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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Theresa May’s stage-managed election campaign keeps the public at bay

Jeremy Corbyn’s approach may be chaotic, but at least it’s more authentic.

The worst part about running an election campaign for a politician? Having to meet the general public. Those ordinary folk can be a tricky lot, with their lack of regard for being on-message, and their pesky real-life concerns.

But it looks like Theresa May has decided to avoid this inconvenience altogether during this snap general election campaign, as it turns out her visit to Leeds last night was so stage-managed that she barely had to face the public.

Accusations have been whizzing around online that at a campaign event at the Shine building in Leeds, the Prime Minister spoke to a room full of guests invited by the party, rather than local people or people who work in the building’s office space.

The Telegraph’s Chris Hope tweeted a picture of the room in which May was addressing her audience yesterday evening a little before 7pm. He pointed out that, being in Leeds, she was in “Labour territory”:

But a few locals who spied this picture online claimed that the audience did not look like who you’d expect to see congregated at Shine – a grade II-listed Victorian school that has been renovated into a community project housing office space and meeting rooms.

“Ask why she didn’t meet any of the people at the business who work in that beautiful building. Everyone there was an invite-only Tory,” tweeted Rik Kendell, a Leeds-based developer and designer who says he works in the Shine building. “She didn’t arrive until we’d all left for the day. Everyone in the building past 6pm was invite-only . . . They seemed to seek out the most clinical corner for their PR photos. Such a beautiful building to work in.”

Other tweeters also found the snapshot jarring:

Shine’s founders have pointed out that they didn’t host or invite Theresa May – rather the party hired out the space for a private event: “All visitors pay for meeting space in Shine and we do not seek out, bid for, or otherwise host any political parties,” wrote managing director Dawn O'Keefe. The guestlist was not down to Shine, but to the Tory party.

The audience consisted of journalists and around 150 Tory activists, according to the Guardian. This was instead of employees from the 16 offices housed in the building. I have asked the Conservative Party for clarification of who was in the audience and whether it was invite-only and am awaiting its response.

Jeremy Corbyn accused May of “hiding from the public”, and local Labour MP Richard Burgon commented that, “like a medieval monarch, she simply briefly relocated her travelling court of admirers to town and then moved on without so much as a nod to the people she considers to be her lowly subjects”.

But it doesn’t look like the Tories’ painstaking stage-management is a fool-proof plan. Having uniform audiences of the party faithful on the campaign trail seems to be confusing the Prime Minister somewhat. During a visit to a (rather sparsely populated) factory in Clay Cross, Derbyshire, yesterday, she appeared to forget where exactly on the campaign trail she was:

The management of Corbyn’s campaign has also resulted in gaffes – but for opposite reasons. A slightly more chaotic approach has led to him facing the wrong way, with his back to the cameras.

Corbyn’s blunder is born out of his instinct to address the crowd rather than the cameras – May’s problem is the other way round. Both, however, seem far more comfortable talking to the party faithful, even if they are venturing out of safe seat territory.

Anoosh Chakelian is senior writer at the New Statesman.

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