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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.

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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.

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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?

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A nervous breakdown in the body politic

Are we too complacent in thinking that the toxic brew of paranoia and populism that brought Hitler to power will never be repeated?

The conventional wisdom holds that “all that is necessary for the triumph of evil is that good men do nothing”, in Edmund Burke’s familiar phrase; but this is at best a half-truth. Studying the biography of a moral monster triumphantly unleashed on the political and international stage points us to another perspective, no less important. What is necessary for the triumph of evil is that the ground should have been thoroughly prepared by countless small or not-so-small acts of petty malice, unthinking prejudice and collusion. Burke’s axiom, though it represents a powerful challenge to apathy, risks crediting evil with too much of a life of its own: out there, there are evil agencies, hostile to “us”, and we (good men and women) must mobilise to resist.

No doubt; but mobilising intelligently demands being willing to ask what habits and assumptions, as well as what chances and conditions, have made possible the risk of evil triumphing. And that leads us into deep waters, to a recognition of how what we tolerate or ignore or underestimate opens the way for disaster, the ways in which we are at least half-consciously complicit. If this is not to be the silly we-are-all-guilty response that has rightly been so much mocked, nor an absolution for the direct agents of great horrors, it needs a careful and unsparing scrutiny of the processes by which cultures become corruptible, vulnerable to the agendas of damaged and obsessional individuals.

This can be uncomfortable. It raises the awkward issue of what philosophers have learned to call “moral luck” – the fact that some people with immense potential for evil don’t actualise it, because the circumstances don’t present them with the chance, and that some others who might have spent their lives in blameless normality end up supervising transports to Auschwitz. Or, to take a sharply contemporary example, that one Muslim youth from a disturbed or challenging background becomes a suicide bomber but another from exactly the same background doesn’t. It is as though there were a sort of diabolical mirror image for the biblical Parable of the Sower: some seeds grow and some don’t, depending on the ground they fall on, or what chance external stimulus touches them at critical moments.

If what interests us is simply how to assign individuals rapidly and definitively to the categories of sheep and goats, saved and damned, this is offensively frustrating. But if we recognise that evil is in important respects a shared enterprise, we may be prompted to look harder at those patterns of behaviour and interaction that – in the worst cases – give permission to those who are most capable of extreme destructiveness, and to examine our personal, political and social life in the light of this.

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It would be possible to argue that the anti-Semitism of a lot of German culture – as of European Christian culture overall – was never (at least in the modern period) genocidal and obsessed with absolute racial purity; limited but real possibilities of integration were taken for granted, converts to Christianity were not disadvantaged merely because of their race, and so on. Yet the truth is that this cultural hinterland offered a foothold to the mania of Adolf Hitler; that it gave him just enough of the permission he needed to identify his society’s problems with this clearly definable “alien” presence. In his new book, Hitler: the Ascent, Volker Ullrich compellingly tells us once again that no one could have been under any illusion about Hitler’s general intentions towards the Jews from his very first appearance as a political figure, even if the detailed planning of genocide (lucidly traced in the late David Cesarani’s recent, encyclopaedic Final Solution) took some time to solidify. Yet so much of the German public heard Hitler’s language as the slightly exaggerated version of a familiar trope and felt able to treat it as at worst an embarrassing overstatement of a common, even a common-sense, view. One of the most disturbing things about this story is the failure of so many (inside and outside Germany) to grasp that Hitler meant what he said; and this failure in turn reinforced the delusion of those who thought they could use and then sideline Hitler.

To say that Hitler “meant what he said”, however, can be misleading. It is one of the repeated and focal themes in Ullrich’s book that Hitler was a brazen, almost compulsive liar – or, perhaps better, a compulsive and inventive actor, devising a huge range of dramatic roles for himself: frustrated artist, creative patron, philosopher-king (there is a fine chapter on the intellectual and artistic circle he assembled frequently at his Berchtesgaden residence), workers’ friend, martyr for his people (he constantly insinuated that he believed himself doomed to a tragic and premature death), military or economic messiah and a good deal else besides. His notorious outbursts of hysterical rage seem to have been skilfully orchestrated as instruments of intimidation (though this did not exactly indicate that he was otherwise predictable). Ullrich devotes a fair measure of attention to the literal staging of National Socialism, the architectural gigantism of Albert Speer which gave the Führer the sophisticated theatre he craved. In all sorts of ways, Hitler’s regime was a profoundly theatrical exercise, from the great public displays at Nuremberg and the replanning of Berlin to the various private fantasies enacted by him and his close associates (Göring above all), and from the emotional roller coaster he created for his circle to the dangerously accelerated rate of military-industrial expansion with which he concealed the void at the centre of the German economy.

