the times | Monday April 4 2022 V2 35

Business

Calls for a much more progressive

tax system are missing the point

‘A

pril Cruel Day” is how

the Daily Mirror

described April 1.

“Households hit as worst

attack on living

standards starts today,” its front

page roared in response to rising

energy bills, national insurance and

council tax.

The backdrop for any business

looking to increase prices right now

is hostile. You risk being put

alongside Rishi Sunak and the boss

of P&O Ferries as the most

unpopular people in Britain.

Consumers are suspicious of

prices going up. Rightly so. New data

published last week showed that

American companies posted their

biggest profit margin since 1950 last

year (13.8 per cent) after 25 per cent

rise in profits to $2.81 trillion. Oliver

Shah wrote eloquently in The

Sunday Times yesterday about

“ripflation” — companies using the

cover of post-Covid inflation to

opportunistically put up prices. He

noted that Chanel handbags,

broadband and Pret A Manger

coffee have all gone up in price by

much more than the rate of inflation

in recent weeks.

Yet putting up prices is exactly

what many businesses must do to

survive amid surging raw material

costs and energy bills. More than

half of firms (53 per cent) questioned

by the Institute of Directors last

week said that the cost of energy was

having a negative impact on their

operations. Confidence among

businesses has collapsed to the

lowest levels since Britain was

preparing for another national Covid

lockdown in October 2020.

The latest edition of the Harvard

Business Review has a unique

suggestion for struggling businesses

wondering how they put up their

prices — tell the truth. Too many

businesses find it hard talking to

customers about price because they

see it as an obstacle to a sale, its

report says. As a result, they resort

to deceptions such as charging £9.99

instead of £10 or splitting out

additional charges like “booking

fees”. This is a mistake, the authors

(led by a marketing professor) say.

Instead, businesses should be open

with consumers.

The report makes three specific

suggestions: put price at the heart of

your responsible and ethical

credentials; demystify and explain

how prices are set or changed; and

don’t be afraid to break rules. It gives

examples such as AB InBev

promoting Stella Artois as

“reassuringly expensive” to explain

the last point.

Some chief executives are ahead of

the curve on this. Lord Wolfson of

Aspley Guise at Next and Roger

Whiteside at Greggs have warned in

recent weeks that the price of their

companies’ products will go up. Next

even gave specific numbers, saying

that the price of its fashion would

rise by 6.5 per cent and of its

homewares by 13 per cent in the

second half of 2022.

Others would be wise to follow

suit. While psychologists have all

sorts of theories about how to

attractively price products, the

modern consumer is surely wise to

most of these tricks now. The

internet and online shopping mean

that tracking and comparing prices

is easier than ever. Consumer

champions such as Martin Lewis are

ready to pounce on any perceived

wrongdoing. Compared with other

previous jumps in inflation in the

1970s and 1990s, there is nowhere to

hide for businesses.

Yet the Harvard Business Review

also notes a remarkable disconnect

between how consumers and

businesses perceive price.

In a mini-survey of consumers, 24

per cent said that price was a way

that businesses communicated about

a brand or product to them. But a

group of executives across different

industries did not mention price once.

The world’s biggest bricks-and-

mortar retailer and the world’s

biggest online seller — Walmart and

Amazon — have founders who put

price at the heart of their strategy.

Perhaps they were on to something.

Mark Littlewood

Graham Ruddick

majority of the British people have no

immediate stake in the prevailing rates

of income tax or national insurance,

this surely builds in a likelihood that

future rate rises become more likely.

As far as income tax is concerned, we

most assuredly aren’t all in it together.

Most adults aren’t in it all.

Even within the minority who do

pay taxes on income, there is a

spectacularly high burden on top

earners. The top 300,000 income tax-

payers in Britain contribute more to

the exchequer than the next 20 million

combined and in London fewer than

100,000 people account for more than

half of income tax receipts. This might

not be progressive enough for some,

but it is unquestionably and

dramatically progressive, nonetheless.

If the concern is that those on the

lowest end of the income spectrum

are receiving insufficient support in

these testing times, we should turn

our attention to inefficiencies in our

welfare system. The total amount we

spend on welfare every year is

comfortably in excess of £200 billion.

