Dominic Lawson: Rich and poor agree on cutting taxes

One possible reason may be that it is precisely those most dependent on public services that know the full extent of their inefficiencies and unresponsiveness

Sometimes two events which seem completely unconnected are just different sides of the same coin. A case in point is the Revenue's demand for "previously underpaid" taxes from those on PAYE, and the declaration by the Trades Union Congress that it will co-ordinate strike action against the Government's proposed cuts in planned public expenditure.

The fury directed at David Hartnett, the head of HMRC, when he revealed that 2.4 million people had "underpaid income tax" over the past two years – and that they would have to cough up the shortfall, pronto – has been terrible to behold. So terrible, indeed, that the Government hastily declared that it would increase from £50 to £300 the "underpayment" threshold below which no demands would be made; but that still leaves about 1.5 million people facing an average – and unexpected – demand of £1,500 each.

Now, how many of those 1.5 million people will be saying to themselves: "How relieved I am to be able to contribute this sum: every little extra will help in the battle to fund our threatened public servants"? My guess is: precisely none. Yet what the public-sector unions are demanding is that the attempt to reduce a national debt of a scale unprecedented in peace-time should be achieved through a dramatic increase in taxes, rather than any cuts in public expenditure. They also seem to imagine voters will buy their line that public-sector workers are so unimprovably productive that any cuts in their number, either by natural wastage or redundancy, will result in a proportionate reduction in what economists call "outputs".

Yet the public's fury over the HMRC's miscalculation of our PAYE tax payments is in large part based on the knowledge that this is yet another demonstration of how the increasing size and complexity of the state bureaucracy has enlarged, above all, its capacity for error and institutionalised buck-passing between its ever-proliferating ranks – ranks, moreover, which continue to enjoy a final-salary pension scheme that very few companies in the private sector could dream of funding.

Of course, when asked if they are happy with the idea of deep cuts in planned public expenditure, about half of those polled say that they are not; but the paradox here (and it is a phenomenon which has vexed politicians for as long as such issues have been debated) is that individuals tend to think that others can be found to pay the increased tax to fund the services that they wish to preserve for their own families.

In general elections this self-deception can be maintained, because all political parties tend to pander to such delusions by making commitments on public services which are mathematically (but not psychologically) incompatible with their accompanying pledges on taxation. However, when the matter is put very precisely, by means of a referendum, the public show a less woolly side to their thinking.

In February 2001 Bristol City Council held a public ballot to settle just such an argument: it asked its electors to choose between lower council taxes or "better" services – stressing that a vote not to increase council tax would result in big cuts, especially in its educational budget. It offered its electors the chance to vote for a 6 per cent increase in council tax to help maintain the education budget, a 4 per cent increase, a 2 per cent increase, or, finally, to freeze the council tax. Many more voted for the freezing of tax than the combined numbers of those who ticked any of the other boxes.

This novel experiment in British local democracy was examined yesterday in a BBC Radio 4 Programme called Evan Loves Tax – it was presented by Evan Davis, previously the Corporation's Economics Editor. Now, nine years after that referendum, Davis spoke to the current leader of Bristol City Council, who told him that its effect had been to make the local authority "focus much more on the quality of the services we provide – on exactly what we are delivering – than we did before." It's worth bearing in mind that this was not a solid Tory heartland area that might have been expected to put low taxes before public services: at the time of the referendum Bristol City was a Labour-controlled council.

Since the Bristol experiment, three other councils have conducted a similar referendum. In two of those three, as in Bristol, the electors voted for the combination of the lowest tax option and – explicitly, as described on the voting form – the lowest level of expenditure on services.

Some might argue that these results simply meant that the affluent middle-classes had turned out to vote en masse, while the poorer sections within the councils' electorates had been less well organised. Yet this turns out to be not the case. David Maddison, project officer at the Local Government Association, told the BBC that "research in towns and cities holding the votes suggested the more wealthy wards had opted for the higher tax rises, with deprived wards choosing the smallest rises."

What could be the reason for this apparently paradoxical discovery? One might be that even those on the lowest council bands believed they were being taxed far too much. Another possibility – and perhaps it is more than a possibility – is that it is precisely those most dependent on public services that know the full extent of their inefficiencies and unresponsiveness and are therefore most sceptical of the claim that such organisations would deliver better results if they had even more money – and more employees – to conjure with.

Yesterday the BBC published the results of a no less fascinating ComRes poll which it had commissioned for Evan Loves Tax. This too showed that it is in fact the poorer members of society who are most sceptical about the benefits to them of the public services provided for the tax they pay. Whereas 30 per cent of the AB social group told ComRes that the tax they pay benefits them because of the public services they use, only 20 per cent of the C2 social group and just 19 per cent of the DE group said that they regarded the taxes they pay as good value for the services they get in return.

You can see just why the Liberal Democrat proposal to exempt all those earning under £10,000 a year from income tax was such a potent electoral promise – and why it had been included in the Coalition agreement with the Conservatives. It is certainly true that too many people at the lower end of the income scale have been dragged into the taxman's net in recent years; but the problem for any Government is that if it wants to raise a lot of tax, it has to tax a lot of people. The super-rich are too few (and too internationally mobile) to keep public expenditure at the levels they currently are – or anything like it. In any case, the top 1 per cent of earners already contributes about 22 per cent of total income tax, and the top-earning 10 per cent provide well over half the aggregate income tax collected by HMRC – which is what you would expect under a progressive tax system.

All of which leads me to doubt that those trade union leaders proposing "concerted industrial action" by their members in the public services will encounter similarly concerted support from those most dependent on those same services. On the contrary, they would become even less popular than the Government, cuts and all.

d.lawson@independent.co.uk