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Portillo: Why Britain Needs Lower Taxes

A few years ago the road to Damascus was littered with Labour politicians who had seen the light. No longer was nationalisation the passport to commercial success. No longer was dictatorship by the unions the key to industrial partnership. No longer were higher taxes the route to a more prosperous society and better social services.

"It might be thought that a hundred years was a long time to come to such blindingly obvious conclusions. But now, at last, it did seem possible that - whatever other differences remained between the parties - there would be a reasonable consensus on fundamental economics.

"After four years of a Labour government we now know better than to believe that. Above all, whatever marginal improvements there have been in Labour's attitude to industry, it remains - whether by conviction or default - a high tax party.

"Of course, Government Ministers still attend meetings of Taxoholics Anonymous. They still stand up and denounce the tax habit. They still swear they have kicked it. They still deny they have touched a drop of tax-raising in the last four years. Yet, once the meeting is over, it is out into the back alley and a few more raised taxes are stealthily removed from the brown paper bag.

"Colbert, Louis XIV's Controller General of Finances, said that "the art of taxation consists in so plucking the goose as to get the most feathers with the least hissing". Colbert would have approved of Gordon Brown. £25 billion of feathers a year have now been plucked - equivalent to 10p on the basic rate of income tax. A typical working family is paying £670 a year more. Enough - the Chancellor hopes - to featherbed his party through the next Election. But the hissing has started. It is getting louder and louder. It is our job to make sure that it becomes a cacophony.

"The Conservative Party will enter the next election, as it has entered every previous one, as the party of low taxation.

"Having conducted the most detailed review of public spending ever undertaken by a party in opposition, we know that we will be able to make £8 billion of changes to Labour's spending plans, giving us £8 billion of room for tax cuts. Because we have made tough choices that Gordon Brown won't make, we have room for tax cuts that he doesn't have.

"If Gordon Brown is able to cut taxes in the Budget it will be because he has over-taxed so much that his tax revenues have run ahead of his ability to spend. But our proposals for tax cuts come from altering the course of government spending. Our tax cuts are sustainable, and can be made over and above any tax cuts the Chancellor may be able to make in his pre-election Budget.

Tax cuts for families

"In recent weeks we have set out parts of our proposals to reduce taxes on the people who have been overtaxed by Gordon Brown. Those proposals would bring about not just a radical change in our tax system, but a substantial change in our culture and society.

"We would remove savings and dividends from income tax at the lower or standard rate. We would take a million pensioners out of income tax altogether by raising the threshold at which people begin to pay tax by £2,000 for the over 65s, a move which will reduce the tax bills of approximately another two million pensioners by about £8.50 per week.

"Our aim is that we should replace Gordon's Brown's dependency society with one in which people are encouraged to save, and so enjoy greater independence, have more choices, can face the future with greater confidence, and once they are retired, can look back on a lifetime of saving and believe that they did the right thing and were rewarded for doing the right thing.

"Now this week - throughout this week - we turn our attention to the taxation of families. We believe strongly in supporting people who take on the responsibility of parenthood. Again we want to help them to shoulder their full responsibilities and feel that they were backed in doing so.

"Conservatives believe that in the first instance government should arrange things so that people who do the responsible thing are helped to do so by being able to keep more of their own money. That is one of the principal differences between our approach and that of Gordon Brown. He taxes the least well off and then makes them rely on benefits. That philosophy (if you can call it that) lies behind much of what he has done - making pensioners poorer through stealth taxes, and then forcing more than half of them to rely on means-tested benefits.

"You can see it too in the approach to families. Families on meagre incomes have been impoverished by taxes on fuel and cigarettes and on their mortgages, but Gordon Brown responds by making more of them dependent on means-tested benefits. The Working Families Tax Credit is of course a misnomer. It's a social security benefit. It's paid to people even who don't pay tax. It's paid, not to the parent who has care of the children, but to the one with a wage packet. Gordon Brown forces employers to handle it at a cost to them of £100 million per year, and obliges employees to give their employers intimate details of their family circumstances.

"We will reform WFTC. We will make it payable to the parent with care. We will not make employers handle it on behalf of the government, thus saving business £100 million per year.

"The Chancellor is also planning to introduce a Children's Tax Credit. As usual he has been less than honest about the implications of his reform. He has portrayed the CTC as a replacement to the Married Couples Allowance when, in fact, 5 million married couples have lost the MCA and will not gain from the CTC. Nevertheless, the CTC at least has one advantage compared to Gordon Brown's other reforms - it lets people keep more of their own money by allowing families with children to make a deduction of a given amount from their tax bill. We are happy to support measures which reduce the Income Tax that hard-working families have to pay.

