Where I'd swing the axe - Part 3 (Tax increases)

In the previous two parts of today's trilogy, I have outlined where I would make cuts (if I was George Osborne) in order to cut back on unnecessary Government spending.  In this third and final part, I shall outline the necessary increases in taxation that I would make.

What's in the box?  We shall find out tomorrow...

The Tax-Increases

VAT

This is the big one and the most likely of the increases that will be announced tomorrow.

Those in the know are touting an increase of VAT from 17.5% to a new level of 20%.  Such a level would be in line with most of Europe and, in my opinion, would be nowhere near as bad as the popular press would have you think.

An awful lot of money for just 2.5p in the Pound.

An increase of 2.5% on VAT is nothing, really.  During the recession, 2.5% was taken off VAT as the Labour Government lowered it to 15% in order to stimulate spending.  Did you really notice it?  I'd guess you didn't.

2.5% equates to a mere 2.5p in the Pound.  This would mean that an item costing £10 at today's prices would cost £10.25 after a VAT increase.  By the same token, an item costing £100, would cost just £2.50 more.

Credit Suisse estimates that such an increase would bring in an extra £11bn a year... an awful lot of money for just 2.5p in the Pound.

Capital Gains Tax
Another of the big proposals is an increase in the level of Capital Gains Tax from 18% to between 40% and 50%.

For those of you who don't know what it is, Capital Gains Tax is a tax paid on the profits from certain investments such as second homes and shares.  Say, for example, you buy some shares for £1,000 and sell them for £2,000, you would pay tax on the £1,000 profit that you make.

My justification is this: you do not lose out with CGT, as it only taxes the profits that you make.  As well as this, if such a rise was tapered so as to effect short-term investments more than long-term investments, it may well discourage the kind of short-term risky investments that have exacerbated the financial crisis in Europe in recent months.

Employment Taxes
Any increases in Income Tax or National Insurance would probably prove to be the most contentious and George Osborne will have to proceed with caution.  As far as I am concerned it would have to be a case of raising one or the other, but not both.

Small increases in Income Tax have always been the favoured method for new Chancellors to get money in quickly after an election, safe in the knowledge that they can always reduce the rate after a few years to gain positive public opinion.

Analysts suggest that money raised could be anywhere between £4bn (Income Tax) and £8.8bn (National Insurance) for a 1% increase in the respective rates.

From a personal point of view, I would opt to put 2p on the basic rate of Income Tax for a few years with a view to reducing it again in time for the next General Election.  2p in the Pound doesn't equate to a great deal and would still bring in a tidy sum.  At the end of the day, Income Tax is at its lowest for quite some time and has less effect on the employment market than an increase in National Insurance.

Conclusions

Osborne, Cameron et. al. have made it crystal clear from the start - this will be a budget the likes of which we have not seen in a long time, and it certainly will not be one of the giveaway budgets that became so popular under Labour.

The country's financial situation is dire and we shall all have to do our bit to ensure that we are able to pass on a financially sound economy to our children.  It is our moral and social responsibility to ensure a safe and stable future for those who will follow us rather than leaving them to clear up the mess.

It is without a doubt that we all enjoyed the good times under Labour and unfortunately we will have to pay for them in the end.

However, it is my opinion that the clean-up is best done quickly (and painfully) in order to get the UK back open for business in as quick a time as possible rather than drawing it out over many years in order to keep voters on side.

Yes it will be painful, yes it will be unpopular, but in the end it will be worth it.