Episode 2

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0:00:03 > 0:00:05'Welcome to the street of choices.

0:00:05 > 0:00:09'How much to spend, how much to tax?

0:00:09 > 0:00:14'For years, the occupants of Number 10 have claimed they could spend more without taxing us more...

0:00:16 > 0:00:20'..leaving the chancellors in Number 11 to balance the books.

0:00:23 > 0:00:25'All too often, they've failed.

0:00:25 > 0:00:27'Now, we're living with the consequences.

0:00:29 > 0:00:33'In this series, I've been finding out how we got here,

0:00:33 > 0:00:38'and examining the demands on the people who have to make the nation's sums add up.

0:00:41 > 0:00:47'Right now, the economy is facing the tightest squeeze in decades, and it hurts.'

0:00:50 > 0:00:54We put pressure on the Chancellor to spend more and more,

0:00:54 > 0:00:58and then we're incredibly resistant to paying more tax to pay for it.

0:00:58 > 0:01:03'So why can't politicians protect the have-nots by taxing the have-lots?

0:01:03 > 0:01:06'It may not be that simple.'

0:01:06 > 0:01:10Taxes are, for the very rich, effectively voluntary.

0:01:10 > 0:01:13I think taxes are totally voluntary for the very rich.

0:01:13 > 0:01:17'What about those who are not rich, but are certainly better off?'

0:01:17 > 0:01:23It's not that I don't want to pay any more, but I feel like we haven't got any more to give.

0:01:23 > 0:01:30'And why can't they simplify the bewilderingly complex taxes on what we spend and buy?'

0:01:30 > 0:01:32That one doesn't pay, that one does pay VAT.

0:01:32 > 0:01:35- Why?- Don't ask me, I'm not the Chancellor!

0:01:39 > 0:01:46Why don't chancellors tax us enough to pay for all the things that we say we want them to spend money on?

0:01:46 > 0:01:52Why do the nation's sums fail to add up so often over our history?

0:01:52 > 0:01:59Tonight, the trouble with tax on Your Money And How They Spend It.

0:02:09 > 0:02:13'Let's begin at the beginning. What is tax?

0:02:13 > 0:02:15'We know what it is, don't we?

0:02:15 > 0:02:19'It's the Government chasing us for our hard-earned cash.'

0:02:20 > 0:02:25- Are you a taxpayer?- Er, I am, yeah. - Could I have £5, because somebody over here needs it more than you.

0:02:25 > 0:02:29I'm just trying to get money off taxpayers to give to other people.

0:02:29 > 0:02:32Are you happy to pay a bit more?

0:02:32 > 0:02:36- You probably pay your taxes already, don't you?- Yeah, I do, mate. - Too much?- Too much.

0:02:36 > 0:02:40I wondered if I could have some of your money to give to someone who needs it.

0:02:40 > 0:02:43- I need it meself. - You need it yourself?!- Yeah.

0:02:43 > 0:02:46- Where am I going to get it from, then?- I don't know.

0:02:46 > 0:02:48'Manchester's full of good people,

0:02:48 > 0:02:53'but giving money to total strangers is perhaps asking a bit much.

0:02:53 > 0:02:55'But that's what politicians do.'

0:02:55 > 0:02:58There's somebody in need over there. Could I have £5 to give it to them?

0:02:58 > 0:03:02- I've just got enough for meself. - You don't want to give it to the lady over there?

0:03:02 > 0:03:06- I can't afford to.- She needs it, she's got children.- I need it.

0:03:08 > 0:03:11'And now politicians want us to fork out even more

0:03:11 > 0:03:14'to pay for the country's huge liabilities.'

0:03:15 > 0:03:18I just need a bit of extra money, is that all right?

0:03:18 > 0:03:21It's very expensive, the police, the schools,

0:03:21 > 0:03:25hospitals, there's a war on, so have you got a fiver each, maybe?

0:03:25 > 0:03:28- Governments generally just waste it, don't they?- Yeah.

0:03:28 > 0:03:30They just fritter it away on wars

0:03:30 > 0:03:33and giving it away to idlers who don't work.

0:03:33 > 0:03:38- Who here can I get to give me some more money, do you think? - People who have more money?

0:03:38 > 0:03:41Who are they? What do I have to look for, people in suits?

0:03:41 > 0:03:45- Sir, I'm very sorry to stop you in your lunch break.- Not at all.- We...

0:03:45 > 0:03:48- Have you got your wallet on you? - Yes.

0:03:48 > 0:03:52There are quite a lot of people in need and a lot of public services to be paid for

0:03:52 > 0:03:55and I wonder if you could give me some more money for them.

0:03:55 > 0:04:00- I'm afraid I can't afford it.- No? - I think that's a familiar story that you'll be hearing.

0:04:04 > 0:04:07I don't seem to be able to persuade anybody to part with

0:04:07 > 0:04:11their hard-earned cash so I can hand it on to somebody else.

0:04:11 > 0:04:14Which is a bit of a problem for governments, really, because

0:04:14 > 0:04:18taxes are the way that they take from one and give it to another.

0:04:18 > 0:04:23Maybe even back to us, when we're unable to work or sick or old.

0:04:23 > 0:04:26And if a nice guy like me can't do it

0:04:26 > 0:04:30imagine how much harder it is for politicians.

0:04:30 > 0:04:33Well, the public want to spend money on very worthwhile causes

0:04:33 > 0:04:35that either affect them or other people.

0:04:35 > 0:04:40The public also don't want to pay for it. They believe the Government can find other people to pay.

0:04:40 > 0:04:44Talking about tax in politics is like talking about sex in public.

0:04:44 > 0:04:46Everybody knows it's around,

0:04:46 > 0:04:48but they don't like to talk about it too much.

0:04:48 > 0:04:52And I think people tend to be so cynical now about what Government does

0:04:52 > 0:04:56it's always going to be a difficult conversation,

0:04:56 > 0:04:58but perhaps this is a good time to have it.

0:05:01 > 0:05:03'A good time, because we're living way beyond our means.

0:05:03 > 0:05:09'Last year the Government raised £549 billion in taxes.

0:05:09 > 0:05:13'A huge amount, but much less than they were spending.

0:05:13 > 0:05:16'Stimulating growth is one way to close the gap,

0:05:16 > 0:05:20'but how else could they raise more to make the books add up?'

0:05:20 > 0:05:21Remember that number?

0:05:21 > 0:05:27£549 billion, the amount raised in taxes last year.

0:05:27 > 0:05:31Well, three big taxes raised more than 60% of that.

0:05:31 > 0:05:35The big daddy is income tax. It generated £152 billion.

0:05:35 > 0:05:39But as politicians have been afraid to put the rate up for many years

0:05:39 > 0:05:42they've looked instead to another tax on our incomes.

0:05:42 > 0:05:45It's not called a tax, it's National Insurance,

0:05:45 > 0:05:50and it raised more than most people think, £97 billion last year.

0:05:50 > 0:05:53The amount raised by VAT, value added tax,

0:05:53 > 0:05:55has doubled in the past 30 years.

0:05:55 > 0:06:01It raised £86 billion. Since then, of course, the rate's gone up.

0:06:01 > 0:06:04No other taxes raise anything like as much as those three.

0:06:04 > 0:06:07Businesses pay in all sorts of different ways.

0:06:07 > 0:06:10They pick up more than half the bill in National Insurance,

0:06:10 > 0:06:13they pay rates and other taxes, and then there's corporation tax,

0:06:13 > 0:06:17which generated £43 billion last year.

0:06:17 > 0:06:19Next comes the little guys,

0:06:19 > 0:06:22although it probably doesn't feel like that a lot of the time.

0:06:22 > 0:06:27Add fuel tax, for example, to the so-called "sin taxes" on booze and fags.

0:06:27 > 0:06:30Last year the Government raised £46 billion.

0:06:30 > 0:06:33Council tax, which a lot of people don't like,

0:06:33 > 0:06:37added just £26 billion to the nation's coffers last year.

0:06:37 > 0:06:40Then there are all those little ones that we like to curse.

0:06:40 > 0:06:44Stamp duty when you buy a house, £6 billion,

0:06:44 > 0:06:45inheritance tax, £3 billion,

0:06:45 > 0:06:48and you can't even fly away from the problem

0:06:48 > 0:06:51without paying tax on that plane ticket.

0:06:51 > 0:06:53£2 billion.

0:06:53 > 0:06:58So, short of inventing an entirely new tax, there are your options.

0:07:03 > 0:07:09'Instead of deciding which tax should go up, many start by saying, "Who should pay more tax?"

0:07:09 > 0:07:13'Their answer's simple - the rich. Like this man.'

0:07:15 > 0:07:18OK, so we're ready for departure if you are.

