Hoist by their own petard

Government deficits suffer a double-whammy in a recession, e.g. in Scotland On Sunday:

At the same time, as recession freezes the economy, tax revenues are falling. As unemployment rises, so does welfare spending.

This is another huge advantage of having a flat-tax system and low-level universal benefits. For simplicity, let's imagine that every working age adult claims the weekly Citizen's Income of £60 (rather than choosing a £10,000 tax-free personal allowance) and pays flat tax of 31% (equivalent to current basic rate tax plus NI) on all earnings (to the extent that they have any). Two or three million taxpayer funded quangista, meddlers and snoopers could be "released to find more productive and wealth creating jobs in private business"*, which would give us enough money to safely scrap VAT and Employer's National Insurance, and let's round up corporation tax to 31% as well for simplicity.

Let's assume that the economy were indeed to shrink by one percent next year. That's £15 billion off GDP, so HM Treasury would lose 31% of that, which is a measly £5 billion or so, less than one percent of current government revenues/spending, and a fraction of the £60 billion to £100 billion annual deficit predicted for the next year or two. These horrifying numbers include the £37 billion bail-out for the banks, which was money down the toilet, of course, debt-for-equity-swaps would have sorted this all out much more efficiently at zero cost/risk to the taxpayer.

And once we start coming out of the recession, people who only have the Citizen's Income to live on would not be in a welfare trap - instead of only keeping 30p or 4.5p for every £1 that they manage to earn, they would keep 69p, so the way out of the recession would be a lot quicker as well.

Don't forget that HM Treasury has benefitted enormously from the house price/credit bubble; each extra £1 of credit is about 2p extra in income/corporation tax every year; each £1 rise in house prices is an extra 1p, 3p or 4p in Stamp Duty Land Tax and potentially an extra 40p in Inheritance Tax; and each £1 paid out as City bonus is an extra 47.7p in income tax/National Insurance. And every time somebody moves home, there's all the lovely VAT and additional profits tax to be collected from estate agents, solicitors and home furnishing shops. These revenues are now collapsing nicely.

If we had replaced Council Tax, Business Rates, Stamp Duty and Inheritance Tax with Land Value Tax when land values were at their lowest in the mid-1990s, and we wouldn't have had the house price bubble/credit bubble in the first place. LVT would have redirected all the lovely cheap credit into the productive economy rather than into a house price bubble, so we'd be in a considerably less-bad situation than we are now. And yes, of course this wouldn't have made us immune from the economic cycle, but it sure would have softened the blow.

That's that fixed. Next.

*^TM Lola.