When I did my first editor’s letter for MoneyWeek in the very first edition of the magazine (dated 4 November 2000), I wrote about public spending and taxes. At the time, Gordon Brown had announced plans to raise public spending by 3.3% (0.8% more than our GDP growth) and Michael Portillo was gunning for 2.5% (in line with GDP growth). Nobody was saying it might be a good idea for public spending to be reined in and perhaps for taxes to fall a bit. Instead, it appeared to have become accepted that the Government had the right to take our money as it liked and spend it for us.
One day, I said in the letter, this will change. The under-35s aren’t listened to much, but we work ludicrously long hours under enormous pressure, having found that for us – unlike for our parents – a good education is no passport to an easy life. We won’t accept a system whereby so much of our hard-earned money is spent so badly on our behalf for much longer. “Soon we will be looking back in amazement at the fact that it could ever have been accepted that the state should control half our wealth.”
Well, it’s been a long time coming, but five years on, the challenge has begun. A new report out from Reform points out that a few decades ago, paying 30%-40% of their income in tax made sense for the under-35s: they were, in effect, buying an income in old age, free higher education and access to free health care. But this contract has broken down. Today, the young still pay 30%-40% plus of their income in taxes (add in indirect taxes and the total can hit 65%-70%), but they don’t get much of the above. Worse, at the same time as they are having to pay off student loans, use private dentists and set up private pensions, their taxes are paying pensions to retirees living in the kind of homes they will never be able to afford. It isn’t really much of a deal. No wonder then that, as The Sunday Times puts it, they are “having the dynamism and enterprise knocked out of them”.
So how can we change this? The answer is simple. We can cut the tax burden. It has worked in the US, where tax cuts have actually led to increased tax revenues, and it has worked in the eastern European countries that have introduced flat taxes. Indeed, according to Reform, those who have adopted a flat tax have averaged nearly 3% better annual GDP growth than those who haven’t. I can’t see why it wouldn’t work here too. And I’m pleased to say that I’m not the only one who thinks so. Writers in the FT, The Sunday Times, The Business and The Guardian have all reacted to the Reform report and put forward a case for tax cuts in recent weeks. Let’s hope someone’s listening.