Theatre both presupposes and creates a public. In the anxiety and despair of post-Versailles Germany, there was a ready audience for the high drama of Nazism, including its scapegoating of demonic enemies within and without. And in turn, the shrill pitch of Hitler’s quasi-liturgies normalised a whole set of bizarre and fantastic constructions of reality. A N Wilson’s challenging novel Winnie and Wolf, a fantasia on Hitler’s relations with Winifred Wagner, culminates in a scene at the end of the war where refugees and destitute citizens in Bayreuth raid the wardrobe of the opera house and wander the streets dressed in moth-eaten costumes; it is an unforgettable metaphor for one of the effects of Hitlerian theatre. Ullrich leaves his readers contemplating the picture of a vast collective drama centred on a personality that was not – as some biographers have suggested – something of a cipher, but that of a fantasist on a grand scale, endowed with a huge literal and metaphorical budget for staging his work.

All of this prompts questions about how it is that apparently sophisticated political systems succumb to corporate nervous breakdowns. It is anything but an academic question in a contemporary world where theatrical politics, tribal scapegoating and variegated confusions about the rule of law are increasingly in evidence. On this last point, it is still shocking to realise how rapidly post-Versailles Germany came to regard violent public conflict between heavily armed militias as almost routine, and this is an important background to the embittered negotiations later on around the relation between Hitler’s Sturmabteilung and the official organs of state coercion. Ullrich’s insightful account of a de facto civil war in Bavaria in the early 1920s makes it mercilessly plain that any pretensions to a state monopoly of coercion in Germany in this period were empty.

Yet the idea of such a state monopoly is in fact essential to anything that could be called a legitimate democracy. In effect, the polity of the Third Reich “privatised” coer­cion: again and again in Ullrich’s book, in the struggles for power before 1933, we see Nazi politicians successfully bidding for control of the mechanisms of public order in the German regions, and more or less franchising public order to their own agencies. A classical democratic political philosophy would argue that the state alone has the right to use force because the state is the guarantor of every community’s and every individual’s access to redress for injury or injustice. If state coercion becomes a tool for any one element in the social complex, it loses legitimacy. It is bound up with the rule of law, which is about something more than mere majority consent. One way of reading the rise of Hitler and National Socialism is as the steady and consistent normalising of illegitimate or partisan force, undermining any concept of an independent guarantee of lawfulness in society. It is the deliberate dissolution of the idea of a Rechtsstaat, a law-governed state order that can be recognised by citizens as organised for their common and individual good. Rule by decree, the common pattern of Nazi governmental practice, worked in harness with law enforcement by a force that was essentially a toxic hybrid, combining what was left of an independent police operation with a highly organised party militia system.

So, one of the general imperatives with which Hitler’s story might leave us is the need to keep a clear sense of what the proper work of the state involves. Arguments about the ideal “size” of the state are often spectacularly indifferent to the basic question of what the irreducible functions of state authority are – and so to the question of what cannot be franchised or delegated to non-state actors (it is extraordinary that we have in the UK apparently accepted without much debate the idea that prison security can be sold off to private interests). This is not the same as saying that privatisation in general leads to fascism; the issues around the limits to state direction of an economy are complex. However, a refusal to ask some fundamental questions about the limits of “franchising” corrodes the idea of real democratic legitimacy – the legitimacy that arises from an assurance to every citizen that, whatever their convictions or their purchasing power, the state is there to secure their access to justice. And, connected with this, there are issues about how we legislate: what are the proper processes of scrutiny for legislation, and how is populist and short-view legislation avoided? The Third Reich offers a masterclass in executive tyranny, and we need not only robust and intelligent counter-models, but a clear political theory to make sense of and defend those models.

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Theatre has always been an aspect of the political. But there are different kinds of theatre. In ancient Athens, the annual Dionysia festival included the performance of tragedies that forced members of the audience to acknowledge the fragility of the political order and encouraged them to meditate on the divine interventions that set a boundary to vendetta and strife. Classical tragedy is, as political theatre, the exact opposite of Hitlerian drama, which repeatedly asserted the solid power of the Reich, the overcoming of weakness and division by the sheer, innate force of popular will as expressed through the Führer.

