Show Hide image

Trouble ahead at the Treasury

Unnoticed, the Lib Dems are driving through changes to the structure of personal tax allowances. And

For many politicians, tax cuts are the elixir of politics. In times of plenty they are deployed triumphantly as evidence of a thriving economy; in times of hardship they are handed down by chancellors as a salve to a hard-pressed public. So it should come as no surprise that, even in this parliament - dominated as it has been by arguments about fiscal austerity, tax rises and lower spending - there will be a growing debate about which taxes to cut.

Political gravity will ensure this is the case. As the economy gradually recovers - at the same time as the pain of the deepest and longest wage squeeze in living memory maintains its grip on family bank balances - politicians will be desperate to offer hope of better times ahead. They will know that tax cuts won't solve the structural problem of stagnant wages, nor will they deal with the rising pressures on the cost of living. And there will still be sharply differing views about whether tax cuts for some mean tax rises for others, as opposed to further cuts to spending. But have no doubt: all party leaders will be forced to offer respite to a public whose anger about falling living standards will reach boiling point over the next few years.

So, how will the coming tussle over tax cuts play out? There will be a few early skirmishes following the Budget, which inevitably included a few popular giveaways - such as the cut in fuel duty and support for first-time housebuyers - along with a tax cut for business (and let's not forget that George Osborne has already proved capable of pulling rabbits out of a hat, as with his dramatic promise to raise the inheritance-tax threshold in October 2007 - a move that skewered Labour's plans for an early general election).

Osborne clearly wants to burnish his credentials as a Lawson-like tax reformer as well as a spending cutter, so in the months ahead he'll talk up the radicalism of his long-term ambition to merge National Insurance and income tax. But the challenges involved in this are daunting, and the Conservatives are very unlikely to go into the next election having just raised the basic rate of income tax by 12p, so don't expect this to yield practical policies any time soon.

Indeed, it says something about the topsy-turvy state of today's politics that we need to look first at the Liberal Democrats to understand the shifting politics of tax. It is perhaps the least remarked-upon story in Westminster that the smaller and deeply unpopular coalition partner is driving one of the biggest changes in domestic policy - and in a department it doesn't even control. Not since the days of David Lloyd George have Liberal politicians had such influence over the Treasury's tax policies.

The ambitions of senior Lib Dems are not to be underestimated. Nick Clegg knows what he wants. He has been fighting hard for it internally and he is going to succeed in getting most of it - notably, a £10,000 income tax personal allowance at a total cost of more than £13bn (having already secured a commitment to a rise in the personal allowance from £6,475 to £7,475, increased in the Chancellor's 23 March Budget to £8,105 in April 2012.

Clegg's party has been emboldened by the quiescence of its Conservative partners. That is in part because the £10,000 commitment is a central fact of the coalition agreement, but it has also served the Conservative leadership's purpose to go along with something that deflects irritant calls from Boris Johnson and the Tory right to prioritise the removal of the 50p tax rate for the top 1 per cent of earners - a move that would delight Labour - just as it provides Tory leaders with a ready-made and voter-friendly tax-cutting agenda to talk about.

This context helps explain why senior Liberal Democrats, battered on so many fronts, are more ideologically self-confident than their coalition partners on this naturally Conservative terrain. They are the ones making the political weather on tax. Buoyed by this, they have set about working on what they should be seeking to achieve by 2015; and, more significantly, what their distinct Liberal ambitions for the tax system should be in 2020.

As part of their wider ideological journey, Clegg and those around him view themselves as the authors of a new "fiscal liberalism". This blends the spirit of John Stuart Mill's call for a generous, tax-free allowance sufficient for "life, health and immunity from bodily pain" with the modernising zeal of last year's Mirrlees Review (produced for the Institute for Fiscal Studies), which sets out far-reaching proposals for simplifying the UK tax system.

The priority is to achieve and then surpass the totemic commitment to increasing tax-free allowances. Don't be surprised when Liberal Democrat outriders call for a detailed plan for securing the £10,000 allowance in this parliament and £15,000 in the next.

