The Demos guide to pragmatic, pro-growth tax reform

Must the government choose between a broken promise and a broken economy, or is there another way? As the Budget countdown continues (just 34 days now), that’s the question everyone’s asking.

Facing the fiscal hole, the Chancellor has begun rewriting her old script. Tax rises are now explicitly on the cards (shock horror!). The reason? The finger is being pointed at Brexit, austerity and Liz Truss’s mini-budget.

The stakes for tax rises could not be higher. On one hand is the danger of a political firestorm which sinks public trust. On the other, a business backlash which drags on economic growth. Neither are remotely acceptable.

We at Demos are determined to find another way. And that we have…

In a reassuring harmony (if such a thing exists in politics), the public and business align in their support for a tax system which is fairer between different people and firms. Our paper, Solving the Tax Puzzle (covered in The Times, The Telegraph and Politico) shows how pragmatic reforms like tackling tax advantages for landlords could, at once, plug the fiscal hole, drive growth and win public support. Our upcoming report, Getting Down to Business suggests that smaller businesses – which the PM called “the beating heart of our high streets, our communities, and our economy” – back the changes too.

Taking this approach could not only avoid a broken promise and broken economy, it could move us onto an optimistic path towards a more trusted state. Reporting this week about Treasury plans to equalise tax between some partnerships and other businesses – closely reflecting Demos proposals – suggests they’re listening.

Yet, three key risks remain.

First: a government scared about further taxing wealth. Tractors rumbling down Whitehall after last year’s inheritance tax reforms may now be etched into the Chancellor’s psyche. But our recent research, Beyond the Headlines, shows that the backlash was not a verdict on taxing wealth. Rather, it was a case study in how not to communicate such reforms. If the government taxes wealth with clarity and without apology, this time could be different.

Second: a government defaulting to a timid, reactionary defence of tax rises. With a public tired of blame-games, defending tax rises as reactions to Brexit won’t cut the mustard. The public instead longs for a positive vision of change. Our latest paper, The Story to Tell on Tax Rises, shows that a narrative of fairness holds the key. The evidence demonstrates how a compelling promise to ‘close loopholes and rebalance the tax system’ could not just minimise backlash, but rebuild public confidence in the state (details in The Guardian).

Third: will it be enough? Beyond balancing the books, we also desperately need investment in national renewal. The three big taxes which the government promised not to raise – income tax, national insurance and VAT – may be the only way to deliver that. But how can Reeves do so without shattering faith in the state? Our upcoming paper, Taxing Decisions, will address exactly that. Keep your eyes peeled.

The government’s position is not enviable; the challenge is immense. But the opportunity is even greater. Tax rises can be the foundation of a fair, pro-growth, positive vision for change. The government cannot let fear stand in its way.

This is the moment to choose purpose over panic.