Contemporary political theatre is not – outside the more nakedly totalitarian states – a matter of Albert Speer-like spectacle and affirmation of a quasi-divine leader; but it is increasingly the product of a populist-oriented market, the parading of celebrities for popular approval, with limited possibilities for deep public discussion of policies advanced, and an assumption that politicians will be, above all, performers. It is not – to warn once again against cliché and exaggeration – that celebrity culture in politics is a short route to fascism. But a political theatre that never deals with the fragility of the context in which law and civility operate, that never admits the internal flaws and conflicts of a society, and never allows some corporate opening-up to the possibilities of reconciliation and reparation, is one that exploits, rather than resolves our anxieties. And, as such, it makes us politically weaker, more confused and fragmented.

The extraordinary mixture of farce and menace in Donald Trump’s campaign is a potent distillation of all this: a political theatre, divorced from realism, patience and human solidarity, bringing to the surface the buried poisons of a whole system and threatening its entire viability and rationality. But it is an extreme version of the way in which modern technology-and-image-driven communication intensifies the risks that beset the ideals of legitimate democracy.

And – think of Trump once again – one of the most seductively available tricks of such a theatre is the rhetoric of what could be called triumphant victimhood: we are menaced by such and such a group (Jews, mig­rants, Muslims, Freemasons, international business, Zionism, Marxism . . .), which has exerted its vast but covert influence to destroy us; but our native strength has brought us through and, given clear leadership, will soon, once and for all, guarantee our safety from these nightmare aliens.

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This is a rhetoric that depends on ideas of collective guilt or collective malignity: plots ascribed to the agency of some dangerous minority are brandished in order to tarnish the name of entire communities. The dark legacy of much popular Christian language about collective Jewish guilt for the death of Jesus could be translated without much difficulty into talk about the responsibility of Jews for the violence and poverty afflicting Germans in the 1920s. (Shadows of the same myths still affect the way in which – as recent reports suggest – sinister, vague talk about Zionism and assumptions of a collective Jewish guilt for the actions of various Israeli politicians can become part of a climate that condones anti-Semitic bullying, or text messages saying “Hitler had a point”, on university campuses.)

Granted that there is no shortage of other candidates for demonic otherness in Europe and the United States (witness Trump’s language about Muslims and Mexicans), the specific and abiding lesson of Nazi anti-Semitism is the twofold recognition of the ease with which actually disadvantaged communities can be cast in the role of all-powerful subverters, and the way in which the path to violent exclusion of one kind or another can be prepared by cultures of casual bigotry and collective anxiety or self-pity, dramatised by high-temperature styles of media communication.

Marie Luise Knott’s recent short book Unlearning With Hannah Arendt (2014) revisits the controversy over Arendt’s notorious characterisation of the mindset of Nazism as “the banality of evil”, and brilliantly shows how her point is to do with the erosion in Hitlerian Germany of the capacity to think, to understand one’s agency as answerable to more than public pressure and fashion, to hold to notions of honour and dignity independent of status, convention or influence – but also, ultimately, the erosion of a sense of the ridiculous. The victory of public cliché and stereotype is, in Arendt’s terms, a protection against reality, “against the claim on our thinking attention that all events and facts make by virtue of their existence”, as she memorably wrote in The Life of the Mind. Hitler was committed to the destruction of anything that challenged the simple self-identity and self-justification of the race and the nation; hence, as Ullrich shows in an acutely argued chapter of Hitler: a Biography, the Führer’s venom against the churches, despite their (generally) embarrassingly lukewarm resistance to the horrors of the Reich. The problem was that the churches’ rationale entailed just that accountability to more than power and political self-identity that Nazi philosophy treated as absolute. They had grounds for thinking Nazism not only evil, but absurd. Perhaps, then, one of the more unexpected questions we are left with by a study of political nightmare such as Ullrich’s excellent book is how we find the resources for identifying the absurd as well as for clarifying the grounds of law and honour.

The threats now faced by “developed” democracy are not those of the 1920s and 1930s; whatever rough beasts are on their way are unlikely to have the exact features of Hitler’s distinctive blend of criminality and melodrama. But this does not mean that we shouldn’t be looking as hard as we can at the lessons to be learned from the collapse of political legality, the collective panics and myths, the acceptance of delusional and violent public theatre that characterised Hitler’s Germany. For evil to triumph, what is necessary is for societies to stop thinking, to stop developing an eye for the absurd as well as the corrupt in language and action, public or private.

Hitler: a Biography – Volume I: Ascent by Volker Ullrich is published by the Bodley Head

Rowan Williams is an Anglican prelate, theologian and poet, who was Archbishop of Canterbury from 2002 to 2012. He writes on books for the New Statesman

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism