50p tax: Labour versus the ideologues
Few elements of Britain’s tax code could reasonably be described as ‘totemic’. But the debate over the 50p top rate of income tax has, for better or worse, become much more than a question of costs and benefits. It has become an emblem.
For many in Labour, it is a crucial instrument of tax justice for the 99% of the population who earn under £150,000. For others in the party, it is a barrier to aspiration. For some in the Liberal Democrats, its retention (to date) is proof of their influence in the coalition. For others, it is distinctly negotiable. For most in the Conservative Party, its introduction and continued existence are downright offensive.
Assuming that leaks to this effect have not been a masterful pre-Budget feint, George Osborne looks likely to announce a provocative cut to the top rate tomorrow. If so, he will accuse Labour and renegade Liberal Democrats of knee-jerk, ideological opposition. It will fall to Ed Balls to voice public anger.
Yet the Shadow Chancellor’s reply also needs to be deeply pragmatic. A dogmatic tax cut for the very wealthiest speaks for itself; Labour’s job is to put the facts on the table. If the total impact of the rate is to raise money for the Exchequer, the cut is unjustified. If not, it should be replaced or supplemented by a new, alternative levy that ensures that the wealthy pay their fair share. Most importantly, Labour must detach this from the debate on tax avoidance and state loud and clear: anti-avoidance measures do not a wealth tax make.
This means addressing the five core claims likely to feature, in one combination or another, at the heart of Osborne’s arguments: that the 50p tax is failing to produce the expected revenues, that it is less effective than a lower rate, that it curbs aspiration, that it incentivises tax evasion and that it could be replaced by new anti-avoidance measures to ensure fairness.
The first claim – that the 2011/12 increase to 50p will generate ‘just’ a few hundred million rather than the expected £2.6 billion – will be based on the HMRC study commissioned by the Chancellor last year. Labour’s response should be to highlight the sheer inadequacy of any judgement based on the first year of the 50p rate; all the evidence is that vast tax payments were brought forward to pre-empt its introduction. One independent study estimates that this distorts this year’s revenues by some £2 billion. As the IFS argues, the HMRC study is therefore ‘too narrow’ to make a proper assessment.
Labour would also do well to point to the bank bonus tax. Naysayers wearily predicted a mass exodus to Zurich and a nugatory contribution to the Exchequer. Once bedded in, the tax generated almost double the £2 billion originally predicted; bankers, it seemed, were happy to pay the premium to live in London’s vibrant bustle.
To the second claim, that a lower rate will bring in more money and boost growth, Labour must respond by reclaiming the Laffer Curve – the principle that there is an optimum rate beyond which the disincentive effect of a tax reduces revenues – from the likes of its originator, Arthur ‘it doesn’t get any better than Mr. Gingrich’s optional 15% flat tax’ Laffer, an intellectual lodestar to the Osborne set. Laffer’s ham-fisted track record typifies that of the dogmatic right: consistently situating the optimum tax level some way south of wherever it happens to be at a given moment. His predictions of economic calamity when Bill Clinton increased the top rate of tax in 1993 and a surge in revenues when Bush Junior cut it a decade later were two notable bloopers. Of course an optimal top tax level exists, but Labour should demand solid proof that this optimum sits below 50p: proof, in short, that the reduced rate will raise more money.
And on growth, even the CBI has said that a proper economic strategy – not cutting the 50p rate – is its top priority. So why not stimulate the economy by cutting a high-multiplier tax – VAT – instead?
Aspiration matters, but without hard evidence, the third claim – that tax cuts fuel social mobility – can be made ad infinitum. The US Republican Party, for example, uses the same argument to champion a deeply regressive flat tax (the likes of which Osborne himself advocated back in 2005). Sweden, on the other hand, manages to combine Europe’s highest level of social mobility with its most competitive economy, all at a top rate of 57%. So once more, Labour’s response has to be hard-nosed and factual: does the 50p rate hit aspiration any more than an alternative means of ensuring that the wealthy pay a fair share? It may be that some form of Wealth Tax or Land Tax is a better way of raising the revenues. If so: very well. If not, the case crumbles.
The fourth claim has a very simple answer: if the 50p rate increases evasion, the government should reinstate some of the 13,000 jobs cut at HMRC to combat this. Which brings us to the fifth, weakest and most egregious of Osborne’s likely arguments: the claim that a new anti-avoidance drive is an adequate counterbalance to the 50p tax cut. Say it loud and clear: tax avoidance measures are not an alternative to the 50p rate. They should either exist alongside it, or alongside a tax on high earners.
The government assures us that the wealthy will pay double under the terms of this Budget what they would have paid additionally under the 50p rate. It should be judged forensically by this pledge: anything less than new tax measures (independent of new anti-avoidance rules) that produce twice what the bedded-in 50p rate would have generated should be treated as a failure. Let’s be clear: an anti-avoidance ‘Tycoon Tax’ is not a tax: it is an anti-avoidance measure. So is a general anti-avoidance rule. So is closing stamp duty loopholes.
Reason and common sense are Labour’s strengths in the 50p debate precisely because the Chancellor’s case is so firmly rooted in personal ideological preference. Lobbyists for a lower top rate readily cite the proportion of income tax paid by the top 1%, which has doubled since the mid-1980s. Yet they neglect to mention that the share of income going to the top 1% has also doubled. Indeed, over recent years the post-tax share of income going to wealthiest has if anything trended upwards. As such, when the former boss of Marks & Spencer argues that the 50p rate is ‘only fair’ when middle and lower earners are tightening belts, he has a point. To quote comments by the Chief Secretary to the Treasury just two months ago, it ‘ensures that the wealthiest in society pay a fair contribution.’
So when Ed Balls rises to reply to the Budget tomorrow, he should make a pragmatic appeal to national unity. Labour has no sentimental attachment to the 50p rate. If it helps ensure that those with the broadest shoulders bear the greatest burden, great. If not, replace it with a serious levy that does. But to prioritise an income tax cut for the top 1% of earners without introducing an alternative is an affront to reality, let alone fairness. Labour has the facts on its side.
Jeremy Cliffe is a Labour commentator and contributing editor to Shifting Grounds. He tweets from @jeremycliffe.