0:07:18 > 0:07:20I'm happy, yeah, thank you very much.

0:07:22 > 0:07:26'John Caudwell has all the trappings of enormous wealth.

0:07:29 > 0:07:33'A helicopter, a yacht and a vast mansion.'

0:07:33 > 0:07:36- That feel good, looking at that? - It's a fabulous house, isn't it?

0:07:36 > 0:07:41- Lovely.- I've always loved Jacobean architecture, Elizabethan, Jacobean.

0:07:43 > 0:07:46'Caudwell's a great British success story.

0:07:46 > 0:07:50'His Phones4U mobile-phone business created thousands of jobs

0:07:50 > 0:07:55'and, when he sold it, netted him £1.5 billion.'

0:07:55 > 0:07:59How does a lad from a terraced house with an outdoor loo here in Stoke

0:07:59 > 0:08:04feel about living in that 50-room mansion a few minutes away?

0:08:04 > 0:08:08Well, of course I feel, er...lucky. And privileged.

0:08:08 > 0:08:12But I don't sort of look at it and it takes me breath away,

0:08:12 > 0:08:14because it sort of took me 35 years to get there!

0:08:19 > 0:08:24'In some countries, the super-rich have asked to pay more tax

0:08:24 > 0:08:26'to help clear their countries' debts.

0:08:26 > 0:08:30'Here, billionaire like John Caudwell aren't keen to follow suit.'

0:08:33 > 0:08:36How much can you tax the rich before they vote with their feet

0:08:36 > 0:08:38and decide to leave the country,

0:08:38 > 0:08:42and then the revenue to the Exchequer is reduced rather than increased?

0:08:42 > 0:08:46And have you got a sense of how much tax you've been paying in the last few years?

0:08:46 > 0:08:49I've got a very great sense of the tax I've paid

0:08:49 > 0:08:53- but I don't know whether you could even stand the number.- Go on.

0:08:53 > 0:08:58Well, if we go from what I've already paid since selling the business,

0:08:58 > 0:09:02and then include what is due and going to be paid,

0:09:02 > 0:09:09we are definitely talking of around about £280 million.

0:09:10 > 0:09:15'Caudwell's proud that that sum could pay to build 14 brand-new secondary schools.

0:09:15 > 0:09:18'But he doesn't like paying his tax one little bit.'

0:09:20 > 0:09:24You choose to give quite a bit of cash now to charities.

0:09:24 > 0:09:28Why do you feel better about doing that than paying your tax bill?

0:09:30 > 0:09:34HE LAUGHS Do you know, there's no comparison! I'm sorry...

0:09:34 > 0:09:39It take me breath away, to be honest, because...we run our charity,

0:09:39 > 0:09:42and all my charitable works, like a business,

0:09:42 > 0:09:45and we make every last penny really count.

0:09:45 > 0:09:47That is incredibly satisfying

0:09:47 > 0:09:50and, because I do it voluntarily, it's even more satisfying.

0:09:50 > 0:09:55What is satisfying about giving 50% of your income to the Government

0:09:55 > 0:10:00and then having it frittered away in many areas that you strongly disagree with?

0:10:03 > 0:10:07Few people like taxes, no matter how rich they are.

0:10:07 > 0:10:10Parliament echoes to the sound of past struggles

0:10:10 > 0:10:13to prise more from the wallets of the wealthy.

0:10:13 > 0:10:15The biggest tax of them all

0:10:15 > 0:10:18was invented specifically to target them.

0:10:19 > 0:10:24200 years ago, like today, Britain faced a mighty big bill.

0:10:24 > 0:10:29The Prime Minister, William Pitt, decided the rich should stump up.

0:10:29 > 0:10:32You can blame him for income tax.

0:10:32 > 0:10:36Its troubled history starts here, in the Parliamentary Archive.

0:10:36 > 0:10:41So...here we are, and the original income tax is right here.

0:10:41 > 0:10:44This is the original Income Tax Act of 1799.

0:10:44 > 0:10:47So if I bin that, I won't have to pay any tax?

0:10:47 > 0:10:49I fear it doesn't quite work like that.

0:10:49 > 0:10:53- If I just take it off the shelf.- You can live in hope, can't you?- Indeed.

0:10:53 > 0:10:56- This is it? This is what they wrote? - This is the original.

0:10:56 > 0:11:00As written out in Parliament while the bill was being passed.

0:11:00 > 0:11:05'When first introduced, income tax was solely for the wealthy.

0:11:05 > 0:11:10'Those earning over £200 a year would pay 10% of their earnings.'

0:11:11 > 0:11:16"Most Gracious Sovereign, we, Your Majesty's most dutiful and loyal subjects,

0:11:16 > 0:11:19"the Commons of great Britain, in Parliament assembled,

0:11:19 > 0:11:25"for granting to His Majesty an aid and contribution for the prosecution of the war."

0:11:25 > 0:11:30This great act was introduced to deal with what's now a familiar problem,

0:11:30 > 0:11:32a whopping great budget deficit.

0:11:32 > 0:11:34But in particular to deal with the costs of war.

0:11:34 > 0:11:37And because the idea was so unpopular,

0:11:37 > 0:11:40then as well as now, the writers of this document

0:11:40 > 0:11:43convinced themselves that it would be temporary.

0:11:43 > 0:11:47'But of course income tax is still with us.

0:11:47 > 0:11:50'Over the years, more and more people have had to pay it

0:11:50 > 0:11:53'and time and again when things got tough

0:11:53 > 0:11:56'politicians turned to the wealthy.'

0:11:59 > 0:12:05Back in 1973, hammering the rich was thought to be a sure-fire vote winner.

0:12:05 > 0:12:10Just before an election, Labour's Shadow Chancellor made this prediction.

0:12:10 > 0:12:12I warn you,

0:12:12 > 0:12:15there are going to be howls of anguish

0:12:15 > 0:12:18from the 80,000 rich people,

0:12:18 > 0:12:22people who are rich enough to pay over 75% on the last slice of their income.

0:12:22 > 0:12:27Denis Healey boasted that he'd squeeze the rich till the pips squeaked.

0:12:27 > 0:12:30At the Treasury, he went further,

0:12:30 > 0:12:33raising the top rate of income tax to 83%.

0:12:38 > 0:12:42It was in fact the Stones, not the pips, that did the squeaking.

0:12:45 > 0:12:49They and other celebrities complained bitterly.

0:12:49 > 0:12:53Basically we have to give all the money to the Revenue, bless them.

0:12:53 > 0:12:55They should be promoting the tour,

0:12:55 > 0:12:57I mean, they're doing very well out of it.

0:12:59 > 0:13:02The Rolling Stones could avoid their soaring tax bill

0:13:02 > 0:13:05by rolling out of Britain, along with Rod Stewart, Michael Caine

0:13:05 > 0:13:08and countless other wealthy people,

0:13:08 > 0:13:12leaving Labour to be branded the high-tax party.

0:13:17 > 0:13:21By the end of the '70s, a new Tory government came to office,

0:13:21 > 0:13:23promising lower income tax for all.

0:13:23 > 0:13:28The basic rate was cut to 30%, the top rate to 60%.

0:13:28 > 0:13:32But it was the next dramatic step which changed everything.

0:13:34 > 0:13:39One day, one speech, one Budget transformed the politics of tax.

0:13:39 > 0:13:42It was 15th March 1988

0:13:42 > 0:13:45when Margaret Thatcher's Chancellor, Nigel Lawson,

0:13:45 > 0:13:49cut not just the basic rate of income tax, but slashed the top rate too.

0:13:49 > 0:13:53There were cries of "Shame!" from within the Commons.

0:13:53 > 0:13:56But the echoes died remarkably quickly.

0:13:59 > 0:14:03'A reduction in the top rates of income tax can, over time,

0:14:03 > 0:14:08'result in a higher and not a lower yield to the Exchequer.'

0:14:08 > 0:14:11We had a system of taxation that was a result of Labour governments

0:14:11 > 0:14:16putting up the top rates of income tax, and Conservative governments

0:14:16 > 0:14:18not reducing them again,

0:14:18 > 0:14:21so we had an absurdly high top rate of income tax

0:14:21 > 0:14:24which was having very great ill effects.

0:14:26 > 0:14:30'Excessive rates of income tax destroy enterprise,

0:14:30 > 0:14:37'encourage avoidance and drive talent to more hospitable shores overseas.'

0:14:37 > 0:14:43'I propose to abolish all the higher rates of income tax above 40%.

0:14:43 > 0:14:46CHEERING AND JEERING

0:14:46 > 0:14:49There was uproar in the House. It was quite extraordinary.

