Taxes have to go up... but we can't just target the rich

The UK economy is thankfully showing signs of recovery, with growth of 0.3 per cent in the last three months of 2009. But the high unemployment rates will take time to come down. The Government has set out plans to stop young people from languishing on benefits with a guarantee of a job, work placement or training after six months out of work for anyone under 25.

But at the same time, the Government is increasing taxes on employment, with the 50p rate and an increase in National Insurance Contributions from April 2011. Lifting taxes on jobs at a time of high unemployment is nothing short of astonishing, given the importance of tax on employers' decisions to take on new staff.

Our new report, Reality check: Fixing the UK's tax system, argues that some tax rises are inevitable

– whatever the outcome of the election – to help balance the Government's books. But politicians have a choice over how best to do it.

Increasing NICs means that individuals have less money in their pockets for every hour they work, reducing the incentives for people to raise their work effort. It also makes it more expensive for employers to hire new staff, or indeed to maintain existing workforce levels. Labour market surveys have already shown that one in eight employers is planning to recruit fewer staff because of the NICs increase.

The 50p rate may seem to some like a "fair" way to raise extra revenues, because it taxes those on higher incomes more heavily. But when considered alongside the series of other tax rises targeted at this group – including the clawback of personal allowances on incomes over 100,000, the restriction of higher rate relief on pensions contributions, the non-doms levy and the bankers' bonus tax – it becomes clear that actually the balance of fairness has tilted too far against a small group of wealth generators.

The top one per cent of taxpayers already pay a quarter of all taxes, while the richest 10 per cent contribute more than half of the UK's tax bill. This group funds a large proportion of public services which are used more heavily by those on lower incomes. And they create substantial economic growth for the UK which provides opportunities and security that are good for everyone. If we tax this group too heavily, they will simply leave the UK, or employ accountants to help them plan their way around paying more.

At a Reform dinner for business leaders held last year on the night of the Budget, we learned that two chief executives had received phone calls within hours of the 50p announcement from the Swiss and Irish governments trying to persuade them to relocate. The ability of the rich and their employers to move abroad should not be underestimated.

The Conservative Party has said that it cannot repeal the 50p rate and NICs increase in the short-term because of the need to reduce the deficit. But that is not true because there is a much better candidate for increasing revenue – indirect taxes on consumption.

Reform proposes that the raft of zero and reduced rated items on which VAT is charged should be scrapped. This would follow the principle of the best tax systems which levy the lowest rates on the largest numbers of people. The rich would still be hit the hardest, as they spend more. But increasing cash benefits by 7.5 per cent would mean that the poorest third of households would not pay any more VAT and would still raise enough tax – 15bn – to help reduce the deficit while abolishing the 50p rate and cutting NICs below their present level.

The reality is that taxes will have to go up to help reduce the deficit in the short term and before the full effects of spending reform take place. Some tax rises will also remind the public that spending has to be paid for. But politicians need to implement the right tax rises. The unemployed of Yorkshire should be urging higher taxes on spending rather than on jobs, and on the masses, not the few. These will be the tax policies to help secure our economic future.