Labour needs tax reform for a credible economic plan. Photo: Getty
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Why tax reform should be Labour's top priority

Tax reform is central to the clear, credible and persuasive economic story the Labour party needs for winning the general election.

Comprehensive tax reform should be a top Labour priority. Escaping the present political straightjacket over tax, spending and the deficit here intersects with compelling need for reform and this being the only way to square the circle of improving economic performance, paying for essential public services and greater fairness. These then feed into Labour articulating a clear, credible and persuasive economic story, without which winning the May 2015 election is increasingly in doubt.  

Politically Labour is caught between voters’ fears of tax increases and reality of a large on-going deficit, including £25bn of cuts which have yet to be identified before funding even pressing priorities. Voter trepidation is then part of wider lack confidence in Labour’s economic strategy and competence, including scepticism the money from any tax increases will used to good effect.

Conversely, the Conservatives are now claiming success, however belated and despite rather than because of their policies economic recovery is in reality. They have promised cuts in income tax if re-elected; albeit these are worth nearly three times more to the high paid than ordinary taxpayers and follow on from a slew of tax cuts for big business and wealthy paid for by tax increases and falling incomes for everyone else.  Conservatives have so far also dominated the narrative and are now hammering at Labour’s economic and tax vulnerabilities. 

The only way out for Labour is to shift the focus to how, not how much, we tax; in other words, on to the tax system itself.  But this can and, if the political debate is to be recast, needs to be a key facet of a wider economic story of how Labour will secure the economy yet pay for public services and deliver greater equality.

There is deep public resentment at the tax regime’s failings and injustices as well as foreboding about the long term economic future. But this merely highlights deeper weaknesses in the tax system, economy and already over-stretched public finances. Here the present tax system’s unfairness and inequity intersect with economically detrimental or disproportionate impositions.

Tax cuts for the well off and big companies simply don’t deliver the hoped for improvements in investment, growth and new business creation. Business development and investment are part of a far wider equation of markets, capabilities, skills and costs; where the UK is confronting both the on-going erosion of its economic strengths and decades of woeful under-investment in nearly every facet of the country’s economic capabilities. Equally, the tax cuts don’t end up in the investment in productive activities in the UK but mainly go into inflating property values, financial and rentier activities, excessive rewards at the top or just disappear offshore. Meantime severe, repeated public spending cuts are hacking away at the economy’s essential underpinnings.

Yet work – jobs and earned income – is over taxed. Only work attracts National Insurance; and other types of earnings then often also benefit from preferential tax rates. Together work is taxed at minimum 50-100 per cent more than any other earnings, profits or gains.  High work taxes are in turn bought at a high economic price, reducing demand, output and incentives for both employers and employees.

The flip side of the coin is the under-taxing of wealth and failures of progressive tax in the face of marked economically and socially detrimental inequalities. Income tax is alone caries nearly all the progressive aspects the whole system, yet ends overwhelming borne by just work income and concentrating progression between the bottom and middle of the income, let alone wealth spectrum. Meanwhile the returns from wealth – rents, profits, dividends and capital gains – are all favourably taxed compared to earned income. And, critically, wealth itself isn’t taxed at all (except on death; when even then tax is still overwhelmingly avoided by the wealthy).

The next critical fault line is the way companies are taxed. On the one hand, company profits are particularly favourably taxed. On the other hand, all the advantage is to back-end profit taxes; while all the loading is put on front-end tax costs, particularly labour taxes. Yet given prevailing UK tax rates and circumstances, taxes on work, not company profits, have the greater adverse impact on businesses, growth and competitiveness;  and, conversely,  would most enhance economic performance if mitigated. 

British company taxes also reinforce rather than redress the economy’s shortcomings and imbalances. They are highly regressive in practise, favouring large or multi-national companies; bias towards the rentier and financial; and favour incumbent market power. Conversely, they bias against the substantively productive and those who actually employ people here; fail to support innovation; and disadvantage domestic UK businesses.

Finally, the tax system and economy are being cannibalised by a dangerous parallel ‘offshore’ financial realm within. Coring-out tax revenues, this gives some, particularly multi-national and larger businesses, unfair financial, market and competitive advantages – warping the economy’s essential structure.

The reverse face of the present tax system’s considerable dysfunctions is its reform can potentially square the circle between the otherwise intractable fiscal, economic and political problems.  By using the present systems critical fault-lines as the axes of comprehensive reform, better and fairer taxes can enhance economic performance; while improved economic performance and fairer taxes pay for the necessary public services.  

The essential aim would be to shift a significant amount of the tax burden from over taxing jobs and earned income to currently under-taxed unearned income, capital gains and wealth.  At the same time, company taxes would be refocused to drive investment, employment and innovation; paid for by increasing taxes on rentier activities, capital gains and financial transactions. Meanwhile legitimated tax avoidance (not just "abuse" or "loopholes"), particularly by multi-nationals and offshore companies, would be stamped on.

In passing Labour might not only escapes it present political cul-de-sac over tax but connect to voters with a credible, persuasive story of economic enablement through reform, empowerment and greater fairness.

Chris Nicholas is an economist, qualified barrister and former media and technology businessman. He now writes and advises on economic policy and the political economy

One time Barrister, economist and media and technology entrepreneur, Chris Nicholas now writes and lectures on economic policy and political economy.

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How will Labour handle the Trident vote?

Shadow cabinet ministers have been promised a free vote and dismiss suggestions that the party should abstain. 

At some point this year MPs will vote on whether Trident should be renewed. It is politics, rather than policy, that will likely determine the timing. With Labour more divided on the nuclear question than any other, the Tories aim to inflict maximum damage on the opposition. Some want an early vote in order to wreak havoc ahead of the May elections, while others suggest waiting until autumn in the hope that the unilateralist Jeremy Corbyn may have changed party policy by then.  

Urged at PMQs by Conservative defence select committee chair Julian Lewis to "do the statesmanlike thing" and hold the vote "as soon as possible", Cameron replied: "We should have the vote when we need to have the vote and that is exactly what we will do" - a reply that does little to settle the matter. 

As I've reported before, frontbenchers have been privately assured by Corbyn that they and other Labour MPs will have a free vote on the issue. Just seven of the shadow cabinet's 31 members support unilateral disarmament, with Tom Watson, Andy Burnham, Hilary Benn and Angela Eagle among those committed to Trident renewal. But interviewed on the Today programme yesterday, after her gruelling PLP appearance, Emily Thornberry suggested that Labour may advise MPs to abstain. Noting that there was no legal requirement for the Commons to vote on the decision (and that MPs did so in 2007), she denounced the Tories for "playing games". But the possibility that Labour could ignore the vote was described to me by one shadow cabinet member as "madness". He warned that Labour would appear entirely unfit to govern if it abstained on a matter of national security. 

But with Trident renewal a fait accompli, owing to the Conservatives' majority, the real battle is to determine Labour's stance at the next election. Sources on both sides are doubtful that Corbyn will have the support required to change policy at the party conference, with the trade unions, including the pro-Trident Unite and GMB, holding 50 per cent of the vote. And Trident supporters also speak of their success against the left in constituency delegate elections. One described the Corbyn-aligned Momentum as a "clickocracy" that ultimately failed to turn out when required. 

George Eaton is political editor of the New Statesman.