0:14:49 > 0:14:54It was in fact...the only Budget there's ever been in which

0:14:54 > 0:14:58the House of Commons...the sitting had to be suspended.

0:14:58 > 0:15:03- SHOUTING This major reform...- Order! Order!

0:15:03 > 0:15:06- SHOUTING CONTINUES - ORDER!

0:15:06 > 0:15:10Order! Sitting suspended for ten minutes!

0:15:10 > 0:15:12SHOUTING CONTINUES, THEN FADES DOOR SLAMS

0:15:14 > 0:15:18'Outrage would soon turn into acceptance.

0:15:18 > 0:15:23'The new lower rates of income tax became politically untouchable.

0:15:23 > 0:15:26'A decade later, New Labour and Tony Blair

0:15:26 > 0:15:30'pledged not to raise income tax, even for the rich.'

0:15:30 > 0:15:33'If we had not capped the top rate,'

0:15:33 > 0:15:35people would've said, you know,

0:15:35 > 0:15:38"This increase in taxation is coming our way,

0:15:38 > 0:15:41"gradually, step-by-step." It wouldn't end

0:15:41 > 0:15:45at the relatively very rich, it would start encroaching,

0:15:45 > 0:15:49you know, on the not-so-rich and the people who want more.

0:15:54 > 0:15:56That in short was the dilemma

0:15:56 > 0:15:59which the last Labour Government wrestled with.

0:15:59 > 0:16:01How do you target the rich to pay more tax

0:16:01 > 0:16:05without alienating the people who aspire to be rich one day

0:16:05 > 0:16:10or indeed everybody else who fears that you might come for them next?

0:16:10 > 0:16:15In short, how exactly do you decide who are the rich?

0:16:20 > 0:16:24'It's race day at Newbury in Berkshire,

0:16:24 > 0:16:27'home, surely, to one or two rich people.'

0:16:29 > 0:16:31Come on!

0:16:40 > 0:16:46'I'm certainly not making MY fortune, but surely this is just the place

0:16:46 > 0:16:50'to find the people who we all agree should pay more tax. Don't we?'

0:16:53 > 0:16:55Where are the rich? Who are the rich?

0:16:55 > 0:16:59- I wish I knew, but it's not me. - It's not you?- No!

0:16:59 > 0:17:04I have come in search of the rich. Who are the rich? Is it you?

0:17:04 > 0:17:06- No chance.- Is it him?- It's not.

0:17:06 > 0:17:08- Who are the rich?- Yeah.

0:17:08 > 0:17:10The blokes over in those boxes?

0:17:10 > 0:17:14- I would imagine so, yeah. They've got a nice life, haven't they?- Yeah.

0:17:14 > 0:17:17- Who are the rich?- Not us. LAUGHTER

0:17:17 > 0:17:21- No?- Not this evening.- And we won't be after this is finished.- Yeah?

0:17:21 > 0:17:26No, by the rich, you mean the very rich, that's what it means. Not the middle people like us.

0:17:28 > 0:17:31'No luck, then, in finding people who think THEY are rich.

0:17:31 > 0:17:35'So let's try another tack. On a range of pay scales,

0:17:35 > 0:17:37'from about 20 grand to half-a-million-plus,

0:17:37 > 0:17:40'where does being rich begin?'

0:17:40 > 0:17:44Where on here would you instinctively think rich begins?

0:17:46 > 0:17:48- There?- Definitely.

0:17:48 > 0:17:52Where do you think the rich starts, then? Is it that one or there?

0:17:52 > 0:17:56- Round here.- About there?- Round here. - So I guess you're the top bit.

0:17:56 > 0:17:59- Where do I come in? - I think you must be here.

0:17:59 > 0:18:02- I can...- Judging by the BBC thing, I guess you're here.

0:18:02 > 0:18:06You are absolutely right, I am on this sheet(!)

0:18:06 > 0:18:07Thank you very much indeed!

0:18:07 > 0:18:12I think rich, I hate to tell you, but I think it begins round about here.

0:18:12 > 0:18:14- 119,000 a year?- Yeah.

0:18:14 > 0:18:18- There.- 119,000? That's rich.- Yeah.

0:18:18 > 0:18:21'So, some agreement about who the rich are,

0:18:21 > 0:18:24'but how many people ARE that well-paid?'

0:18:24 > 0:18:28- How many people earn that sort of money?- Oh, not many, not many.

0:18:28 > 0:18:32- About how many? - Um... Oh! About 20%.

0:18:32 > 0:18:35- 20% earn more than 120,000?- Yeah.

0:18:35 > 0:18:37- I would say 10.- 10%?

0:18:37 > 0:18:40- 25% of the country earn more than 119,000?- Yeah.

0:18:40 > 0:18:42- Shall I tell you the answer? - Go on, then.

0:18:42 > 0:18:44- 1%.- Oh, is that right?!

0:18:44 > 0:18:46- Only 1?- Only 1%?- Is that really?

0:18:46 > 0:18:48- 1% of the country.- Crikey!

0:18:48 > 0:18:52- Is it?- What about football players? - There are not many, are there?

0:18:52 > 0:18:54We're the lucky ones, then, aren't we? LAUGHTER

0:18:54 > 0:18:57- Mind you, we blooming well work for it.- Yeah.

0:18:57 > 0:18:59So our perspective is all wrong.

0:19:01 > 0:19:04'Having the wrong perspective has real political impact.

0:19:04 > 0:19:07'When we tell politicians to tax the rich,

0:19:07 > 0:19:09'we mean other people, never us,

0:19:09 > 0:19:13'and we overestimate how many there really are.'

0:19:14 > 0:19:16There aren't enough rich

0:19:16 > 0:19:21to fund the sorts of expenditures that need to be funded.

0:19:21 > 0:19:27I mean, I... I'm not poor, but I don't regard myself as rich.

0:19:27 > 0:19:30I regard Russian oligarchs as rich.

0:19:30 > 0:19:33Everybody has their own idea of who the rich are

0:19:33 > 0:19:35and they're always someone else.

0:19:35 > 0:19:39- And it's them that should pay rather than us?- It's them that should pay.

0:19:41 > 0:19:44'At Westminster, politicians are tempted

0:19:44 > 0:19:49'to pander to voters' perceptions of who can afford to pay more tax,

0:19:49 > 0:19:53'whilst also having to confront reality.

0:19:53 > 0:19:57'Let's take a look at who pays what when it comes to income tax.'

0:19:57 > 0:20:01This is the total amount raised in income tax last year.

0:20:01 > 0:20:06So how much do those on the lowest 10% of incomes contribute to that?

0:20:06 > 0:20:10That's people whose incomes are up to about £10,000 a year.

0:20:10 > 0:20:14That will include part-time workers, some pensioners and students.

0:20:14 > 0:20:21That group contributes just 0.5% of the income-tax total.

0:20:21 > 0:20:24In fact, the first 90% of income-tax earners

0:20:24 > 0:20:29contribute less than half of all the income tax collected.

0:20:29 > 0:20:35This means all of the rest is paid for by the top 10% of earners alone.

0:20:35 > 0:20:38That's those earning more than £48,000 a year.

0:20:38 > 0:20:42People like police inspectors and some senior teachers and the like.

0:20:42 > 0:20:44What about the richest 1%?

0:20:44 > 0:20:47Now, if you include not just salary,

0:20:47 > 0:20:50but income from savings and shares and other assets,

0:20:50 > 0:20:54we're talking of people earning more than £153,000 a year,

0:20:54 > 0:20:58and that top 1%, just over 300,000 people,

0:20:58 > 0:21:03pays around 27% of all the income tax.

0:21:03 > 0:21:07That is a consequence of growing inequality.

0:21:07 > 0:21:10As the rich earn more and more,

0:21:10 > 0:21:13they pay a greater and greater share of income tax.

0:21:13 > 0:21:18More than enough, they may think, but others say not nearly enough.

0:21:20 > 0:21:24'After 30 years in which income tax rates only went down,

0:21:24 > 0:21:28'it's not been easy for politicians, whatever their instincts,

0:21:28 > 0:21:33'to put it back up. It wasn't until the global financial crisis of 2008

0:21:33 > 0:21:37'that raising the top rate of tax got back on the agenda.'

0:21:38 > 0:21:41Even when the banks were crashing round our ears,

0:21:41 > 0:21:44when the taxpayer was shelling out for them,

0:21:44 > 0:21:48when anger about bankers' bonuses was at its height,

0:21:48 > 0:21:51a Labour Government, led by Gordon Brown,

0:21:51 > 0:21:54two decades after Nigel Lawson's budget,

0:21:54 > 0:21:59still agonised about whether it could get away with increasing the top rate of tax.

