Don't Mess With Taxes

All eyes are on England and the United States, but I'm not talking (this time) about the World Cup matches.

Rather, it's Great Britain's "most severe package of spending cuts and tax increases since the early days of Margaret Thatcher's era."

New Prime Minister David Cameron has proposed average budget reductions of 25 percent for almost all government departments -- except health and international spending -- over the next five years. Or, as the Evening Standard's catchy headline characterized the move, "Tax and Axe."

Cameron and his coalition are hoping the cuts, along with a series of tax increases (roughly four pounds in spending cuts for every pound in tax increases), will cut the annual government deficit by nearly $180 billion by 2015.

Will it work?

Or will, as many economists fear, will the reduced government spending cause any recovery to stall? The conventional wisdom, shared by the United State's top fiscal folks, is that when the private sector is struggling, governments should increase spending to stimulate growth.

American deficit hawks will be watching England's economic approach closely to see if there's anything we can borrow to deal with our own fiscal dilemmas.

One thing I'm willing to bet we won't hear, especially in this midterm election year, is the type of talk George Osborne, Chancellor of the Exchequer, offered his countrymen (via today's story in the New York Times):

"I am not going to hide the hard choices from the British people," Mr. Osborne said in a speech in which he accused the former Labour government of understating the impact of its 13 years of deficit spending. But he said the new coalition government, which should have little difficulty enacting the new measures with its Parliament majority, had striven to make the austerity fair.

"Over all, everyone will pay something," he said, but the poor would pay less than the rich.

One thing, however, that is very reminiscent of U.S. fiscal policy and politics is that many of the austerity plan's detail's won't be made public until the fall. Yep, every politician everywhere likes to keep a tight rein on tax and spending information for as long as possible.

Sparking debate, protests: And it seems that in many respects, the U.S. and U.K. are still very much alike.

On both sides of the Atlantic, spending and tax proposals spark the creativity of protesters, like those at left upset about the budget plans revealed so far.

It's been announced that England's new taxes include an increase next year in the value-added tax on most goods and services, from 17.5 percent to 20 percent.

There's also a hike in the country's capital gains tax, to a new high of 28 percent. In a decidedly U.S.-style populist sound bite, this increase will ensure that the rich are no longer "paying less tax than the people who clean for them."

The budget also will remover nearly 900,000 of Britain's poorest citizens will be dropped from the income tax system and corporate taxes will be reduced from 28 percent to 24 percent over five years.

In addition to those carrying signs, the budget details released so far have have generated media grumbling about such things as unnecessary tax hikes and the unintended burden the changes will place on retirees.

Will such protests shape the final policy details that will be released later this year? That sometimes works in America. We and all of Europe must wait to find out.

Now if only England had a model that might give Capitol Hill some direction on dealing with tax extenders!

Related posts:

• Limited small biz capital gains tax break
• Tax policy and the American homeownership dream
• Today's episode of Tax Extenders Folly
• Tax extenders Senate saga continues
• Senate tax extender changes: homebuyer credit extension, easing S Corp taxes?
• Senate makes changes to tax extenders
• House passes extenders

Want to tell your friends about this blog post? Click the Tweet This or Digg This buttons below or use the Share Thisicon to spread the word via e-mail, Facebook and other popular applications. Thanks!