As there are fewer than 20 million

families in the UK, this amounts to

state payments in excess of £10,000

per family. Given that the vast bulk of

people do not need welfare support to

make ends meets, this surely should be

a more than adequate budget to

wholly eradicate poverty in Britain. In

admittedly simplistic and crude terms,

we could give the bottom fifth of

households a cash handout of about

£50,000 a year. As Ronald Reagan

once observed about the US social

security system, somewhere there

must be a lot of overhead.

There are many good grounds for

scepticism and criticism of the

government’s economic record. It has

done very little to supercharge growth,

showing an enthusiasm for bringing in

still more regulations rather than

repealing very many. It has, to date,

been insufficiently attentive to the

inexorable increases in state spending.

However, criticisms that the

chancellor is presiding over a tax

system that is insufficiently

progressive or a

welfare state that is

woefully

underfunded simply

don’t ring true.

It is usually bad

news for a

chancellor, at least

in political terms, if a

big economic

statement is still being picked over and

analysed more than a week after he

has delivered it. This is exactly the

situation Rishi Sunak finds himself in.

The rise in the price of energy is now

feeding through to household bills

and, although mitigated in his spring

statement, taxes remain at a historical

high. The criticism from the Labour

opposition and from many of his own

backbenchers, albeit from a different

angle, is that, in one way or another,

the government “hasn’t done enough”.

Although we don’t know when or at

what level inflation will peak, how

wage increases will be affected or the

extent to which the economy as a

whole will grow, it seems likely that in

a year’s time most people will be

feeling poorer. That’s because — in

real terms — they actually will be

poorer.

At the heart of the disgruntlement

with the chancellor’s latest

pronouncements has been the charge

that he has been insufficiently

progressive in his recalibration of the

tax rulebook. It is important to

understand the precise meaning of the

term “progressive” before deciding

whether the accusation has any merit.

Although the word has come to

denote a generally left-of-centre

philosophical position, when it comes

to taxation, it means something very

specific. A progressive tax system is

one in which not only do the affluent

pay more, but they also pay a higher

rate than those in the middle or the

bottom.

With one or two perverse

anomalies, income tax in the UK is

progressive. If, all other things

being equal, you earn

£100,000 per annum,

not only will you be

paying more

income tax than

someone earning

£50,000, you will

be handing over

a higher

proportion of

your income —

indeed, more than

twice as much. Some taxes aren’t

configured to be progressive. It may be

the case that someone earning

£100,000 drinks more than someone

earning £20,000, but they probably

don’t drink five times as much so

won’t be paying five times as much in

alcohol duty, even if they pay more in

cash terms. Similarly, the television

licence fee is a £159 charge per annum

irrespective of your wider financial

circumstances.

There are strong moral arguments

in favour of progressive taxation. Not

only do the rich have a greater ability

to pay taxes, but it can be argued that

they face less dramatic trade-offs. A

millionaire might have to forego

upgrading their Mercedes if their

taxes rise, but they can comfortably

afford the basic necessities of life.

Those at the lower end of the income

spectrum may be balancing their tax

liabilities with the need to purchase

food, clothing and energy and keeping

a roof over their heads.

However, in rational economic

terms, more progressive doesn’t

necessarily equal “better” as far as the

taxation system is concerned. This is

because individual incentives matter.

If you want someone to strive to boost

their salary from, say, £80,000 to

£110,000, you need to make sure their

increased tax liability is reasonable.

They might not “need” that additional

£30,000 pre-tax income, but if they

don’t set about getting it — because

they’ll lose too much of it in tax — it

is not just that individual who is not as

affluent than they might be; tax

receipts are less impressive, too.

Sunak is presiding over a tax system

that, by any reasonable metric, is

extraordinarily progressive. So it

might be succeeding to some

measurable degree in redistributing

wealth in a socially desirable

manner, but it is also very

probably holding back

overall economic

growth.

Fully 60 per cent

of adults pay no

income tax at all,

up sharply on a

decade ago. A

swathe of

individuals will

now be taken out of

liability for national

insurance, given the

impending rise in the

threshold. Given that a

“

’’

Mark Littlewood is director-general

of the Institute of Economic Affairs.

Twitter: @MarkJLittlewood

Graham Ruddick is Deputy Business

Editor of The Times

If you need to increase

your prices, perhaps you

should just tell the truth

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