0:21:59 > 0:22:04But the crash had blown a vast hole in public finances,

0:22:04 > 0:22:08which had to be plugged with tax rises and spending cuts.

0:22:08 > 0:22:11Anyone earning over £150,000 a year

0:22:11 > 0:22:15would pay the new top rate of income tax.

0:22:15 > 0:22:19In order to help pay for additional support for people now,

0:22:19 > 0:22:23and to invest in the future, I've decided that the new rate will be 50%

0:22:23 > 0:22:26and will come in from April next year, a year earlier.

0:22:28 > 0:22:32'The Chancellor considered promising that it was a temporary tax rise,

0:22:32 > 0:22:35'but that's what they'd said when income tax began.

0:22:35 > 0:22:40'Ever since, there have been loud calls to scrap the 50p rate.'

0:22:40 > 0:22:44The debate about how much to tax the incomes of the rich

0:22:44 > 0:22:48is now not really focused on how much money can be raised,

0:22:48 > 0:22:50but what it says about Britain.

0:22:50 > 0:22:54Those who want to keep the top rate of tax at 50p argue,

0:22:54 > 0:22:58"It's a symbol of fairness, of shared pain in difficult times."

0:22:58 > 0:23:01Those who want to see it gone say that the rate acts

0:23:01 > 0:23:04as a kind of warning sign over Britain, over London,

0:23:04 > 0:23:08saying to the wealthy, "You're not welcome here."

0:23:08 > 0:23:13That's a fear shared even by the man who introduced that new top rate

0:23:13 > 0:23:15and he fears something else too -

0:23:15 > 0:23:20that it suggests that Labour is still a high-tax party.

0:23:20 > 0:23:25- Was it crossing a Rubicon? - Yes, it was. I felt it was crossing a Rubicon, because it was changing...

0:23:25 > 0:23:29Our whole philosophy, as New Labour, was a different economic approach,

0:23:29 > 0:23:32that we were to encourage people, encourage aspiration.

0:23:32 > 0:23:37That meant a competitive tax rate, something realistic, to encourage people to get on.

0:23:37 > 0:23:41It was sending a broader political signal, if you like. Now, this was changing it.

0:23:42 > 0:23:45If putting it up was difficult for Labour,

0:23:45 > 0:23:48cutting it now is a headache for the coalition.

0:23:48 > 0:23:50Liberal Democrat David Laws

0:23:50 > 0:23:53was George Osborne's deputy at the Treasury.

0:23:53 > 0:23:58The politics now makes keeping the top rate much easier than scrapping it.

0:23:59 > 0:24:02I think that 50% is too high.

0:24:02 > 0:24:06Half of somebody's income is a hell of a lot for we in government,

0:24:06 > 0:24:09for the state, to take, however rich they are.

0:24:09 > 0:24:14But I'm absolutely clear that, while we are in the middle of this, er,

0:24:14 > 0:24:17necessary process of Government austerity,

0:24:17 > 0:24:21while we're imposing huge burdens on people across society,

0:24:21 > 0:24:24it would be absolutely nuts to be seen to be a government

0:24:24 > 0:24:27that was prioritising the richest 1% of the population.

0:24:31 > 0:24:34The rich aren't exactly lining up

0:24:34 > 0:24:37to offer to pay more tax on their income. To many,

0:24:37 > 0:24:41having to hand over more than half what they earn to the Government

0:24:41 > 0:24:45crosses a psychological pain barrier.

0:24:45 > 0:24:51So politicians faced with the political and practical difficulties of getting more money that way

0:24:51 > 0:24:54have turned increasingly, not to the rich,

0:24:54 > 0:24:57but to the, well, comfortably off.

0:25:07 > 0:25:11'I'm heading to the seaside town of Southport in Lancashire.

0:25:11 > 0:25:15'I'm going to meet a family classified as comfortably off,

0:25:15 > 0:25:18'wealthy enough to pay, not the top rate of tax,

0:25:18 > 0:25:21'but the so-called higher rate of 40p in the pound,

0:25:21 > 0:25:25'levied on earnings over 44,000 a year.'

0:25:27 > 0:25:32'Kat Sumner earns nothing. She's a full-time mum, bringing up four children.

0:25:32 > 0:25:36'Although her husband Neil earns about 49,000 a year,

0:25:36 > 0:25:41'they feel far from comfortable. In fact, they feel stretched.'

0:25:43 > 0:25:48- Some people will hear 49,000 and think, "That's a lot of money, a lot more than we earn."- Yeah.

0:25:48 > 0:25:51And I understand how people feel about that,

0:25:51 > 0:25:54but, I mean, I don't think they really understand how,

0:25:54 > 0:25:59you know, far that really goes, when you've got to think about six people,

0:25:59 > 0:26:03paying for their food, paying for their clothes, housing them all.

0:26:03 > 0:26:06I have to try quite hard to make ends meet.

0:26:07 > 0:26:11'Instead of putting up tax rates, politicians have classified

0:26:11 > 0:26:15'more and more people as higher-rate taxpayers,

0:26:15 > 0:26:18'dragging more families into the net.

0:26:18 > 0:26:22'The number of families like Kat's paying 40%

0:26:22 > 0:26:25'has trebled in the past 30 years.'

0:26:25 > 0:26:27- CHILD:- I don't know now. - You don't know?

0:26:27 > 0:26:32The tax bandings have been very static compared to people's incomes.

0:26:32 > 0:26:37As people's incomes rose and rose, the tax bandings stayed pretty much where they were

0:26:37 > 0:26:41and therefore brought more people into paying 40p tax rate.

0:26:41 > 0:26:44That whole situation is really unfair.

0:26:44 > 0:26:48'With so many ordinary families now paying the higher rate of tax,

0:26:48 > 0:26:53'it's become harder for politicians to increase their tax rate.

0:26:53 > 0:26:58'Instead, the Government has to claw back cash from them in other ways.'

0:26:58 > 0:27:01'We will withdraw child benefit from households'

0:27:01 > 0:27:05with a higher-rate taxpayer. When the debts left by Labour

0:27:05 > 0:27:08threaten our economy, when our welfare costs

0:27:08 > 0:27:11are out of control, this measure makes sense.

0:27:11 > 0:27:14APPLAUSE

0:27:16 > 0:27:19It's my only income as a person, um, and it...

0:27:19 > 0:27:24When it was taken away, it made me feel really, like, this is...

0:27:24 > 0:27:28This is us saying, "There is no value in what you do,

0:27:28 > 0:27:32"we don't value anything about you, who you are or what you do."

0:27:35 > 0:27:39The plan to cut Kat's child benefit inspired her

0:27:39 > 0:27:42to start a local campaign against the cuts.

0:27:42 > 0:27:47I've got a few things here explaining about some of the cuts that are being made.

0:27:47 > 0:27:50'She wants the better-off to pay more

0:27:50 > 0:27:55'and certainly doesn't think of herself as belonging to that group.'

0:27:56 > 0:27:59In terms of tax, you don't want to pay any more?

0:27:59 > 0:28:01It's not that I don't WANT to pay any more,

0:28:01 > 0:28:05I feel that people should be responsible and take pride

0:28:05 > 0:28:09in paying their taxes, but I feel like we haven't got any more to give.

0:28:12 > 0:28:15That feeling, which many people share,

0:28:15 > 0:28:18is what tempts politicians to promise tax cuts,

0:28:18 > 0:28:21even when there simply isn't the money to pay for them.

0:28:21 > 0:28:25'There are now three million higher-rate taxpayers,

0:28:25 > 0:28:28'but ten times that number pay the basic rate,

0:28:28 > 0:28:32'so cutting that has long been the holy grail.'

0:28:34 > 0:28:38The idea of cutting income tax has held politicians,

0:28:38 > 0:28:43whether Conservative or Labour, in its spell for three decades.

0:28:43 > 0:28:47When Gordon Brown delivered his last Budget just weeks before

0:28:47 > 0:28:50moving next door on Downing Street to Number 10,

0:28:50 > 0:28:55he was determined to prove that he too was a New Labour figure.

0:28:55 > 0:28:57What better way of doing that

0:28:57 > 0:29:00than cutting the basic rate of income tax?

0:29:00 > 0:29:05And you know, for a while, it all seemed to go so well.

0:29:05 > 0:29:08To reward work, to ensure working families are better off

0:29:08 > 0:29:10and to make the tax system fairer,

0:29:10 > 0:29:14I will from next April cut the basic rate of income tax

0:29:14 > 0:29:17from 22 pence to 20 pence...

0:29:17 > 0:29:18CHEERING

0:29:20 > 0:29:23Everybody likes to sit down to a cheer,

0:29:23 > 0:29:27but this is a case where if you are going to change the tax system

0:29:27 > 0:29:29in a big way, for goodness' sake,

0:29:29 > 0:29:32ask yourself...is this too good to be true?

