Sunday, 3 October 2010

On abolishing income tax...

It was a dream I know but I retain a picture in my mind of ‘Surrallan’ (or Lord Sugar as is has grown into now) gruffly – for he is gruff – telling his aspirant apprentices; “your challenge for today is to abolish income tax.”

And what a challenge!

Income tax raised (net of tax credits) £134bn in 2009/10 – which is about a third of HMRC revenue. However, it is only about 20% of total government spending for the same year. So, were we to maintain borrowing at the levels of 2009/10, a 20% reduction in public spending would be sufficient to remove the need for an income tax? And there are several ways to reduce government spending:

We can ‘marketise’ the area of spending – in simpler terms shift all or most of the spending from fiat spending (where the government gives a grant and the service is free) to consumer discretionary spending. It is possible to require consumers to purchase the product – as we do, for example, with third party motor insurance – but most people would buy the product or service. We have successfully shifted most utilities to private provision – and there aren’t many people who don’t buy water and electricity are there? This model could apply to such services as refuse collection where the service (as is the case with utilities) is delivered directly to individual households.
We can deliver services more efficiently – we can all given a few minutes identify examples of ‘waste’ within public services (and I guess within a large private organisation). Much attention has been given to this activity since it does not constitute a “cut”, avoids restructures or legislative change and gives the impression of success – but as we has seen with “Gershon” savings the results are largely fictional! The problem is that ‘waste’ within the public sector reflects (along with high levels of total remuneration) what would, in a well-run private business, be profit. The best driver (other than a real market) of efficiency is outsourcing.
We can deliver services more effectively – this is similar to ‘marketisation’ (we could call it an ‘artificial market approach’) in that is uses consumer choice models to drive effectiveness in supply. This is more likely to achieve better outcomes – especially in terms of customer service – since the consumer is in control of the spending decision. We are seeing this model emerging (too slowly) in education and the NHS has blown hot and cold on this approach for a long while. Senior producers (doctors, headteachers, etc.) will resist such a model as it removes their ability to capture monopoly profit in the form of inflated earnings.
We can stop doing something – let’s indulge the campaigners and call these changes “cuts”. The problem with this is that, in most cases, public services are doing something because the decision-makers (in theory if not often in practice) have made a positive decision to undertake that activity. We have ‘diversity outreach workers’ and ‘five-a-day co-ordinators’ because politicians have voted the cash for these activities to take place – even if (as I sometimes feel) we really haven’t the faintest hope of really knowing what we’re voting for!

To eliminate income tax we need to identify – on top of the currently announced reductions needed to reduce the deficit – savings amounting to around 20% of revenue spending (so it wouldn’t include, for example, not replacing Trident). It strikes me that, using the four approaches outlines above this should be achievable. It should surely be possible for anyone on or below average earnings to no longer be robbed blind by a venal government!

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