"But the CTC will still need to be reformed to make it simpler and less unfair. Much of the complexity stems from the Chancellor's ideological insistence that people who are a bit better off should not receive any recognition from the government of the costs of parenthood. That seems extraordinary even by Labour standards, since they have maintained in place child benefit, which rightly goes to everyone regardless of income. It seems absurd too given that the children's tax credit (which is a credit for a fixed deduction from the tax bill, not an allowance for tax-free income) is a fixed amount to everyone, and is therefore worth relatively most to those on low incomes.

"So messianically has Gordon Brown chastised the notion that anyone above an income of £40,000 might be given help with his or her children, that he has introduced palpable unfairnesses into the system. He has arranged that two people in a couple each earning £30,000 will receive the children's tax credit, but a couple with a smaller joint income, with one earner receiving just over £40,000, will receive no tax credit. This is clearly absurd and indefensible.

"We will have to sort out this mess. Indeed Gordon Brown would have to, and has already indicated that the measure that he is just now introducing will have to be reformed before it can bed down properly because of its complicated interaction with the child care credit within the WFTC and child benefit. Rarely can there have been as candid an admission of administrative incompetence as owning up to the fact that he will have to change everything that is now being introduced with such a lavish expenditure of taxpayers' money on advertising.

"We will reform the children's tax credit, but we will also make it more generous. The government planned to introduce it at £442. They are now consulting on increasing it to £520. Whatever they do the Conservatives are in a position to do more because we are pledged to alter the course of public spending and have found room for £8 billion of tax cuts by 2003-4. The government is not in a position to make tax cuts in the coming parliament. Indeed their policy of increasing government spending faster than the underlying growth rate of the economy means that sooner or later they will have to resort to more stealth taxes.

"I will devote £400 million of the £8 billion to reducing Income Tax for parents, and I believe that it would be best to give extra help to families with the youngest children. When children are not yet at school, they make the greatest demands in terms of expense, time and nervous energy.

"I therefore propose to reduce the tax payable by families with a child under the age of five by £200 over and above the credit that Gordon Brown may announce in the budget, whether that is £520 or any other sum.

"There will be further announcements on family policy later this week. I will announce special help for widows and widowers and I will announce how a Conservative government would wish to recognise marriage within the tax system.

The Economics of Low Taxation

"Between now and polling day, William Hague and I and the entire Conservative Party will make the case for low taxation: the economic case; the political case; the moral case. We will remind the country that it was through the pursuit of low-tax policies that the British economy was transformed from the sick man of Europe to the picture of health that the rest of Europe has since clamoured to copy.

"The economic prosperity of Britain remains dependent on the incentives that only a low-tax regime can provide.

"The march of globalisation is a reality. One consequence is that the nations of the world are more firmly in competition with each other than ever before. There is an unparalleled mobility not only of individuals, but also of companies. We cannot hope to be successful in the years ahead unless we can persuade the most able individuals and the most dynamic companies to locate themselves here. A high tax regime attracts no one.

"So it is some irony that, just when other countries are taking on board what we were doing in the 1980s and '90s, this Government should be abandoning the most important single plank of the policy that revived the British economy. We are departing further and further from the international consensus. As Gordon Brown made clear when he addressed the Labour Party in Glasgow last week, this is now one of the few countries where tax reduction is not on the government's agenda. The Chancellor has turned his face against the world. Whilst others bring their taxes down, he plans to go on increasing government spending faster than the underlying growth rate of the economy, year after year. As I said earlier, if he were to get the chance to continue along that path, taxes would have to go up again.

"The Chancellor may think he can get away with it. But he will not get away with it for ever, and nor will the country. Changing taxation policy can be like turning the wheel of an oil tanker. It takes a long time to show any effect. But now the tanker has changed direction, it will take great political willpower to get it back on course again.

"One of the lessons of the '70s and early '80s is that there is no absolute guarantee of a life that improves materially year by year. There is no automatic entitlement to an income that will be higher next year than this. There is no permanent warranty that social services will be better next year than this. Nothing can be taken for granted.

"A prosperous, well-rooted economy not only personally benefits all of us who work in it and draw an income from it: it also pays for new hospitals, better-equipped schools and more police. Taxation does not pay for those things. Taxation is merely the means by which they are funded. If I have no income, a tax rate of 100% will yield no revenue. The one indispensable source of improved social services is a healthy economy. The one prerequisite for a healthy economy is the encouragement of business and enterprise. An essential component of that is a low tax regime.

