Careful, Rishi! Sunak’s tax hike plan could backfire disastrously, warns expert

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Pieter Cleppe, a Brussels-based research fellow with the think tank Property Rights Alliance, said the Chancellor should instead identify areas where he could save money. During an online question and answer session at the Conservative Party conference earlier this month, Mr Sunak refused to rule out increases to VAT, income tax and National Insurance to cover the cost of borrowing which totalled £174billion in the first five months of the year alone.

Mr Cleppe provided a number of examples of how rules imposed in response to the coronavirus pandemic have exposed the impact high rates of taxation have on the economies of individual countries.

Norway’s consumption taxes at high rates of VAT typically mean food is typically 35 percent more expensive than in neighbouring Sweden.

As a result, large numbers of people cross the border to shop, with the result that Norway loses out on an estimated £320million in tax revenue.

In the Netherlands, a tax hike on classic cars which involved restricting the number of cars exempt from car taxes was estimated to have cost the Government €80million because many owners decided to export or no longer register their vehicles.

Conversely, in 2014, Sweden abolished its inheritance tax and gift tax, a decision taken unanimously by its Parliament.

The tax ratio declined from 51 percent of GDP in 2000 to 44 percent in 2014, even as tax income increased by SEK 260 billion, adjusted for inflation.

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These European examples demonstrate that the Government should think very deeply before increasing taxes

Pieter Cleppe

This was triggered by the repeal of gift and inheritance taxation, the abolition of net wealth taxes and the introduction of the in-work tax credit, incentivising finding a job rather than living on benefits.

Mr Cleppe told Express.co.uk: “These European examples demonstrate that the Government should think very deeply before increasing taxes.

“In many instances, jacking up taxes may end up hurting government income, counter-intuitively.

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“The phenomenon whereby higher taxes result in lower state income has been dubbed the “Laffer effect”, after economist Arthur Laffer.

“One can never be sure when the Laffer point is reached, but as the economy has been badly hurt by COVID-19 and its effects, it is likely to see it playing out with post-COVID-19 tax hikes.”

He added: “When an ordinary household ends up in a crisis of some sort and is forced to make big expenses, it will need to find the money to finance this afterwards, and this may include scrapping whatever expenses it was used to before that crisis happened. This is not different for governments.

“Instead of hiking taxes, the government should look at trimming government spending from inefficiencies.

“The regular reports of the National Audit Office can perhaps offer inspiration here, as it has singled out projects like Crossrail, probation and smart meters as well as the Ministry of Defence as areas where improved spending is possible.”

During his speech to the conference, Mr Sunak told delegates: “We will protect the public finances, over the medium term getting our borrowing and debt back under control.

“We have a sacred responsibility to future generations to leave the public finances strong, and through careful management of our economy, this Conservative Government will always balance the books.

“If instead we argue there is no limit on what we can spend, that we can simply borrow our way out of any hole, what is the point in us?

“I have never pretended there is some easy cost-free answer – hard choices are everywhere. I won’t stop trying to find ways to support people and businesses.”

He added: “It’s difficult for me to comment on tax policy but I think the public should expect from a Conservative Government especially a regard for public finances.

“The public will also appreciate this year we’ve done a lot, needed to do a lot, that was the right and sensible thing to do.

“But clearly that can’t go on forever. That doesn’t seem to pass the common sense test.”

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