Tax Policy Under Scrutiny: The Chancellor's Balancing Act

The art of taxation was once described by Finance Minister Jean-Baptiste Colbert as “plucking the goose to obtain the largest amount of feathers with the least amount of hissing.” However, this art conflicts with Adam Smith's maxim that taxes should be “efficient, secure, convenient, and fair.” Chancellor Rachel Reeves currently finds herself in this dilemma between pragmatism and good policy. With the advance tax commitments before the election, Reeves has placed herself in a difficult position. Her categorical exclusion of income tax increases, national insurance, and VAT significantly limits her options. Now she must resort to smaller taxes that could yield lower revenues and face greater resistance. Past tax decisions illustrate the risks of rushed measures. Nigel Lawson’s abolition of multiple mortgage tax reliefs in 1988 triggered a property boom and subsequent crisis due to the advance announcement. A decade later, in 1997, Gordon Brown’s removal of the dividend tax credit for pensions resulted in long-term losses in the billions for pensioners and the British stock market. Even recent tax decisions, such as the introduction of VAT on private school fees, can have negative consequences. In Surrey, this could lead to an overburdening of state schools, further exacerbating the existing capacity issue. Upcoming changes to capital gains taxes and the tax treatment of pension contributions could have similar unintended consequences. Raising capital gains taxes on rental properties would reduce the supply of rental housing and increase rents, which would be particularly problematic for low-income households. Historical and current developments show that seemingly pragmatic tax policies can lead to long-term challenges and burdens. As George Bernard Shaw aptly noted, a government that robs Peter to pay Paul can always count on Paul’s support. It is to be hoped that the Chancellor prioritizes wise policy over short-term pragmatism.