The belief is that a "liberal tax system" should protect a greater chunk of individual earnings from the state, a sharp contrast with the social-democratic view that support for families, funded through progressive income taxes and tax credits, is the beating heart of a fair tax system. Nor do the Lib Dems' ambitions end here. Clegg is likely to push for further increases in green taxes - putting him on a direct collision course with Conservative backbenchers who want big cuts to fuel duty - and for raising more revenue from "unearned income".

Footloose families

One of the great political advantages of having a single, emblematic tax policy is that, in contrast to many of the tax changes of the Blair/Brown years, it is an easy thing to communicate. Quite simply, people are likely to get it. So where's the rub? The hard truth that Clegg and his team have largely sidestepped is that the simplicity of the allowance policy comes at a sig­nificant price: the distributional effects of the strategy are distinctly odd. Some high-income households (often with no children) gain quite a lot each time the allowance is raised, while many middle-income families with children gain nothing and, indeed, are set to lose a great deal (see chart 1), and the very poorest, who don't pay tax, won't get a penny.

This is not an accident: it is a direct result of tax cuts based on individual rather than household income. Further, because this year's increased tax allowance will be linked to a reduction in the income level at which the 40p tax rate kicks in, an extra 700,000 higher-rate taxpayers will be created in April.

For now, Clegg will shrug off these charges with the broad-brush argument that individual beneficiaries are overwhelmingly basic-rate taxpayers. He will not be so relaxed if a popular sentiment emerges that his prized tax strategy offers little to precisely those working (and politically footloose) middle-income families that hold the key to the next election.

A

All of this gives the Labour leadership plenty to reflect on. Apart from airing its internal travails over the 50p rate, and Ed Balls's recent call for fuel to be exempt from the January VAT increase, Labour has said remarkably little about tax. Many on the political right, together with much of the media class - and some former New Labour figures - have already written off Miliband and Balls as big-state high taxers with no "feel" for the concern of people striving to get on in life, nor the discipline to rein in a party hard-wired to tax and spend. That is likely to be a serious misjudgement.

It was Balls and Miliband who came of age masterminding the commitment to stick to Tory spending plans, and showed the steel necessary to peg Labour to pre-1997 basic and top rates of tax. You don't go through that experience in your late twenties only to forget it in your early forties.

Recently Miliband has said that he supports "genuine" tax relief for low-to-middle-income earners but won't back a "tax con" in which a personal allowance giveaway is funded out of a hike in VAT. For now, that is a reasonable position: many low-to-middle-income earners will be worse off once increased allowances and VAT are taken into account; painfully so, once cuts to tax credits are factored in. But stick to this position for too long, and Labour will be badly exposed. Few expect the recent increase in VAT to be reversed come the next election. As chart 2 shows (below), the VAT rate has long been converging on the basic rate of income tax - Labour in power tends not to cut Conservative increases to VAT, whatever it says in opposition. Nor is there much prospect of it reversing the coalition's increased tax allowances and, in doing so, dragging many modest earners back into the tax system.

So, the risk is that Miliband ends up entering an election in 2015 saying little more than: "I now realise that I agree with Nick." Labour strategists with the ear of the leader are well aware of this conundrum and are starting to work out how to respond.

Their belief is that the coalition has made a big mistake in focusing so much of the pain of cuts on working families with children, and above all women. But they are also acutely aware that to make targeted tax cuts, at the same time as they rebuild their reputation for fiscal credibility, will be no mean feat.

N

Miliband's team is heartened by private polling that it has seen on how the Obama 2008 campaign managed to break out of the Republican tax trap. With targeted tax cuts for the middle classes, the Democrats were able to change the framing question from whether each party was "for or against tax cuts" (the Democrats typically being "against") to "who do you want tax cuts for?". That freed Barack Obama to outpoll John McCain as a tax cutter for "middle-class America" at the same time as he won widespread support for tax rises for the richest 2 per cent. Labour thinks there are lessons to be learned.

