October 22, 2007

Taxing Times

It is a truism of British politics that New Labour changed the terms of debate on tax-and-spend. Where once John Smith’s tax-raising budget hamstrung Labour in the 1992 election, the last three elections have seen the party convince the electorate to opt for increased spending over Conservative tax cuts.

After last week’s pre-budget report one can no longer assert this with the same confidence. Alistair Darling’s transparent act of political cross-dressing muddies the divide. Labour could have mounted a robust defence of inheritance tax based on equality and meritocracy. Instead they pandered to the same populism that infused George Osborne’s original proposal. Now Labour has entered this sweepstake, there is every chance that floating voters will opt for the opposition and that extra £300,000 on the inheritance tax threshold.

And yet there remain reasons to be hopeful. It is dispiriting that it took the Tory party, of all groups, to bounce Labour into action on non-domicile residents, but welcome all the same. With the tax debate in such a febrile state, now is the time to push harder than ever for Gordon Brown to grasp the nettle on inequality and tax. For Blair progressive taxation was an Old Labour shibboleth, firmly lodged in the dustbin of history. By contrast, privately, Brown is yet to rule out eventually raising the top rate of income tax. A slight hope this remains, but hope all the same.

While the government has succeeded in lifting over 500,000 children out of poverty-although Darling’s report showed no sign of hitting the target of halving child poverty by 2010- and in enacting modest redistribution, it has also presided over an ever-rising inequality between the richest and the poorest. The top 10 per cent now hold 54 per cent of national wealth, up from 47 per cent. Yet no sector of society can shield itself from the ramifications of inequality. Inequality corrodes social cohesion, saps social mobility, rouses crime and breeds economic inefficiency.

The tax system only compounds this problem. The popular focus on income tax masks the fact that the wider system is regressive. While the top fifth pay 35.6 per cent of their income in tax, the bottom fifth actually pay 36.4 per cent. A genuinely progressive tax system, with a new top rate of 50 per cent kicking in at earnings over £100,000, is not a sufficient reform but it is a necessary one.

Against this proposal four arguments are commonly raised. Firstly, that it damages the economy by weakening work-incentives. Yet the Nordic countries, where taxes are both higher and progressive, have long been more economically competitive than the UK. There is staggeringly little empirical evidence linking taxation to economic performance.

In the second case, others point to the phenomenon of globalisation and the risk of ‘tax-flight’ at any increase. This apparent ‘risk’ grossly overestimates the actual opportunities abroad for British business, and forgets that the more motivated, productive workforce linked to equality is just as important.

Thirdly, while conceding the desirability of reform, some argue that in practice the backlash would be too great. In fact, the most recent Social Attitudes survey found that when offered a range of tax-and-spend packages, 89 per cent preferred the redistributive options. An apt reflection of individual’s intuitive sense of a fair society, in spite of the failure of Labour to make the political case.

The final argument, that all this is motivated by ‘envy’ of the rich, is matched only in its commonality by its desperation. Never mind that most of those who hurl this charge also claim that the left is dominated by the rich; the real envy is of flourishing, egalitarian societies, the emulation of which would benefit all, including the wealthiest.

This hackneyed ‘envy’ trope is often bookended with the claim that we’re returning to the days of ‘taxing the rich till the pips squeak’. Those who imagine they’ve just quoted Denis Healey are wrong; the words never left his lips. However, he did declare at the 1973 party conference, “I warn you that there are going to be howls of anguish from those rich enough to pay over 75 per cent on their last slice of earnings.” Yet a new top rate of 50 per cent is far from the eventual rate of 83 per cent under Jim Callaghan. Even Margaret Thatcher managed to live with a top rate of 60 per cent for nine years.

In a conversation last year with Ed Miliband, the man charged with drawing up the next Labour manifesto, I put the case for progressive taxation. Miliband replied that firm political foundations had to be laid down before this; the problem was when ultra-Blairites like Stephen Byers dragged the debate to the right. Faced now with similar difficulties, Labour must act before debate is entrenched on the right.

Nye Bevan’s dictum held that “the language of priorities is the religion of socialism”. A decent tax system should embody the priority of social justice. Without remembering this, the sea change in the polls will leave Labour marooned.

Published in the Warwick Boar, 18/10/07

- 2 comments by 0 or more people Not publicly viewable

  1. Sorry, not buying it.

    “There is staggeringly little empirical evidence linking taxation to economic performance”, “This apparent ‘risk’ grossly overestimates the actual opportunities abroad for British business” – how can you say this? These are not valid responses and not supported by mainstream research. You dismiss opposing arguments with fallacies and support your own arguments with speculation.

    24 Oct 2007, 11:23

  2. Hamid

    Your point about the less well of spending a greater percentage of their income is somewhat misleading, as much of this will be in the form of VAT. I’m not sure how this would justify a 50% tax rate. That is rather ludicrous.

    28 Oct 2007, 09:03

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