0:29:32 > 0:29:35I commend this Budget to the House.

0:29:35 > 0:29:38Because the answer is it probably is too good to be true.

0:29:38 > 0:29:43Problem for David Cameron to follow this, which he'll be doing in a moment?

0:29:43 > 0:29:46Diary said that it was worse than changing nappies.

0:29:46 > 0:29:49A Labour Chancellor who they've said is a tax increaser has suddenly,

0:29:49 > 0:29:53with about 30 seconds' notice, said, "There, a 2p cut on income tax."

0:29:53 > 0:29:56He doesn't know what we don't know -

0:29:56 > 0:29:59who is paying for that 2p cut in the basic rate? We'll find out.

0:30:02 > 0:30:06What we did find out is that that income-tax cut for some

0:30:06 > 0:30:10was being paid for by an income-tax rise

0:30:10 > 0:30:13for some of the poorest taxpayers in the country.

0:30:13 > 0:30:16Gordon Brown had scrapped the lowest level of income tax -

0:30:16 > 0:30:22the 10p band - and he, like another Labour Chancellor, Denis Healey,

0:30:22 > 0:30:27all those years ago, was greeted with howls of outrage.

0:30:27 > 0:30:31The problem this time is they were coming from his own supporters.

0:30:31 > 0:30:34I'm afraid the real problem for us was there was an awful lot of people

0:30:34 > 0:30:38who bluntly were traditional Labour voters and had been with us

0:30:38 > 0:30:40in support for the last ten years,

0:30:40 > 0:30:43who suddenly found their income had dropped,

0:30:43 > 0:30:46and they're the ones who said, "Hold on, what have you done to us?"

0:30:48 > 0:30:51When Alistair Darling took over from Brown at the Treasury,

0:30:51 > 0:30:55he also took over the daunting problem of compensating those

0:30:55 > 0:30:59who'd paid the price for a good headline.

0:30:59 > 0:31:01At a cost of £2.7 billion,

0:31:01 > 0:31:07I will increase the individual personal tax allowances by £600...

0:31:07 > 0:31:10The eventual bill was closer to £6 billion

0:31:10 > 0:31:13and it was politically costly too.

0:31:13 > 0:31:17Just eight days after Darling's attempted salvage job,

0:31:17 > 0:31:22Labour lost a once-safe seat in a by-election in Crewe and Nantwich.

0:31:22 > 0:31:26..20,541.

0:31:26 > 0:31:28This was not well managed at all,

0:31:28 > 0:31:31this was a political disaster, and it took a heavy toll.

0:31:37 > 0:31:40The reality is that the biggest money-spinner of all,

0:31:40 > 0:31:45income tax, has now become a dead cert political loser.

0:31:45 > 0:31:50The political consensus that it was impossible to raise income tax

0:31:50 > 0:31:53meant the Government simply couldn't raise enough money that way.

0:31:53 > 0:31:56There was, of course, a simple solution -

0:31:56 > 0:32:00tax people's incomes, but do it with a tax called something different.

0:32:00 > 0:32:03National Insurance.

0:32:04 > 0:32:09'The Government takes not only income tax from our pay packets

0:32:09 > 0:32:13'but also National Insurance, which of course is paid by employers too.'

0:32:13 > 0:32:16Is Wise Venture a wise venture?

0:32:16 > 0:32:19'It's hard to keep track of how much we cough up,

0:32:19 > 0:32:21'let alone where it goes.'

0:32:21 > 0:32:23Thanks very much indeed.

0:32:23 > 0:32:26'So, with some punters, I did a few sums.'

0:32:28 > 0:32:32How much income tax do you think you pay?

0:32:35 > 0:32:382,000, 3,000?

0:32:40 > 0:32:41SHE GASPS

0:32:41 > 0:32:45- Oh, my God!- How much do you think you pay in National Insurance?

0:32:45 > 0:32:48- Two and a half? - Two and a half thousand?

0:32:53 > 0:32:55Wow.

0:32:56 > 0:32:57I need a pay rise!

0:32:57 > 0:33:02- Would you like to pay more tax, Kirsty?- No, I wouldn't, actually.

0:33:02 > 0:33:03- You wouldn't?- No!

0:33:03 > 0:33:05But if you had to have a tax rise,

0:33:05 > 0:33:09would you rather it was income tax or National Insurance?

0:33:09 > 0:33:12- I would prefer that it was National Insurance.- Because?

0:33:12 > 0:33:15Because I believe in the National Health system.

0:33:15 > 0:33:19And I think it is far better to pay into that.

0:33:19 > 0:33:21I think if they had to put one up,

0:33:21 > 0:33:24I'd prefer it to be National Insurance.

0:33:24 > 0:33:25Because?

0:33:25 > 0:33:28Because I think that goes towards healthcare

0:33:28 > 0:33:31and things that I will need in the future.

0:33:31 > 0:33:33If they're going to put anything up,

0:33:33 > 0:33:35- put up the National Insurance? - National Insurance.

0:33:35 > 0:33:38If I told you they're absolutely the same,

0:33:38 > 0:33:40income tax and National Insurance,

0:33:40 > 0:33:42they pay for exactly the same things...

0:33:42 > 0:33:46- No. That is just like...wrong. - They do.

0:33:46 > 0:33:51Many of us may think that National Insurance is not just another tax,

0:33:51 > 0:33:53but some kind of, well, insurance,

0:33:53 > 0:33:57paying exclusively for health and pensions.

0:33:57 > 0:34:01That was true once, now it's a fiction.

0:34:01 > 0:34:04Yet it's one which serves politicians well to maintain.

0:34:04 > 0:34:07At the top, Mr Brown, please!

0:34:07 > 0:34:11In the budget of 2002, Gordon Brown,

0:34:11 > 0:34:14the Chancellor who'd pledged not to raise income tax,

0:34:14 > 0:34:17raised the tax on our incomes by putting up National Insurance.

0:34:17 > 0:34:20The clever bit was the way he sold it to us.

0:34:20 > 0:34:24We as a nation will have to spend more on health care.

0:34:24 > 0:34:29I believe it is right that when everyone, employees and employers,

0:34:29 > 0:34:32benefit from the insurance provided by

0:34:32 > 0:34:34the National Health Service,

0:34:34 > 0:34:38everyone who can should make a fair contribution.

0:34:40 > 0:34:46Market researcher Deborah Mattinson had tested every key phrase in focus groups.

0:34:46 > 0:34:50Her job was to find a way to sell Gordon Brown's tax rise.

0:34:50 > 0:34:54First off it was about ring-fencing the money and saying

0:34:54 > 0:34:55this will go on the NHS

0:34:55 > 0:34:57and that the NHS needed more investment,

0:34:57 > 0:35:02which people bought relatively easy and it resulted in a tax rise

0:35:02 > 0:35:05that eight out of ten people supported and were in favour of,

0:35:05 > 0:35:07which I think is quite an achievement.

0:35:09 > 0:35:12Finally someone had done it, come up with a popular tax rise.

0:35:12 > 0:35:14How did Gordon Brown do it?

0:35:14 > 0:35:18Well, first and foremost by not calling it an income-tax rise.

0:35:18 > 0:35:22Second, by making it seem to be for a very specific purpose.

0:35:22 > 0:35:27And thirdly, by linking it with the national religion - the NHS.

0:35:27 > 0:35:30But there's a sting in this tale.

0:35:30 > 0:35:33If the Government thought it would get the credit for the spending

0:35:33 > 0:35:37produced by that tax rise, it was to be mistaken.

0:35:37 > 0:35:39What we found, very frustratingly,

0:35:39 > 0:35:42was what we began to describe as, "I've been lucky syndrome."

0:35:42 > 0:35:49People would say, "My local primary school is OK but I've been lucky."

0:35:49 > 0:35:53Or, "I took my daughter to the A&E, we were seen in half an hour, but we were lucky."

0:35:53 > 0:35:57In other words, when they started to see that change in their own lives,

0:35:57 > 0:36:01they didn't assume that this was happening all over the country.

0:36:01 > 0:36:03Does that have an impact of undermining

0:36:03 > 0:36:06the ability of politicians to ask for more money to spend?

0:36:06 > 0:36:09It completely undermined the ability,

0:36:09 > 0:36:12because basically people didn't feel that things had improved.

0:36:12 > 0:36:14What had happened to them, their experience,

0:36:14 > 0:36:17what they'd seen was an isolated lucky fluke. "I've been lucky."

0:36:22 > 0:36:25'And this could be one of the biggest problems of all

0:36:25 > 0:36:29'for politicians trying to raise more tax on our incomes.