Return of the 10p rate

So what are the likely directions for the different parties? No one should mistake the Conservatives' current focus on measures to boost growth with what is likely to become their agenda as we get closer to 2015. It is almost inconceivable that Osborne won't build up a formidable war chest over the next few years to fund a major commitment to cut the tax burden on families, as well as abolish the 50p rate, should the Tories win the election.

The Lib Dems have the immediate political task of reaping some popular reward for this April's increased tax allowances, and a deeper challenge - perhaps an insurmountable one - in making their strategy more appealing to middle-income families with children. One option would be to attempt to persuade the Treasury to build a child allowance into the tax system for basic-rate payers. But, apart from difficult questions about the administrative feasibility, this would ignite a huge row with the Tories, who still want to introduce a married couple's allowance. Even more significantly, senior Lib Dem strategists whisper that, in the longer term, they may need to open up a debate about moving from independent taxation to a system based on household income - as was the case before 1988. The implications of this should not go unmissed: any public contemplation of ditching one of the proudest achievements of modern feminism in the name of liberal tax reform would be explosive.

And Labour? It will try to home in on the electoral sweet spot - modest- and middle-income families with children, on a household income of between roughly £25,000 and £50,000. Less clear is what it wants to offer this group. There is already scepticism in senior circles about whether it would be enough merely to reverse some of the coalition's cuts to tax credits; a fundamental rethink is needed. This would involve looking at benefits as well as taxes and grappling with thorny problems such as child benefit - something not lost on Labour strategists, who are quick to point out that "we never said all aspects of universalism are sacrosanct".

The idea would be to create a simpler way for the tax and benefit system to support modest-income families that are going to lose from cuts to tax credits, as well as middle-income families that are going to be hit by the axing of their child benefit. At the same time, Labour will have to act to support the very lowest-paid. An intriguing option here, which would also help make peace with Labour's recent past, would be to consider a reduced tax rate for the lowest earners: might we see the return of the 10p rate?

The cost of cuts

Above all, Labour will have to balance intense and contradictory pressures for tax cuts, targeted increases in spending and the rebuilding of its fiscal credibility. Harder still, any new tax cuts will be expensive. Given the size of low-to-middle-income Britain, a few billion pounds won't stretch far; a meaningful cut is likely to cost over £10bn. In view of the fiscal outlook, Labour strategists realise that they will have to raise taxes for some in order to cut for others - as do those Lib Dems who accept that, by the next election, public spending will need to recover with growth rather than be cut further.

When it comes to income tax, there is very little room for manoeuvre. The 40p rate already kicks in at a relatively low and falling level, and there is no support for raising the 50p rate. A further increase in VAT is out of the question. This suggests the need for new ways of raising revenue from wealth and high-value housing. Expect to hear squeals in response to a Labour version of a "mansion tax", a continued push on bankers' bonuses, further savings on pension-tax relief for the highest earners and new ideas for raising money from capital gains and inheritance. Generating income from these sources will be a stiff test of Labour's resolve: the party will face bitter opposition.

In the years ahead, however, the crisis of living standards will lead to something rather like a primal scream from low-to-middle-income households, demanding relief as they become even more resentful of growing wealth at the top. The politics of taxing affluence in 2015 won't be the same as they were in 2010, never mind 1997: on this matter, the past doesn't provide a guide to the future. As Obama showed in 2008, it is possible to forge a common set of interests between low- and middle-income earners and a narrative on tax that speaks to the extraordinary times in which we are living.

Gavin Kelly is chief executive of the Resolution Foundation

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

This article first appeared in the 28 March 2011 issue of the New Statesman, Why Libya? Why now?

PAUL KOOIMAN/GALLERY STOCK
Show Hide image

Chill out

Stress is not as destructive as is often assumed: a little bit of it may even be good for us.

It creeps up on you as soon as the alarm clock rings. Fingers reflexively unlock your phone. Emails bound in with a jolly ping: things you should have done last week; pointless meeting requests; bills to pay.

