Public Attitudes to taxes and spending, and VAT zero rating

 

Does the recent and unprecedented increase in the minority wanting a smaller state reflect the non-indexation of tax thresholds? If it does, are social attitudes a problem for those economists arguing to end the zero-rating of many goods for VAT?

The National Centre for Social Research produces an annual survey about British Social Attitudes, and they have issued a preliminary look at the survey conducted in the Autumn of last year. One question that I have looked at a number of times in previous years has concerned attitudes to taxes and public spending. The latest results are both surprising and imteresting.

As I have regularly noted, over the 40+ years of the survey the number of people saying they wanted lower taxes and spending (a smaller state) has been remarkably low at less than 10%. Remarkable, that is, given the prominence that view gets in public discourse. But not any more. In the last few years this proportion has grown significantly, and is now at 19%.

Why is this? The most obvious explanation is that taxes are going up, which is true. But total taxes have risen before, and we haven’t seen this response in public attitudes. Here is the share of total taxes in GDP from the OBR’s database.

Taxes have risen substantially since the pandemic, but they rose by almost twice as much from 1993/4 to 2000/1, yet in the social attitudes survey there is no rise in those wanting a smaller state over that period comparable with recent movements..

One explanation for this recent rapid increase in those wanting a smaller state would be if people were much happier about the level of public services now compared to the late 1990s. This isn’t plausible because both the level of public service provision (measured by indicators like waiting times for hospital appointments) and the level of spending on public services is clearly inferior to the period at the end of the last Labour government, and is at least comparable if not worse than in the late 1990s. The impact of the austerity period from 2010 onwards has not been undone.

A more plausible story is that those answering the survey are not thinking about total taxes, but rather just taxes on income. Here is a chart from the Resolution Foundation:

The noteworthy fact this chart shows is that taxes on income have been falling for most earners since 1980. [1] This hasn’t been true for the total tax burden because taxes have been shifting from taxes on income to taxes on consumption (e.g. VAT) or taxes on profits.

Very few survey respondents will be aware of the total tax burden they face. What most will see is the amount of tax taken from their pay each month. So the recent increase in the number of people wanting a smaller state could simply reflect the recent rise in the amount of income tax they are paying, which in turn is mainly the result of the non-indexation of income tax thresholds, started under the previous government and continued by Rachel Reeves. [2]

If this interpretation of the survey is correct (and I’m sure there are other interpretations) then the main implication for me is that attitudes to the size of the state depend crucially on the type of taxes being raised. Public attitudes to the size of the state may depend on the mix of taxes, with in the longer term the public accepting higher taxes on consumption and profits more easily than taxes on income. (In the short term the latter will generate inflation which is unpopular, but that unpopularity does not seem to be translated into public attitudes about the size of the state.)

Of course politicians, particularly on the right, have long suspected this, which is one reason why there has been a shift away from taxes on income over the last few decades. To that extent recent public attitudes are consistent with this belief. Those on the political left have often favoured higher taxes on income rather than higher taxes on consumption because the former is thought to be more progressive. This is true, although VAT in particular is in itself mildly progressive because there are lower or zero tax rates on necessities like food, children’s clothing or domestic energy.

However the progressivity of consumption taxes has been challenged by economists, who argue there are better, more effective ways to help poorer people than zero-rating. They, and journalists, love to tell us about the time wasted on borderline cases involving Jaffa cakes and the like, and these compliance costs are real and waste resources. At least as important is that the better off also spend large amounts on zero rated items, so zero-rating is a relatively inefficient way of redistributing income.

In my view a perfectly legitimate counter argument is that this reasoning neglects how many people feel about helping the poor in other ways. The same National Centre for Social Research Social Attitudes survey shows more people now disagree than agree that more money should be spent on benefits for the poor. It is fine to argue that the poor can be helped more efficiently by replacing zero-rating with better benefits, but that will not happen if better benefits are impossible to achieve politically, or are gradually reduced in real terms because of public suspicion or even hostility. 

To take a more specific example, an economist would argue that benefits (like child benefit) are better than VAT zero-rating on essentials in part because benefits don’t distort the choices those receiving them make. But many socially conservative voters might argue that they are happy to subsidise children’s clothing for the poor because they know that money is well spent, whereas they will be more suspicious that money on benefits that the beneficiiary is free to spend as they like will be misspent. 

There are many reasons why people might favour higher taxes and public spending, but one may simply be that they are unaware of the taxes they pay indirectly through VAT and elsewhere. This in turn may encourage politicians to shift the tax burden from direct to indirect taxes. Economists argue quite rightly that VAT zero-rating on essential items is an inefficient means of redistribution, but making indirect taxes more regressive could end up making the overall tax and benefit system less progressive if socially conservative voters and the politicians that represent them squeeze benefits.

[1] The only exception is for high earners, but they are likely to make up a good proportion of those who always thought that their taxes should be lower.

[2] An interesting question is whether the impact of the non-indexation of thresholds has been more noticeable ex post by survey respondents than the same amount of revenue raised by raising tax rates would have been, because it has meant that some are now paying income tax for the first time.