The Politics of Taxation

"So why, given all the evidence that recent history provides, does this Government insist on raising the burden of taxation while trying to pretend that it isn't? Why is it putting at risk the economic achievements of the past 20 years? Why is it putting at risk the political opportunities that flow from these achievements? Why is it putting at risk the increased investment in hospitals and schools that it wants to make? Why, come to that, is it putting at risk its own continuance in office?

"First, there is such paucity of imagination at the centre of this government and such panic at the thought that it might yet fail to achieve its one true objective - namely, its own re-election - that, as the evidence mounts of the failure of its social policies, its only solution is to throw yet more money at the problems, whatever the economic consequences. I also fear that the Government's conversion to market economics, remains only skin deep. The mind accepts what history teaches, but the heart does not warm to it. There is a limited comprehension, but there is certainly no faith. Deep down, Labour ministers still think that high taxes are fair, are just, are morally admirable. But they are not.

"Third, the fashionable opinion these days is that high taxes are popular, the key to electoral success. Higher taxes, it is argued, bring better public services. Since the last election, that theory has been tested to breaking point. Taxes have gone up, but hospital waiting lists are longer, class sizes in secondary schools are larger and crime is rising. Only the Conservative Party are in sync with the British people. With their Government spending £12,000 every second, they know that too much money is being wasted, that taxes can be cut and services improved. Anyone who thinks that high taxes are a vote-winner should look at last week's referendums in Bristol and Croydon, where a majority of voters chose the lowest taxes they were offered.

"The true believers in low taxation are in the Conservative Party. We believe in rewarding hard work and enterprise, not in taxing it. We believe in helping those who are less well off to free themselves from reliance on the state, not forcing them to become dependent on it. We believe in justifying to the British people how much of their money the government needs to take in tax, not expecting people to justify to the government how much they should be allowed to keep.

The Moral Case for Low Taxation

"There is no single, unchanging point at which the level of taxation is correct. There is no single, unchanging point at which anyone can say with certainty that taxation above this level is oppressive to the wealth-creators and taxation below this level is unfair to the poor and vulnerable in our society. The level of taxation is, like most things in life, a question of balance.

"The morality of tax policy lies in getting the balance right. Just as it would be wrong to raise so little tax that the country could not be defended nor its citizens protected and educated, so it would be wrong to raise so much tax that individual choice was severely restricted and personal responsibility diminished. Tax inevitably reduces choices for those upon whom it falls. Yet a free country is one where there is as much choice as possible. A moral tax policy tries to give the greatest possible choice to all citizens, rich and poor. Apart from anything else, if it does this successfully, it will ensure that in future there are fewer poor citizens.

"The notion that every pound spent by the government is spent wisely and morally, while the same pound spent by an individual is spent selfishly and immorally is absurd. Yes, of course we want to spend some of our disposable income on enjoying ourselves (and why not?), but we also want to spend it to help our families, make sure our children get a good start in life, provide for our old age, save for the future and give to charity.

"These are all fundamentally moral choices, made impossible by over-oppressive taxation. Worse still, the burden becomes self-perpetuating. Because if people are discouraged from saving or providing for their retirement in this generation, government expenditure and hence taxation will inevitably need to be higher in the next generation.

Where we are now

"Over the last few years, we have started to see many of the characteristics of over-taxation. The Chancellor has raided private pension provision to the tune of £5 billion a year. The proportion of income saved by the average family has more than halved since 1997. Charitable donations are less than half what they are under the low-tax regime of the USA. More means-testing has created more dependency on the state; the Chancellor plans for more than half of Britain's pensioners to be subject to the means test by 2003. And, of course, the Government have faced a taxpayers' revolt against their stealth taxes on petrol and diesel.

"We have passed this way before. It was debilitating and it brought the country to its knees. Now, as before, it is the Conservative party that is determined to reverse the trend.

"Four years ago, we were repeatedly assured by that nice Mr Blair and Mr Brown that Labour had no plans at all to raise taxes.

"Instead, we were told that - without any need to raise them - the social services would be transformed. The NHS would be beefed up. The resources given to education would be beefed up. The fight against crime would be beefed up. Public transport would be beefed up. Four years later we are entitled to ask: where's the beef? A Government that announced its plans to get the best of both worlds has got the worst of both.

"In 1997 the Labour Party offered to lead us to the promised land. They have led us instead to a land of broken promises.

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