Letter: Saving up for a better economy

Sir: May I, at the risk of seeming pedantic, try to clarify the confusion in the debate on taxation (report, 24 January)? There are claims being made on all sides of the political debate which are half truths at best and, even then, dubious ground for achieving economic growth or justice.

1. The Conservatives, in claiming to have cut taxation, think only of the marginal rate of income tax, and that, too, primarily at the top end of incomes. This was the nub of the Prime Minister's jibe at John Smith on Thursday, 20 January.

Cuts in marginal rates of income tax are supposed to be good for economic growth. There is no evidence either in economic research or in real life for this incentive effect. Growth has been lower in the years since top rates came down than in the 'overtaxed' Sixties and Seventies.

2. The average burden of all taxation, direct and indirect, has gone up during the 'tax cutting' years of Conservative government. This was said at the last election by the Labour Party and has now been admitted.

3. If we think not of the 'average household' on pounds 19,000 but of the population at large, taxation in this country is regressive. The lower paid people in the bottom fifth pay more in direct and indirect taxation than the top fifth.

4. There is nothing wrong with taxation, as long as its burden is fairly distributed and it does not have disincentive effects, as for example the present system does for those at the margin of choosing to take a job or stay on the dole. A nation that likes to spend between 40 and 45 per cent of its income ought to be ready to pay a similar slice of its income in taxation. We cannot be a low taxation and high expenditure country.

The complaint should thus be not that taxation is high, since it is not high relative to spending, but that it is inevitable. The balance of taxation and spending is only mildly progressive. Taxing income rather than expenditure is also a disincentive to saving. As a nation, we overconsume; hence the trade deficit and the budget deficit. It is time we consumed less and saved more. When politicians have the courage to admit this, we may have a sounder economy.

Yours sincerely,

MEGHNAD DESAI

House of Lords

London, SW1