Labour and the Tories are both avoiding the tax debate we need

The repetitive and needlessly venomous exchanges over the 50p rate distract from the long-term question of how we should pay for the services that we value in an era of austerity.

Ed Balls’s confirmation that Labour would restore the 50p top rate of income tax has gone down badly with the small number of people who would be eligible to pay. It isn’t very popular with conservative commentators either. The two sets no doubt intersect on the venn diagram of people who think austerity is a much better idea when it affects someone else.

None of this is very surprising. The economic and political arguments are pretty much the same as they were when George Osborne axed the rate – and it was all but inevitable that Labour would pledge to restore it. The attack on a “Tory tax cut for millionaires” probes a serious weakness in the Conservative brand, but its effectiveness would be diminished by a queasy caveat to the effect that “we hate it but we wouldn’t reverse it.” So reverse it Labour will, if they get the chance.

One thing Labour has failed to do in the days since the announcement was made is put any pressure on the Tories and Lib Dems to talk about their own tax rises this parliament – the VAT hike leaps out as a broken Conservative pre-election promise and a regressive measure – and the near certainty that there is more to come after 2015.

Osborne insists he can balance the books without raising any more taxes, simply by stripping yet more cash out of the welfare budget instead. (And he is confident that voters are sufficiently hostile to benefit spending to make cuts in that direction an attractive proposition.) But most economists and policy wonks who have looked at the fiscal projections and scanned the post-election landscape think any incoming government will be raising taxes and cutting spending.

So really the Balls announcement ought to be an opportunity to discuss with a bit of candour how money should be raised. If, as the critics insist, the 50p rate is ineffective and counter-productive, what kind of taxes are legitimate and just?

None but the flattest and lowest possible, say the libertarians. But let’s suppose for the sake of argument that an incoming government isn’t rolling in surprisingly luxuriant revenues – that growth disappoints – yet still ministers want to provide universal healthcare, education, a police force, some military capability, investment in infrastructure and a basic guarantee that elderly people will not be abandoned to penury and starvation.

Those, after all, will be Labour and Tory manifesto commitments and they will have to be funded. Even if you accept the view that the optimum direction is always towards lower taxes, there is still a debate to be had about widening the tax base and winning consent for government to impose levies and spend on our collective behalf from time to time.

In my column in the magazine last week, I mentioned the intriguing example of the special “business rate supplement” that helps meet the costs of Crossrail. Those who set it up say the companies that stand to benefit from the new train service were more than happy to subsidise its construction. “A rare example of taxpayers asking to pay more taxes,” was how one architect of the scheme described it to me. Labour’s policy review team are looking closely at this kind of approach – allowing local authorities more fiscal freedom if the focus is on boosting local services and infrastructure.

In a very different corner of the policy field, Danny Finkelstein, Times columnist, Conservative peer, and casual advisor to the Chancellor, recently floated the idea of a dedicated NHS tax. The idea is that British voters will only be persuaded of the case for drastic reform of the health service when they are confronted with the reality of how much the current funding model costs them and how inexorably that burden will rise. (The Times article is behind a paywall, so here’s a free discussion of the same issue from Nick Pearce’s IPPR blog.)

The appearance of this notion under Lord Finkelstein’s byline all but guarantees that it will be under some level of consideration in the Treasury. What this and Labour’s local infrastructure thinking have in common is a recognition that traditional models of consent for tax rises have broken down.

Whitehall has always hated hypothecation – the pegging of specific revenue streams to particular services. But in a climate where politicians and officials are simply not trusted with public money, some new devices will be needed to reassure people, whether as private households or businesses, that it is worthwhile handing a portion of their earnings over to state agencies so they can effect good works.

The repetitive and needlessly venomous exchanges over the 50p rate have shown that British politicians like arguments about taxes that reinforce existing prejudices about their opponents – Labour as neo-Bolshevik confiscators of wealth; Tories as self-serving plutocrats defending their entrenched privileges. There are all sorts of questions to be asked about the kind of taxation that supports growth and enterprise, adequately and sustainably funds public services, is not too onerous and conforms to voters’ natural sense of fairness. Sadly, that isn’t the debate we are going to have in the run-up to the next general election. 

Ed Balls and George Osborne attend the State Opening of Parliament on May 8, 2013. Photograph: Getty Images.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

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How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

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