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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Like it or hate it, it doesn't matter: Brexit is happening, and we've got to make a success of it

It's time to stop complaining and start campaigning, says Stella Creasy.

A shortage of Marmite, arguments over exporting jam and angry Belgians. And that’s just this month.  As the Canadian trade deal stalls, and the government decides which cottage industry its will pick next as saviour for the nation, the British people are still no clearer getting an answer to what Brexit actually means. And they are also no clearer as to how they can have a say in how that question is answered.

To date there have been three stages to Brexit. The first was ideological: an ever-rising euroscepticism, rooted in a feeling that the costs the compromises working with others require were not comparable to the benefits. It oozed out, almost unnoticed, from its dormant home deep in the Labour left and the Tory right, stoked by Ukip to devastating effect.

The second stage was the campaign of that referendum itself: a focus on immigration over-riding a wider debate about free trade, and underpinned by the tempting and vague claim that, in an unstable, unfair world, control could be taken back. With any deal dependent on the agreement of twenty eight other countries, it has already proved a hollow victory.

For the last few months, these consequences of these two stages have dominated discussion, generating heat, but not light about what happens next. Neither has anything helped to bring back together those who feel their lives are increasingly at the mercy of a political and economic elite and those who fear Britain is retreating from being a world leader to a back water.

Little wonder the analogy most commonly and easily reached for by commentators has been that of a divorce. They speculate our coming separation from our EU partners is going to be messy, combative and rancorous. Trash talk from some - including those in charge of negotiating -  further feeds this perception. That’s why it is time for all sides to push onto Brexit part three: the practical stage. How and when is it actually going to happen?

A more constructive framework to use than marriage is one of a changing business, rather than a changing relationship. Whatever the solid economic benefits of EU membership, the British people decided the social and democratic costs had become too great. So now we must adapt.

Brexit should be as much about innovating in what we make and create as it is about seeking to renew our trading deals with the world. New products must be sought alongside new markets. This doesn’t have to mean cutting corners or cutting jobs, but it does mean being prepared to learn new skills and invest in helping those in industries that are struggling to make this leap to move on. The UK has an incredible and varied set of services and products to offer the world, but will need to focus on what we do well and uniquely here to thrive. This is easier said than done, but can also offer hope. Specialising and skilling up also means we can resist those who want us to jettison hard-won environmental and social protections as an alternative. 

Most accept such a transition will take time. But what is contested is that it will require openness. However, handing the public a done deal - however well mediated - will do little to address the division within our country. Ensuring the best deal in a way that can garner the public support it needs to work requires strong feedback channels. That is why transparency about the government's plans for Brexit is so important. Of course, a balance needs to be struck with the need to protect negotiating positions, but scrutiny by parliament- and by extension the public- will be vital. With so many differing factors at stake and choices to be made, MPs have to be able and willing to bring their constituents into the discussion not just about what Brexit actually entails, but also what kind of country Britain will be during and after the result - and their role in making it happen. 

Those who want to claim the engagement of parliament and the public undermines the referendum result are still in stages one and two of this debate, looking for someone to blame for past injustices, not building a better future for all. Our Marmite may be safe for the moment, but Brexit can’t remain a love it or hate it phenomenon. It’s time for everyone to get practical.