Over a hurried breakfast you scan the headlines: wall-to-wall misery. On the train you turn to social media for relief. ­Gillian is funnier than you. Alex got promoted again. Laura’s sunning herself in Thailand. You’re here, packed in, surrounded but alone, rattling your way towards another overstretched day.

Stress: we know what it feels like, we can smell it on others, we complain about it most days. And we’re living through an epidemic of it. The government’s Health and Safety Executive estimates that stress cost the economy nearly ten million working days last year. Some 43 per cent of all sick days were attributed to stress. In the US, a large survey conducted by the National Public Radio network in 2014 showed that nearly one in two people reported a major stress event at some point in the previous 12 months. The year before that, American doctors wrote 76 million unique prescriptions for the anti-anxiety drugs Xanax and Ativan. With the media running stories about stress-induced heart disease, strokes, obesity, depression, ulcers and cancer, it’s hard not to conclude that stress kills.

But consider this: just a century ago, nobody got stressed. They suffered with their nerves, got a touch of the vapours; they worried; but they were never stressed. In fact, our current view of stress – what it is, what it feels like, and when it is harmful – evolved surprisingly recently. And research shows that the way we think about stress has a profound influence on how it affects us.

Prolonged, uncontrollable stress – particularly if suffered in childhood – can be profoundly corrosive and debilitating. But what of the familiar stresses of day-to-day life? Are they actually damaging you? Might the belief that stress is harmful be self-fulfilling? And what would a stress-free life look like? Instead of turning in on ourselves and doing battle with our personal stress demons, might we be able to put their diabolic energy to good use?

If we pause for a moment from our daily hustle we would see that many of us are incurably hooked on stress. We thrive on it, getting a kick out of surviving the high-stakes presentation, meeting the deadline and overcoming our fears and prejudices. Watching a thriller, we are on the edge of our seat, pulses racing. Sports, on the field or on television, can propel us into “fight or flight” mode. Humanity’s fascination with gambling hinges on stress.

If the most skilled physiologists in the world could peer beneath the skin of a thrill-seeker on a roller coaster and an out-of-his-depth job interview candidate, they would struggle to tell them apart. Deep in the brain, they would see a structure called the hypothalamus fired up. With each lurch of the ride or disarming question asked, the hypothalamus signals to the adrenal glands, which sit atop each kidney. The adrenals then squirt a shot of adrenalin into the bloodstream. In the background, the hypothalamus prods the pituitary gland, which passes a different message on to the adrenal gland. This increases production of cortisol, the textbook “stress hormone”. Flipping these biological switches triggers the familiar bodily symptoms of stress: a pounding heart, raised blood pressure, dilated pupils, arrested digestion and a damped-down immune system. In both cases, the biological stress response would look very similar.

Even if we could eliminate stress entirely, or smother it with pharmaceuticals, we wouldn’t want to. To muzzle the stress response is to silence the good as well as the bad. At best, stress can motivate us to achieve more and fix the sources of our stress. Boredom is stressful in its own way: observe a caged lion, or an understimulated teenager. In fact, as the animal psychologist Françoise Wemelsfelder told New Scientist recently, boredom may exist to spur us back into activity. This half-forgotten idea, that some degree of stress can inspire and elevate, is common sense. It also has deep roots in the earliest scientific study of stress and stress responses.

***

At the beginning of the 20th century, two American psychologists, Robert Yerkes and John Dodson, wanted to know how stressing out lab mice affected their learning. They set the rodents navigational challenges and punished wrong turns by administering small electric shocks to the feet. In their terminology, larger electric currents caused greater “arousal”.

They spotted some consistent trends. When they gave mice an easy task (choosing between a black or a white tunnel) the relationship between the strength of the shock and the speed of learning was simple. The greater the stressor, the quicker the mice learned to pick the right tunnel.

When the challenge was subtler (differentiating between grey tunnels), the response was less straightforward. Weak shocks provided little impetus to learn, but as the zaps got stronger, the mice gradually upped their game. They focused on the task and remembered the consequences of wrong choices. Yet, at a certain point, the high stress levels that helped with the easy task became counterproductive. Overwhelmed, the mice skittered around at random, trying in vain to escape.

