Taxes

The FT’s leader writers have now weighed up all the contributions and arguments on this issue. Thanks to everyone who joined in the debate. Here is the finished editorial.

As consumers and companies everywhere keep a firm grip on their wallets, governments are stepping in to fill the gap. In Europe, they are doing so less by deliberate action than through the “automatic stabilisers” of welfare states and progressive taxes. Other countries, such as the US, have enacted large stimulus packages. The results are the same: yawning public sector deficits. States are rightly boosting aggregate demand to halt the downward economic spiral, but indebtedness cannot increase without limit. As soon as the recession ends, public debt must be brought under control and more national income diverted from spending to debt service.

How fast and how far should public finances be brought back in the black? The least ambitious choice is to stabilise public debt as a share of output but not reduce it, covering only interest exceeding the rate of economic growth. But this would be unacceptably unfair to future generations who would forever be paying for today’s recession. Surely governments must aim to reduce their debts in the long run, and devote a larger than minimal share of national income to debt reduction.

This must be financed by a correspondingly lower share of output for private spending or publicly provided goods and services. How to split the sacrifice between the two will be the focus of fierce interest-group politics over the next years. This goes with the territory of cost-cutting: people fight harder to avoid losses than they do to secure gains. Taking pre-recession attitudes as our guide, however, there are few widespread objections to the mix of spending settled at in most rich countries. The post-recession belt-tightening should therefore be split in the same proportion. This means private spending must bear a large part of the burden, requiring a period of noticeably higher taxes. This runs the danger of making tax systems even more complex and inefficient than they already are (the UK’s decision to phase out the personal allowance is a case in point). But it also brings an opportunity to make the first steps towards badly needed tax reforms. Governments must choose taxes that spur economic efficiency, not expand those that are a drag on it. The former are easy to find, as the FT online debate on taxes showed with its suggestions of a carbon tax and (for the UK) a land value tax.

Such taxes benefit both the economy and the public purse. As they pay down debts, they free up public revenue, allowing more harmful taxes to be cut. The crisis has made such changes politically possible. Now leaders must find the will and the foresight to commit to them.

Arena

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