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18 May 2015

What can Labour learn from the Miliband approach to tax?

Ed Miliband did well when appealing to broad principles and good policy - less so when acting from the crude politics of us against them.

By Jolyon Maugham

This was the campaign in which tax became political. It was through Labour’s manifesto commitments on tax that it sought to articulate its vision of a share of the rewards of the few accruing to the many. Because for all the considerable intellectual appeal of pre-distribution, we ultimately failed to find a message that resonated with the headline writers.

So we fell back on re-distribution; indeed, we championed it. Read, afresh, Labour’s key Manifesto promises on tax: “Reversing the 50p tax cut so that the top one per cent pay a little more”; abolishing “non-dom status so that all those who make the UK home pay tax in the same way as the rest of us”; and a “Mansion Tax on properties worth over £2m.”

There are many in the Party for whom each of these promises remain comfortable reading. But what of those who see the path to electoral success as taking in not merely the proud pit villages of the North East and shipbuilding yards of Glasgow but also the dappled glades of the South-East? Do these promises bar the gates?

There is, of course, no grand narrative. But sift through the evidence and there is a lesson to take forward.     

Take the Mansion Tax first. Examined through a technical lens it invited 4criticism: it clumsily conflated housing wealth and wealth – a not inconsiderable sin, as anyone with a mortgage will readily tell you. It necessitated a substantial new collection machine which sat astride another – for Council tax – performing a similar function. It raised in tax terms a relatively small sum, a little more than £1bn, most of which would evaporate with a fall in house prices. I could go on. Nevertheless polling data showed it remained hugely popular: why?

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A cynic would argue it was popular because it was a tax other people paid: only 100,000 homes would be caught. But then that cynic would have to explain why Inheritance Tax – paid from only 44,000 estates a year – polls as the least fair tax of all. There is a way – only one – to square that circle. An annual charge of £3,000 annum for those in a house worth between £2m and £3m feels very different from a charge to 40 per cent of accrued family wealth above £650,000. Inheritance Tax, at least in its current incarnation, is riven with unfairness.

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What about the changes to the non-dom rules? My instinct was to devise a quiet mechanic which maximised the tax take from those changes. How might you raise the taxes paid by mobile individuals in such a way that they might remain, and others remain inclined to come? And in anticipating criticism it sought political cover in certain technical incidences of design.

The Party spin machine had other ideas. Rather than leading with the changes as a revenue raiser it sold them as a matter of basic fairness: why should wealthy foreigners be taxed more lightly than Middle England? That, with hindsight, was the right strategy. Remember Boris squirming on Andrew Marr’s couch when invited to defend the status quo? And those three opinion polls showing Labour with a 6 per cent, 4 per cent and 3 per cent poll lead following the announcement? Labour also took the wind from the Tories’ sails: they had planned something similar of their own. The question of fairness, again, won the day.

The final tax wedge policy was a promise to reverse the Tories’ cut of the top rate from 50p to 45p. We sold it as reversing a £3bn tax cut for the wealthiest; the Tories retaliated that the reversal would raise a mere £100m. The £3bn figure is evidentially sound; the £100m less so – it rests upon some disputed modelling of how people alter their behaviour following changes in tax rates. The real figure could well have been more – but it could also have been less.

The reality is that, once you take into account employees’ national insurance contributions, the rate rises to 52 per cent. Time and again I heard from Labour voting high earners that they found the policy confiscatory and bad policy. Their point is made by the evidence on how much the policy would raise. About 350,000 this year would have paid tax at 50p. What signal did this policy send to them? And to the millions more who aspire to this earnings level? That if you work hard and do well Labour will punish you for the prize of a rhetorical flourish.

There was work going on behind the scenes to improve the Party’s messaging on tax. And I wrote on the issue just before the election. But fundamentally the 50p rate was the politics of division and it, quite rightly, played as such.

So some hits and some misses. But where do we go now?

Labour’s electability is contingent on it recovering its ability to look at the world through the eyes of those who didn’t vote for it. A fresh offer to the electorate will, of course, recognise that different demographics will focus on different policy areas. If the Conservatives raise the personal allowance to £12,500 then, come 2020, less than half of adults will pay income tax. This most un-Torylike severing of the link between the vote and the personal financial consequences of its exercise will create opportunities for Labour to appeal to lower income voters – but in other parts of a manifesto. When it comes to a tax offering, it is those who live in the dappled glades to whom Labour must appeal.

There will always be people driven by the desire to minimise their tax bills: Labour needn’t go looking for their votes. But they don’t live in the Middle England that cares profoundly about those values that – whether they would identify them as such or not – are core Labour values. Those voters are very much open to the case that they share responsibility to contribute through their tax returns to the goal of improving the quality of life for our most vulnerable. The answer does not lie in a race to the bottom on tax. But we must learn this lesson: if Middle England perceives our tax offering as unfair or politically motivated voters will rebel at the offices of their accountants – or at the ballot box.