On a graph, the relationship between stress and performance on onerous tasks traces an inverted U shape. Some degree of stress helps, but there is a clear tipping point, beyond which stress becomes paralysing. The findings became known as the Yerkes-Dodson law.

This was all very well for mice, but could it be applied to human beings? According to the Canadian-Austrian endocrinologist Hans Selye, the “father of stress”, it could. Selye was the first person to describe the key glands, hormones and nerves of the biological stress response during the 1930s and 1940s, and also one of the first to apply the word “stress” to human biology.

For Selye, “stress” described an all-purpose response the body had to any demand placed upon it. When stress is on the upswing of Yerkes and Dodson’s inverted-U performance curve, Selye calls it “eustress”. This is where good teachers and managers should push their charges: to the sweet spot that separates predictable tedium from chaotic overload. Where stress gets more persistent, unmanageable and damaging, Selye calls it “distress”. Eustress and distress have identical biological bases; they are simply found at different points on the same curve.

Despite this knowledge, stress has a terrible public image today, often synonymous with distress. While some wear their stress as a badge of honour (“I’m important enough to be stressed”), deep down even the most gung-ho City workers probably stress about their stress. And in painting stress as a beast, we grant it more destructive power.

When did we come to view stress as the universal enemy? Mark Petticrew, Professor of Public Health Evaluation at the London School of Hygiene and Tropical Medicine, has sifted through a huge archive of historical tobacco industry documents. In a 2011 paper, he revealed that a large proportion of stress research during the second half of the 20th century was funded, steered and manipulated by this most unexpected of benefactors. Indeed, from the late 1950s, Hans Selye received hundreds of thousands of tobacco-stained dollars. He also allowed industry lawyers to vet his research and appeared in several pro-tobacco propaganda films.

“They put a massive, massive amount of money into it,” Petticrew told me.

Why were tobacco manufacturers so interested in stress? First, cigarettes were marketed as a stress reliever. “To anxiety . . . I bring relief,” reads a 1930s advertisement for Lucky Strike. So if research could help them pin poor mental and physical health to stress, this sort of message would carry more weight. (Incidentally, the still widespread belief that smoking reduces anxiety appears to be wrong.)

Later, as evidence grew that smoking caused cancer and heart disease, the tobacco industry wanted to prove that stress was an equally significant risk factor. They used the authority of Selye and several other leading researchers as a smokescreen. “Doubt is our product,” read a top industry executive’s 1969 memo. And so doubt they sowed, arguing repeatedly that stress was a major cause of disease. Those seeking to control tobacco were wrong, they claimed.

It worked: the industry convinced the general public of the evils of stress and diverted public health research for at least a decade. With tobacco regulation and compensation payouts postponed, the profits kept rolling in.

Should we doubt the veracity and neutrality of all the foundational research into stress as a disease? “I wouldn’t want to argue that stress doesn’t exist, or that it isn’t bad for your health and certainly your mental health,” Petticrew says. “But you can’t ignore this story.”

He goes on to describe concrete “findings” that industry-funded researchers got wrong. Prominent among these was a link between coronary disease and people displaying so-called Type A personality traits: competitiveness, ambition, anxiety. Such temperamentally “stressed” people were especially likely to suffer heart attacks and, not coincidentally, to smoke. Then the association faded away. “Aside from the scientific weaknesses, which are many, Type A is a cultural artefact to some extent constructed by the tobacco lobby,” Petticrew says. And yet, despite its fragile foundations, the Type A myth persists today.

The long shadow cast by decades of one-sided, propaganda-laced stress research has led many people to believe that stress is a direct cause of heart attacks. But the British Heart Foundation’s website states, “There is no evidence to suggest that stress causes coronary heart disease or heart attacks.” Nor does it cause stomach ulcers: usually it is a bacterium called Helicobacter pylori which does that.

