Cutting taxes to increase freedom? Only for the rich

| Michael Burke | Comment is free | guardian.co.uk

The new Con-Dem coalition's stated aim is to reduce the public sector deficit. But this goal is belied by the fact that they also intend to implement tax cuts. In fact, the programme of cuts to public spending will actually depress demand and tax revenues further. The new government will find, like Margaret Thatcher before it, that taking an axe to public services will actually increase the deficit and lead to a long-lasting increase in the stock of public debt.

As for the tax cuts, the coalition and supporters will present them, like Charlotte Gore, as a blow for personal freedom, rolling back the intrusive state with the seductive promise that "you will get to keep more of your money". But nothing could be further from the truth.

A strong and vibrant public sector and a redistributive tax system are means by which millions of people are liberated from the ravages of poverty, joblessness, ill-health and poor education. These are essential props in an advanced economy, which allow access to health and education for millions of people who would otherwise be denied it. Furthermore, the freedom of the individual is hugely circumscribed if that person is unemployed, seriously ill or with limited access to education.

There is no doubting the appeal of the call for lower taxes. Who would not like to be better off? But any increase in prosperity is illusory if the rising cost of services such as healthcare are greater than the benefit of the tax cut, which is true for all but the very rich.

This is essentially the logic of President Obama's healthcare reforms. The long-run inflation in the US's almost wholly privately owned healthcare system is 6 – 7%, compared to a long-average growth rate for the US economy as a whole of just 2.5%. The combination of low taxes and private healthcare costs was leading to a situation where the costs of healthcare were consuming an ever-greater proportion of national output. The partial socialisation of healthcare was a necessary measure to prevent it from swallowing the whole of the rest of the economy. It also highlights the much-reduced costs in the public sector compared to the inefficiency of the private sector, with its many layers each requiring a profit. The NHS is hugely more productive and efficient than the US system.

The Lib Dems have made a particular pitch for tax thresholds to be raised and presented this as a progressive measure. On the face of it, raising the initial income tax threshold to £10,000 sounds as if it should be supported by progressives. But this notion has been comprehensively refuted by the Institute for Fiscal Studies, which shows that the benefit of this tax measure accrues to middle and high income earners. This is why it has been readily accepted by the Conservative wing of the coalition.

As the IFS study shows, the bottom 20% of the population, who earn below £10,000 per year, get no benefit from the tax measure at all. Other low income groups, earning not much more than £10,000, are only marginally better off. The largest beneficiaries of raising the tax threshold in this way are in fact "families with two earners, where both earn less than £100,000", not the poor. It highlights the inequitable nature of tax cuts, which disproportionately benefit high earners and the rich.

At the same time, lower taxes lead to lower public spending, otherwise the deficit will simply widen even further. Again, it is workers and the poor who are hardest hit by cuts in public services. Women generally are harder hit as they are forced into the unwanted role of carer, often pushing them out of the workforce entirely. And black people and ethnic minority groups suffer disproportionately, as they comprise a disproportionate number of lower income groups.

Cutting taxes while cutting services only increases the freedoms of the rich. Freedom from unemployment, ill-health, illiteracy and low educational attainment are the liberties that are paid for by a strong public sector and progressive taxation system.