0:36:29 > 0:36:34'Whatever the evidence, we never seem to think we're getting a bargain.'

0:36:38 > 0:36:42How much do we get back in return for the taxes that we give to the Government?

0:36:42 > 0:36:46That depends, of course, on where we are on the income scale.

0:36:46 > 0:36:50Let's put all the households in the UK into ten equal groups,

0:36:50 > 0:36:54starting with the poorest and moving up to the richest.

0:36:54 > 0:36:57This shows what households on average get from government.

0:36:57 > 0:36:59The higher the bar, the more the group gets

0:36:59 > 0:37:02in things like healthcare, education, pensions and benefits,

0:37:02 > 0:37:05pretty much everything the Government spends its money on.

0:37:05 > 0:37:09As we go down the income scale, towards the poorest, we see that,

0:37:09 > 0:37:14on average, poorer households get slightly more from the Government.

0:37:14 > 0:37:16No surprise there, because, of course, they get more

0:37:16 > 0:37:18in terms of benefits.

0:37:18 > 0:37:20But now let's add something.

0:37:20 > 0:37:24Let's see what happens when you add in how much people pay in tax.

0:37:24 > 0:37:28Above the line is what you're getting from the Government,

0:37:28 > 0:37:31below the line is what you're paying to them in taxes.

0:37:31 > 0:37:37For the first six groups, that's for 60% of all households,

0:37:37 > 0:37:40on average they are getting more back than they're paying in.

0:37:40 > 0:37:44But then look at the top 40% of households.

0:37:44 > 0:37:47On average they are getting less than they pay

0:37:47 > 0:37:51and this last one, the top, the richest 10%, they contribute

0:37:51 > 0:37:58on average about five times in tax more than they are getting back.

0:37:58 > 0:38:00There is a further twist though,

0:38:00 > 0:38:03which makes life even harder for politicians.

0:38:03 > 0:38:09Opinion polls show that even people in those groups that do receive the most

0:38:09 > 0:38:10don't see it that way.

0:38:10 > 0:38:13They tell pollsters they simply don't believe that

0:38:13 > 0:38:17they're getting more back than they've paid in.

0:38:26 > 0:38:29'If taxing people's incomes is hard to sell,

0:38:29 > 0:38:32'what about taxing the things we buy instead?

0:38:33 > 0:38:37'Leicester is home to one of the biggest markets in Europe.

0:38:37 > 0:38:41'Plenty here, you might think, for a Chancellor to take a bite of.

0:38:41 > 0:38:44'If only it were that simple.'

0:38:44 > 0:38:47There is a tax that we all pay almost every day

0:38:47 > 0:38:49and yet often barely notice it.

0:38:49 > 0:38:52It is a tax that generates a vast amount of revenue

0:38:52 > 0:38:56and can generate a vast amount of political controversy.

0:38:56 > 0:38:59It operates in a pretty bizarre way

0:38:59 > 0:39:03and yet any politician who tries to sort that out

0:39:03 > 0:39:05ends up with a bloody nose.

0:39:08 > 0:39:11It is nearly 40 years since the Chancellor of the Exchequer

0:39:11 > 0:39:14introduced VAT - value added tax.

0:39:14 > 0:39:18You paid 10% on everything except the essentials -

0:39:18 > 0:39:20food and children's clothes.

0:39:20 > 0:39:25He called it "a simple tax". How times change.

0:39:25 > 0:39:27Take pet food.

0:39:32 > 0:39:35- I'll take those if I may, please? - Oh, yes, sir.

0:39:35 > 0:39:38Has that got VAT with it?

0:39:38 > 0:39:44- Yes, it has.- We pay VAT on these?! - Yes.- Really?- Terrible, isn't it?

0:39:44 > 0:39:47If it was a bag of rabbit food, then there's no VAT on it

0:39:47 > 0:39:50because we eat rabbits, but our dogs are pets, so you're charged.

0:39:50 > 0:39:54- So there's no VAT on rabbit food? - On rabbit food. - But there is on dog food?- Yes.

0:39:54 > 0:39:57If you buy some biscuits in a supermarket for YOU, there's no VAT on it,

0:39:57 > 0:39:59but dog biscuits you're charged for, 20%.

0:39:59 > 0:40:02- So if I gave my dog chocolate chip cookies...- No VAT.- No VAT.

0:40:02 > 0:40:05But if I gave my dog these? What hasn't got VAT?

0:40:05 > 0:40:09- What can I feed my dog that hasn't got VAT?- Rabbit food.

0:40:09 > 0:40:12- Where is it? - There's no VAT on that.

0:40:12 > 0:40:15- Do you think the dog would eat that? - There's no VAT on wild birds.

0:40:15 > 0:40:16No VAT on those. OK.

0:40:16 > 0:40:20But if you have the cockatiel seed, because it's got some seed in

0:40:20 > 0:40:24and some of them, then that's VATable because it's for a specific animal.

0:40:24 > 0:40:28- Are you a tax accountant?- No, I have to split it all for my accounts.

0:40:28 > 0:40:31- Does it make any sense?- No. No.

0:40:31 > 0:40:34'Clearly time for me to do some homework.

0:40:34 > 0:40:39'The once simple rules on what is and is not VATable

0:40:39 > 0:40:43'now run to almost 3,500 pages.

0:40:43 > 0:40:47'Even the stallholders seem confused.'

0:40:47 > 0:40:51- What about tea?- Yes, I think. - No, you don't pay VAT on that.

0:40:51 > 0:40:54But if I go and buy a cup of tea over there, I do pay VAT on that.

0:40:54 > 0:40:56Jaffa Cakes.

0:40:57 > 0:41:00- VAT, no VAT?- No.

0:41:00 > 0:41:04What about popcorn? VAT or not VAT?

0:41:04 > 0:41:09- And the right answer is... No.- I said that in the first place!

0:41:09 > 0:41:12- That one doesn't pay. That one does pay VAT.- Why?

0:41:12 > 0:41:14Don't ask me, I'm not the Chancellor.

0:41:14 > 0:41:17This is clear as mud, isn't it(?) It really, really is.

0:41:19 > 0:41:22'With all this confusion and complexity, it might seem

0:41:22 > 0:41:28'straightforward, sensible even, for politicians to simplify things

0:41:28 > 0:41:31'and add VAT to more goods, raising a few quid as they do.

0:41:31 > 0:41:33'Well, not quite.'

0:41:37 > 0:41:41Takeaways used to be tax-free until, back in 1984,

0:41:41 > 0:41:46the then Tory government decided to extend VAT to cover them.

0:41:46 > 0:41:49Logical, painless - or so they thought.

0:41:49 > 0:41:53Restaurant meals were subject to VAT,

0:41:53 > 0:41:56but takeaway food was not subject to VAT.

0:41:56 > 0:41:59If you sat down and had a meal, you were paying VAT.

0:41:59 > 0:42:02If you took the thing away, the takeaway, you weren't.

0:42:02 > 0:42:04I said, "That's ridiculous."

0:42:04 > 0:42:09I said, "Well, we'll put VAT on takeaway meals as well."

0:42:09 > 0:42:14But some political heavyweights found that hard to swallow.

0:42:14 > 0:42:18It's diabolical. This is a tax on the customer, a tax on the consumer.

0:42:18 > 0:42:22It is 15% on the price of food for a lot of pensioners,

0:42:22 > 0:42:26a lot of students, a lot of school children, a lot of unemployed

0:42:26 > 0:42:29and a lot of people with large families who go out to work

0:42:29 > 0:42:32and rely on hot takeaways such as fish and chips and so on.

0:42:32 > 0:42:35As well as that battering,

0:42:35 > 0:42:38there was a problem with the men at the Revenue.

0:42:38 > 0:42:40Then Customs and Excise said to me,

0:42:40 > 0:42:44"Look, it's very difficult to draw a line,"

0:42:44 > 0:42:48because some takeaway foods, for example,

0:42:48 > 0:42:53a salad is very much like going to the grocers and getting it there,

0:42:53 > 0:42:55and you don't have to pay VAT there.

0:42:55 > 0:42:59And how do we draw the line between groceries and takeaway food?

0:42:59 > 0:43:02I came to the absurd conclusion, but it has stuck ever since

0:43:02 > 0:43:06and it is the law, that I would say if it was hot, you paid VAT,

0:43:06 > 0:43:08and if it's cold, you don't.

0:43:08 > 0:43:12For 30 years it has been Tory Chancellors

0:43:12 > 0:43:16who've extended VAT and hiked the rate,

0:43:16 > 0:43:22whilst Labour politicians have condemned them for taxing the poor.

0:43:22 > 0:43:26But under Gordon Brown a battle waged not between the parties

0:43:26 > 0:43:28but within his government.

