001-2002, a net increase of 1.5 percentage points.

Nor is this similarity of trend at all surprising. The Conservatives left behind a structural deficit, which emanated from measures taken in the recession of the 1990s and which Norman Lamont explains clearly in his memoirs. Many Treasury officials used to say the country was "under-taxed". One could think of other ways of putting it.

Indeed, some of the revenue-increasing measures were due to take place in any case under the phased programme left behind by the Tories. These include the road fuel duty escalator, the tobacco duty increases and the draconian anti-avoidance powers. Labour's main contribution has been to scrap pension fund credits, accelerate corporation tax and scrap the married couple's allowance. Moreover, some of the additional revenue has been devoted to cuts in headline rates, such as corporation tax, the basic income tax rate, and the 10p starting rate, which was in part paid for by the scrapping of the Tory starting rate of 20p, which covered a wider band.

Of course, I am not defending the deliberate cheating of the public. If voters do not ultimately see any benefit from rising prosperity in their own take-home pay, because it is all taken out by the so-called social wage, they will soon enough realise what is happening, however feeble the official opposition. But so long as they vaguely approve of what is being done, let us make the paying for it as easy as possible. To move away from the goose metaphor: we might rather not have a cough and have to take medicine for it. But if we do, why not give the medicine a sweet strawberry flavour?

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