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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Cabinet audit: what does the appointment of Andrea Leadsom as Environment Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for Environment, Food and Rural Affairs.

A little over a week into Andrea Leadsom’s new role as Secretary of State for Environment, Food and Rural Affairs (Defra), and senior industry figures are already questioning her credentials. A growing list of campaigners have called for her resignation, and even the Cabinet Office implied that her department's responsibilities will be downgraded.

So far, so bad.

The appointment would appear to be something of a consolation prize, coming just days after Leadsom pulled out of the Conservative leadership race and allowed Theresa May to enter No 10 unopposed.

Yet while Leadsom may have been able to twist the truth on her CV in the City, no amount of tampering will improve the agriculture-related side to her record: one barely exists. In fact, recent statements made on the subject have only added to her reputation for vacuous opinion: “It would make so much more sense if those with the big fields do the sheep, and those with the hill farms do the butterflies,” she told an audience assembled for a referendum debate. No matter the livelihoods of thousands of the UK’s hilltop sheep farmers, then? No need for butterflies outside of national parks?

Normally such a lack of experience is unsurprising. The department has gained a reputation as something of a ministerial backwater; a useful place to send problematic colleagues for some sobering time-out.

But these are not normal times.

As Brexit negotiations unfold, Defra will be central to establishing new, domestic policies for UK food and farming; sectors worth around £108bn to the economy and responsible for employing one in eight of the population.

In this context, Leadsom’s appointment seems, at best, a misguided attempt to make the architects of Brexit either live up to their promises or be seen to fail in the attempt.

At worst, May might actually think she is a good fit for the job. Leadsom’s one, water-tight credential – her commitment to opposing restraints on industry – certainly has its upsides for a Prime Minister in need of an alternative to the EU’s Common Agricultural Policy (CAP); a policy responsible for around 40 per cent the entire EU budget.

Why not leave such a daunting task in the hands of someone with an instinct for “abolishing” subsidies  thus freeing up money to spend elsewhere?

As with most things to do with the EU, CAP has some major cons and some equally compelling pros. Take the fact that 80 per cent of CAP aid is paid out to the richest 25 per cent of farmers (most of whom are either landed gentry or vast, industrialised, mega-farmers). But then offset this against the provision of vital lifelines for some of the UK’s most conscientious, local and insecure of food producers.

The NFU told the New Statesman that there are many issues in need of urgent attention; from an improved Basic Payment Scheme, to guarantees for agri-environment funding, and a commitment to the 25-year TB eradication strategy. But that they also hope, above all, “that Mrs Leadsom will champion British food and farming. Our industry has a great story to tell”.

The construction of a new domestic agricultural policy is a once-in-a-generation opportunity for Britain to truly decide where its priorities for food and environment lie, as well as to which kind of farmers (as well as which countries) it wants to delegate their delivery.

In the context of so much uncertainty and such great opportunity, Leadsom has a tough job ahead of her. And no amount of “speaking as a mother” will change that.

India Bourke is the New Statesman's editorial assistant.