0:43:28 > 0:43:31He was desperate not to put VAT up,

0:43:31 > 0:43:37but his Chancellor living next door was desperate to do just that.

0:43:38 > 0:43:41Desperate because boom had turned to bust.

0:43:41 > 0:43:44The City of London and the housing market, which had provided

0:43:44 > 0:43:48so much of the cash which the Treasury had depended on,

0:43:48 > 0:43:50had crashed.

0:43:50 > 0:43:53The man responsible for balancing the books had already raised

0:43:53 > 0:43:55the top rate of income tax.

0:43:55 > 0:43:59Now he wanted to do precisely what his party had spent decades

0:43:59 > 0:44:02attacking the Tories for doing.

0:44:02 > 0:44:06What I wanted to do was to gradually increase VAT up to 19% or 20%.

0:44:06 > 0:44:09That would've allowed me to have cut personal taxes,

0:44:09 > 0:44:13taken more people out of tax and, critically, not only could

0:44:13 > 0:44:18I have compensated people on fixed incomes who would lose out with VAT

0:44:18 > 0:44:22I could also make a sizeable inroad into cutting our borrowing.

0:44:23 > 0:44:27Nick Pearce worked at the time as a senior aide to Gordon Brown.

0:44:27 > 0:44:32He recalls how the Prime Minister and his team thought a VAT rise

0:44:32 > 0:44:37would be seen as penalising the poor and a massive political U-turn.

0:44:37 > 0:44:40People in Number 10 thought, "Look, that's not a fair tax.

0:44:40 > 0:44:44"It's a regressive tax, it will split the Labour Party potentially

0:44:44 > 0:44:47"and it blunts the sense that Labour has responded

0:44:47 > 0:44:49"to the crisis with fairness,"

0:44:49 > 0:44:53because it's quite hard to argue that VAT is a fair tax.

0:44:53 > 0:44:55Alistair Darling was told

0:44:55 > 0:44:58that a VAT rise would hand the election to the Tories.

0:44:58 > 0:45:02He was ordered to increase National Insurance instead.

0:45:02 > 0:45:05This time, though, the policy backfired.

0:45:07 > 0:45:09You can make a case for National Insurance, yes, you can.

0:45:09 > 0:45:14But inevitably, it was going to be portrayed as a tax on jobs.

0:45:14 > 0:45:16Surprise, surprise, that's exactly what happened

0:45:16 > 0:45:19the first week of the election campaign in 2010.

0:45:19 > 0:45:22How frustrating was this argument?

0:45:22 > 0:45:26It was frustrating, but I am not the first Chancellor to clash

0:45:26 > 0:45:29or to find it frustrating with my next-door neighbour.

0:45:29 > 0:45:32In fact, most chancellors sooner or later,

0:45:32 > 0:45:36it's one of these things, it's a doomed relationship when you move in together.

0:45:37 > 0:45:43Even more frustrating must have been the sight of his Tory successor George Osborne

0:45:43 > 0:45:48doing exactly what Darling had wanted to do - raising VAT to 20%.

0:45:48 > 0:45:54The years of debt and spending make this unavoidable.

0:45:54 > 0:45:59'Unavoidable he says, but before the election, it had been unmentionable.'

0:45:59 > 0:46:05The Conservatives hadn't gone to the electorate to say that they were thinking about putting up VAT.

0:46:05 > 0:46:08There again, Labour ministers had not told voters

0:46:08 > 0:46:12that they were thinking of doing precisely the same thing.

0:46:12 > 0:46:17It all goes to show that politicians find it very, very difficult

0:46:17 > 0:46:21to be upfront with the public about putting up tax.

0:46:28 > 0:46:32For government after government, raising enough tax to cover their spending

0:46:32 > 0:46:35has been a political nightmare.

0:46:35 > 0:46:38But people who take to the streets have no such worries.

0:46:38 > 0:46:43Their answer is to get more tax from those who are avoiding it,

0:46:43 > 0:46:46especially the banks and big business.

0:46:46 > 0:46:50The people who caused the crisis are getting away without paying for it.

0:46:50 > 0:46:53The people in my community, living in the shadow of these banks,

0:46:53 > 0:46:56we're suffering, we're having our services cut.

0:46:56 > 0:47:02We've really got to challenge this idea that businesses, somehow, are constrained by paying tax.

0:47:02 > 0:47:07The idea that they can get away from their tax means other people have to pay that tax for them.

0:47:07 > 0:47:12'A growing number believe that bankers and those they see as greedy businessmen

0:47:12 > 0:47:15'are getting away with avoiding what they really owe.

0:47:15 > 0:47:19'And the taxman is seen as being a mere amateur

0:47:19 > 0:47:24'compared with the professional tax avoiders of the corporate world.'

0:47:26 > 0:47:29Big companies have one advantage over all the rest of us.

0:47:29 > 0:47:33They can make their affairs really, really complicated.

0:47:33 > 0:47:37And because they can, they become really difficult to understand

0:47:37 > 0:47:42and that means the job of collecting tax from them is quite hard

0:47:42 > 0:47:44because no-one quite knows the truth.

0:47:44 > 0:47:47As a consequence, they pay less tax than you do,

0:47:47 > 0:47:51I do and most people watching this programme will pay.

0:47:51 > 0:47:55Cowardly politicians have put us into this situation

0:47:55 > 0:47:59and we now need some courageous ones to get us out of it.

0:47:59 > 0:48:02- Of both parties?- Of both parties. Of all parties.

0:48:06 > 0:48:09For many centuries,

0:48:09 > 0:48:13the authorities have come up with more and more ingenious ways to get their hands on our money

0:48:13 > 0:48:17and taxpayers have found ways to avoid paying it.

0:48:17 > 0:48:20If you don't give the revenue what you owe them,

0:48:20 > 0:48:22that's illegal, that's tax evasion.

0:48:22 > 0:48:25But if you do your best to give them as little as possible,

0:48:25 > 0:48:30that's perfectly legal. That's called tax avoidance.

0:48:31 > 0:48:37'These days, tax-avoiding wheezes are often hidden deep in company accounts.

0:48:37 > 0:48:42'But our past efforts are everywhere to be seen.'

0:48:42 > 0:48:48This building in Westminster was built just a few years after the imposition of the hated windows tax.

0:48:48 > 0:48:53In the early 1700s, the idea of taxing our incomes was unthinkable. The way it worked was simple.

0:48:53 > 0:48:57If you had a building and it had windows, you owed the Government 2 shillings a year.

0:48:57 > 0:49:00If you had more than 10 windows, it was 4 shillings.

0:49:00 > 0:49:02More than 20, 8 shillings.

0:49:02 > 0:49:07Which is why buildings were often built with the windows bricked up.

0:49:07 > 0:49:13The only way to avoid what we call these days daylight robbery.

0:49:13 > 0:49:16MUSIC: Theme from "Coronation Street"

0:49:18 > 0:49:19Down Coronation Street,

0:49:19 > 0:49:23avoiding tax is what you do when you pay the plumber in cash.

0:49:23 > 0:49:28But the programme vividly shows how politicians themselves

0:49:28 > 0:49:33can make avoidance easier by making the tax system too complex.

0:49:33 > 0:49:35A classic example is the mess

0:49:35 > 0:49:38that Gordon Brown got into when he was Chancellor a few years ago

0:49:38 > 0:49:42when he introduced a very well-meaning new tax relief

0:49:42 > 0:49:48designed to encourage filmmakers to come to the United Kingdom and make all their films over here.

0:49:48 > 0:49:51We suddenly had, allegedly, Coronation Street

0:49:51 > 0:49:54and all sorts of comedy programmes made by independent producers

0:49:54 > 0:49:58being classified as films and enjoying the value of this tax relief.

0:50:02 > 0:50:04What the hell's going on?

0:50:04 > 0:50:08By the time the Treasury had figured out what was going on,

0:50:08 > 0:50:12a tax relief that was supposed to be costing the Exchequer £20 or £30 million a year

0:50:12 > 0:50:16was beginning to cost £200, £300, £400 million.

0:50:16 > 0:50:20A massive, massive loss to the taxpayer.

0:50:23 > 0:50:27So tax avoidance created by a well-meaning Chancellor?

0:50:27 > 0:50:30This was tax avoidance on an industrial scale

0:50:30 > 0:50:32created by the Government

0:50:32 > 0:50:36not thinking through the consequences of the measures it was taking

0:50:36 > 0:50:40and not putting in place the protection necessary to make sure

0:50:40 > 0:50:42this tax allowance didn't grow out of control.

0:50:42 > 0:50:49'Both businesses and individuals exploit the complexity of our tax system.

0:50:49 > 0:50:55'Billionaire John Caudwell was branded a tax avoider a few years back.