The tobacco-funded researchers didn’t get it all wrong. Stress does have clear causal links to some diseases, particularly mental illnesses, including depression, anxiety disorders, schizophrenia and addictive behaviour. High stress levels appear to be a general risk factor for early death, among middle-aged men in particular. Moreover, we all know how unpleasant stress can be. From insomnia to binge eating and boozing, we respond to stress with all sorts of counterproductive and antisocial behaviours. And that is partly why the tone of messages we hear about stress matters so much. Human beings are inherently suggestible and particularly vulnerable to warning messages about our health, especially when those messages seem to be backed by science.

***

With mice in a cage, you can measure the tipping point – the precise current of the electric shock – where good stress becomes bad. But we don’t need the lurking menace of a lion in the long grass to activate our stress response. We can do it perfectly well for ourselves. All it takes is a negative thought, the memory of an insult, or a vague feeling of unease.

We can think our way into stress. And, as recent evidence shows, if we believe stress is going to hurt us, it is more likely to hurt us. This is one message emerging from the Whitehall II project, a long-term study of 10,000 UK government civil servants, set up in 1985 to study the social, economic and personal determinants of health and disease. A 2013 analysis of Whitehall II data concluded that people who believe stress adversely affects their health are more than twice as likely to suffer a heart attack, irrespective of their stress levels.

There is a flipside to this gloomy news. If our thoughts and beliefs can switch on a damaging stress response, can they also switch it off? Could the power of suggestion be a partial vaccination in the battle against the stress epidemic?

This is the contention of Alia Crum, a psychology professor at Stanford University and a flagbearer for the science of mindset manipulations. In 2007 she showed that if hotel chambermaids come to think of their work as exercise, they lose weight and their blood pressure falls, apparently without them working any harder. More recently, she described how UBS bankers who were shown videos about the life-enhancing effects of stress – how it can sharpen attention, boost cognition and force fresh perspectives – reported being more productive, focused and collaborative, and less afflicted by depression and anxiety.

The inescapable conclusion is this: the human mind is a powerful gatekeeper to the stress response. But we have to tread carefully here. UBS employees may have the freedom to choose a less stressful life, and find opportunity to reshape their stress mindsets. What about those whose stress is delivered early and compounded by a lifetime of disadvantage and adversity? Perhaps this is where the story of familiar, workaday stress and the grinding strain of social injustice come together. Stress gets under our skin only when we can’t see the end or spot the fix. So what, other than using Crum’s mindset interventions, can we do to restore the critical feeling of empowerment?

Emily Ansell, an assistant professor of psychiatry at Yale, says that reaching out a kindly hand to your fellow human beings can be surprisingly helpful. In a study published last year, Ansell and colleagues gave a group of 77 people a diary-like smartphone app. They asked the subjects to record all the stressful incidents they encountered, and any minor acts of kindness they performed, during a 14-day period. The data shows that gestures such as holding doors for strangers and helping elderly people across the road buffer the effects of stress and make you feel more optimistic.

Positive interactions deliver a reward at the neurological level. They restore a sense of control and show that meaningful relationships are possible. Moreover, helpers often get more psychological and health benefits than those on the receiving end of  that help.

How do we encourage prosocial behaviour throughout society, particularly at the margins? According to Paul Piff, a social psychologist at the University of California, Irvine, lower-class people in America often “have less and give more”. They are more generous, charitable, trusting and helpful than their upper-class counterparts. It’s possible that this tendency to reach out and muck in is a direct response to a life of chronic stress. In response to Piff’s theory, Michael Poulin, a professor of psychology at the University of Buffalo, suggests: “We should perhaps really focus on encouraging prosocial behaviour among the well-off, ­potentially leading to benefits both for them – in terms of stress – and for the disadvantaged, who would presumably benefit from their generosity.”

This article is published simultaneously in the Long + Short, the free online magazine of ideas published by Nesta, the UK’s innovation foundation. thelongandshort.org

This article first appeared in the 19 May 2016 issue of the New Statesman, The Great Huckster