Forget motions at party conference. Forget beer and sandwiches with union leaders. Forget think tank reports. Forget lobbying. Forget focus groups. Forget polling. We now all know the quickest route to setting Labour Party policy: it’s a few mean articles in the Telegraph. The paper spent last week issuing whatever blood-curdling warnings it could summon about equalising capital gains tax, which draws from the profit made on the increased value of a sold asset, with income tax – an eminently reasonable measure that the tax economist Arun Advani estimates would raise £15.8bn a year.
How else to explain the scramble of shadow cabinet ministers to tell any journalist who asks that Labour has, in Rachel Reeves’ words, “no plans” to increase capital gains taxes? Or the shadow justice secretary Steve Reed telling Andrew Neil that Labour couldn’t possibly change taxes on people’s “future security”?
Particularly odd is that this minor panic comes mere days after it was revealed our ultra-rich Prime Minister pays a lower rate of tax on his capital gains than many people pay on their earnings from actual work – and had saved £300,000 from a tax cut that he had personally argued and voted for.
With Rishi Sunak doing the rough equivalent of wandering around Westminster with a KICK ME sign on his back, this was a golden opportunity for Labour not only to further demonstrate the PM’s great distance from the rest of us but (more importantly) to clear some political space for its own tax and spending plans. An opposition with a more realistic view of the kind of election campaign it is likely to fight would have known to grab this moment with both hands.
Because whatever scenarios are rattling around the leader’s office, and whichever segment of the population is currently flavour of the week, if Labour forms the next government it will have little choice but to either raise taxes, raise borrowing or (most likely) some combination of both. Public services are crumbling just as the demands on the NHS, social care and the rest of the state are growing. The former Treasury permanent secretary Nicholas Macpherson, has estimated an extra £50bn a year will be needed to cope – which could be thought of as a minimum. Merely closing loopholes in existing taxes, as Andrew Fisher has said, will not be sufficient.
Capital gains tax is an obvious revenue source (the current rate is capped at just 28 per cent for residential property and 20 per cent for other assets, compared with the top income tax rate of 45 per cent). Receipts from the tax are absurdly concentrated. Forty-five per cent of all revenue comes from gains worth £5m or more, from less than 1 per cent of capital gains taxpayers each year. The people who gain most from the failure to equalise taxation are a tiny and extremely wealthy sliver of the population – people very much like the PM.
They currently pay a capital gains tax rate far below their income tax rate, potentially as low as 10 per cent. The government’s own Office of Tax Simplification, after surveying the evidence, modestly suggested that ministers should “consider more closely aligning capital gains tax rates with income tax rates”. The Institute for Fiscal Studies has described equalisation as an “excellent” idea.
But perhaps most glaring of all, it was a Conservative chancellor, the late Nigel Lawson, who aligned income and capital gains tax rates back in 1988, noting, correctly, that “there is little economic difference between income and capital gains… it is by no means clear why one should be taxed more heavily than the other”. Thirty-five years later, the same argument applies, with the same consequences that Lawson flagged back then: unequal tax rates mean distorted investment decisions and the creation of major tax avoidance.
If this argument was good enough for Margaret Thatcher’s ideological “golden boy” (her words), it surely isn’t too hard for Labour to make the same case today. By seizing the opportunity of Sunak’s tax return, Labour could have avoided having to make the argument in more challenging circumstances.
The current leadership greatly admires New Labour and wants to emulate its 1997 triumph. But this isn’t 1997, when Labour inherited a fast-growing economy at the start of the greatest credit boom in history. The global economy is in a worse state, as a gloomy long-term assessment from the World Bank last month made clear. Reeves’ plaintive appeals to the miracles of “growth” aren’t particularly credible, since even achieving whatever growth can be found will require upfront investment – never mind that no plausible amount of future growth will cover future public spending demands.
The party should be getting in front of the political challenge today. That this has been scared off by some yelping from the Telegraph suggests that rather than a 1997-style triumph, it is facing a repeat of one or two other elections: 1992, for example, when a “tax bombshell” campaign by the Tories helped erode Labour’s poll lead; or 2015, when a late capitulation to austerity, for fear of raising taxes or borrowing more, had much the same impact.
Since Keir Starmer became Labour leader three years ago, there has been much talk of the leadership’s laser-like focus on winning elections. But the party’s current positioning on the basic issue of tax suggests that this focus isn’t nearly as sharp as it needs to be.