0:50:55 > 0:50:59'He was paying himself and his executives via a tax-free trust in Jersey

0:50:59 > 0:51:02'and had to refund the Exchequer millions of pounds.'

0:51:04 > 0:51:09Those words tax avoider, how do you feel when you hear them?

0:51:09 > 0:51:14Well, avoidance still doesn't sound great, does it?

0:51:14 > 0:51:21But all it really means is somebody legally minimising their tax liability. You tell me

0:51:21 > 0:51:27what grown up in the UK is paying tax wouldn't like to minimise the tax through whatever means they can.

0:51:27 > 0:51:32'John Caudwell has now paid a fortune in taxes,

0:51:32 > 0:51:37'but he says avoidance is simple for people like him.'

0:51:37 > 0:51:39There's so many of my friends

0:51:39 > 0:51:42that have done tax planning by leaving the country

0:51:42 > 0:51:45and the country is so much the poorer for it.

0:51:45 > 0:51:49Some people say that taxes are, for the very rich, effectively voluntarily.

0:51:49 > 0:51:52I think taxes are totally voluntary for the very rich.

0:51:52 > 0:51:56We all have the freedom of choice to leave the country,

0:51:56 > 0:52:01to go to a tax-free state and end up selling your business

0:52:01 > 0:52:04or generating income and doing it in a virtually tax-free environment.

0:52:10 > 0:52:13If you are rich and you want to avoid paying tax,

0:52:13 > 0:52:16you can move yourself or your business abroad.

0:52:16 > 0:52:20There is one thing, of course, that is very hard to move abroad.

0:52:20 > 0:52:22Your house.

0:52:28 > 0:52:31'Which is why there's now growing pressure

0:52:31 > 0:52:35'for a so-called mansions tax on expensive property.

0:52:35 > 0:52:40'Here in London's Mayfair, there should be scope for quite a haul for the Chancellor.

0:52:43 > 0:52:50'Even a rather modest looking place down this street has been on the market for £20 million.'

0:52:52 > 0:52:55'That's right, 20 million.'

0:52:55 > 0:52:59- Here we go.- It looks very different inside.- It does.

0:52:59 > 0:53:02'Estate agent Liam Bailey gave me a tour.'

0:53:02 > 0:53:04Open plan, ready to move into.

0:53:04 > 0:53:09This market, the buyers for this sort of property, what they are looking for

0:53:09 > 0:53:12is a property which is absolutely finished before they move in.

0:53:12 > 0:53:16- Almost like having a hotel room. You come in and you can use it.- Exactly.

0:53:18 > 0:53:22'Some say that a tax on expensive property

0:53:22 > 0:53:26'offers a way of getting the very rich to stump up more.

0:53:26 > 0:53:28'And there's another argument too.

0:53:28 > 0:53:32'It turns out that the people who can afford places like this can pay

0:53:32 > 0:53:35'a lot less tax on their purchases than most ordinary mortals.'

0:53:37 > 0:53:42If I was buying this, stamp duty would be a bit of a worry. If I even had the money.

0:53:42 > 0:53:46Well, it would be 5%, so you would be paying £1 million in stamp duty.

0:53:46 > 0:53:49- Can I avoid that?- You could buy

0:53:49 > 0:53:52an offshore company structure and, effectively,

0:53:52 > 0:53:56- you would be paying half a percent. - So I'm saving...?- £900,000.

0:53:58 > 0:54:01'Rich foreign buyers can also escape

0:54:01 > 0:54:05'having to pay capital gains tax when they sell up.

0:54:05 > 0:54:08'And council tax isn't much of a worry either.'

0:54:10 > 0:54:13This would be banded band H, top band,

0:54:13 > 0:54:16so you would be paying the maximum council tax in the area.

0:54:16 > 0:54:20Which is the same for this 20 million or more house

0:54:20 > 0:54:24- as it is for some £500,000 flat down the road?- Could be.

0:54:27 > 0:54:31'For politicians who see pitfalls in other taxes,

0:54:31 > 0:54:36'raising money from expensive property may sound a sure-fire winner.

0:54:36 > 0:54:42'But hold on, have you forgotten the fuss created by other property taxes? Like the rates.'

0:54:42 > 0:54:45Would a property tax be an easy

0:54:45 > 0:54:48and politically pain-free way of raising a large sum of money?

0:54:48 > 0:54:52There is an economic rationale for a property tax beyond doubt.

0:54:52 > 0:54:55In my view, it would be political suicide

0:54:55 > 0:55:00for anybody to do it. The British are attached to housing,

0:55:00 > 0:55:04they see housing as a source of wealth.

0:55:04 > 0:55:08A lot of it is inflation and is due to the scarcity of housing,

0:55:08 > 0:55:11it's not productive wealth in that sense,

0:55:11 > 0:55:15but I think a property tax would be political madness.

0:55:15 > 0:55:21I think wealth and land taxes tend to be very popular with economists

0:55:21 > 0:55:24and they tend to be less popular with politicians.

0:55:24 > 0:55:30- Because...?- Because people often don't like the idea of being taxed

0:55:30 > 0:55:34on things that they have already purchased out of income which has been taxed.

0:55:34 > 0:55:37And people don't like new taxes in general.

0:55:40 > 0:55:43The tighter the squeeze gets on us all,

0:55:43 > 0:55:46the more pressure government will be under to raise taxes

0:55:46 > 0:55:49on the sorts of people who can afford houses like this.

0:55:49 > 0:55:52If they say, "We are ready to move abroad,"

0:55:52 > 0:55:59there will be plenty of people who say either good riddance, or it's just an idle threat.

0:55:59 > 0:56:03But the dilemma that politicians will face is the same as we have seen before.

0:56:03 > 0:56:06If you want to really raise money on the rich,

0:56:06 > 0:56:11you'll end up hitting people who regard themselves as not rich at all.

0:56:11 > 0:56:17Which of course takes us back, precisely, to where we started.

0:56:19 > 0:56:23'In this series, we have seen how politicians, urged on by us,

0:56:23 > 0:56:27'have been spending more and more and more for decades.

0:56:27 > 0:56:30'Now that the economic clouds have become darker,

0:56:30 > 0:56:33'the sums no longer add up.

0:56:33 > 0:56:37'We voters have begrudged giving the politicians the extra tax

0:56:37 > 0:56:40'needed to pay for it all.'

0:56:40 > 0:56:43Do you resent your taxes going from you to someone else?

0:56:43 > 0:56:45I've resented it all my life.

0:56:45 > 0:56:48'The rich don't want to pay more.'

0:56:48 > 0:56:49So many of my friends

0:56:49 > 0:56:53and acquaintances have done tax planning by leaving the country.

0:56:53 > 0:56:58'And the rest of us seem to think we pay quite enough already.'

0:56:58 > 0:57:00I have to try quite hard to make ends meet.

0:57:00 > 0:57:04'And when politicians try other wheezes to raise tax,

0:57:04 > 0:57:06'they get into trouble.'

0:57:06 > 0:57:08It's as clear as mud, isn't it? It really is.

0:57:08 > 0:57:12'They say they simply can't win.'

0:57:12 > 0:57:14If someone can think of a popular tax,

0:57:14 > 0:57:16they should phone up and let us know,

0:57:16 > 0:57:19because it isn't obvious there is one.

0:57:19 > 0:57:23'But curiously, the current economic crisis may force us

0:57:23 > 0:57:27'to confront head on our troubles with tax.'

0:57:28 > 0:57:32Governments keep on changing and tweaking the existing system,

0:57:32 > 0:57:36creating things that are more and more complex and irrational.

0:57:36 > 0:57:39Perhaps once, twice, three times in every century,

0:57:39 > 0:57:45there's a fundamental opportunity to do something more radical, clear away

0:57:45 > 0:57:48the debris built up from decades of incremental government policy.

0:57:48 > 0:57:55But if we don't make some big changes now, the opportunity to do so again may not come for another 20-30 years.

0:57:59 > 0:58:02For years, any politician living on this street

0:58:02 > 0:58:05who has dared to admit they might need to tax us a bit more

0:58:05 > 0:58:09and spend a little bit less has found themselves punished.

0:58:09 > 0:58:13No wonder, then, that whether they're Labour or Conservative,

0:58:13 > 0:58:21they've tended to pretend that they can spend more and more and yet tax less and less.

0:58:21 > 0:58:26If there's one advantage of the current economic crisis, perhaps it's this -

0:58:26 > 0:58:33that we can have a more grown-up debate about your money and how they spend it.

0:58:43 > 0:58:48Subtitles by Red Bee Media Ltd

0:58:48 > 0:58:51E-mail: subtitling@bbc.co.uk