John Humphrys asks: is Labour tax policy principled or is it just politics?
Labour’s shadow chancellor, Ed Balls, has announced that a Labour government would raise the top rate of income tax to 50%. It would be a temporary measure, he said, necessary until the deficit in the nation’s finances had been eliminated. But the policy has been attacked as ‘anti-business’, and as indicating a return to ‘Old Labour’ policies of high spending and high taxation.
The importance of the new policy is as much political as economic. Income tax rates are hugely significant political symbols. Back before the 1997 election, Tony Blair and Gordon Brown were anxious to demonstrate to voters that they were different, that ‘New Labour’ had abandoned the socialist policies of ‘Old Labour’ and could be trusted to look after the interests of “Middle Britain”. Their strategy was to pledge to raise neither the basic rate of income tax nor the top rate for the entire period of the coming parliament. They repeated the pledge at the following election and the one after that, and they won all three elections.
It was only after the financial crisis of 2007/08, when government finances plunged deep into the red, that the then Labour chancellor, Alistair Darling, raised the top rate in 2010 from 40% to 50% for those earning incomes of over £150,000. That’s where the top rate stayed until last April when the current chancellor, George Osborne, cut it to 45%.
So, on the face of it, Ed Balls’ move is a bold one. It appears to challenge the view of the last generation of Labour leaders that voters need to be reassured that their party is not instinctively the party of higher taxes. But he says the rise is necessary because the coalition government has not done enough to reduce the deficit.
Mr Balls made another announcement, a commitment to eliminate the deficit on current government spending (that’s to say, day-to-day spending that does not include government investment projects) by 2020. To achieve this he warned there would need to be more government spending cuts. He did not say where.
Once the deficit is removed, he says, the top rate of tax can come down again. “It’s a fair way to get the deficit down,” he said. “The phrase is ‘we are all in this together’ – that is part of the policy.” Alistair Darling supported the policy saying ‘the broadest backs’ needed to carry the greatest burden.
But critics say it is worse than pointless. They argue that the policy will raise little money and point to a Treasury study which estimated that the cut to 45% had cost the government only £100m. They also argue that the ‘broadest backs’ already shoulder the biggest burden because our tax system is one of the most progressive in the world: the top 1% of income taxpayers contribute 30% of the total revenue taken in income tax.
Lord Myners, the city minister in the last Labour government, condemned the move as ‘predatory’. He said: “It is not clear how this is going to help the UK economy compete. The UK already has an income tax system that is more progressive than most of our international competitors.” Another Labour peer, Lord Noon, a major donor to the party, said the idea was ‘terrible’. “There are other means to augment the Treasury, not by penalising the business community, which is already hard-pressed.”
It is the effect on business that has attracted most criticism. Richard Longdon, the chief executive of Aveva, a software company based in Cambridge, told the Financial Times: “The real issue with the Labour proposal is the signal it sends, in that taxing the better off is fair game and leaves people wondering what next? History has proven that high taxes don’t raise more money, they simply encourage more taxpayers to relocate away from the UK and taking their wealth with them, usually forever.”
Supporters of Ed Balls’ policy dispute the claim that the higher tax rate won’t raise much money and it is not ‘anti-business’. They point out that for almost the whole period of Margaret Thatcher’s premiership the top rate of income tax was 60% and yet this was the period, they remind us, when we were told she had ‘saved’ the British economy and restored its strength. Mr Balls has pledged not to raise the top rate beyond 50% and to keep it there only temporarily.
But business leaders are yet to be persuaded. They will say that the world is very different now from what it was twenty-five years ago when the top rate was reduced from 60% to 40%. Globalisation has made business much more mobile and high taxation is one of the triggers sending businesses and individuals abroad to seek more favourable treatment. Ed Balls’ policy will create the impression, they say, that a Labour government would take Britain down the path already pursued by socialist France, where President Hollande’s policy of introducing a top rate of tax of 75% is held to be partly responsible for the country’s low growth rate.
These are the arguments that will be hammered out in the months leading up to next year’s general election. In short, is Labour tax policy principled or is it just politics?
