Labour’s economic programme isn’t just radical – it’s credible too

The claim that the party’s tax rises would penalise ordinary workers and reduce investment ignores its transformational agenda.

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Labour’s election manifesto is more transformative than any other seen by this country since 1945. It includes dramatic economic interventions such as building 100,000 council houses a year, the creation of a million jobs through a Green Industrial Revolution, and free universal broadband. 

But it also includes small changes that would make a crucial difference to peoples’ lives – reinstating 3,000 local bus routes, providing free annual dental check-ups, increasing the pensions of former miners.

Immediately, commentators began asking the same question: “how will you pay for it?” This is not a question that is addressed to the Tories when they plan tax cuts that will primarily benefit the rich. But after a decade of austerity, many people are incredulous at the idea that the sixth-largest economy in the world could afford to provide a decent standard of living for its people – that things could be better for them.

The power of the austerity argument is, of course, reinforced by the experience of poverty. Most traditional Labour voters are struggling to make ends meet in a broken economy. The idea that they could afford to take out a payday loan and pay to send their children to university seems absurd. Why should it be any different for the government?

Responding to these concerns – rooted in real experience – with abstract economic arguments will fall on deaf ears. Rather than focusing on the narrative of “borrowing to invest”, an opaque concept to most people, Labour has opted to frame its response in class terms: the rich will pay for it.

Labour has developed a programme of radical tax plans that would generate revenues from corporations and the wealthy. The income tax policy of 2017 – limiting tax increases to the top 5 per cent of earners, those who earn £80,000 or more – has been retained. But this has been combined with a transformative set of proposals on corporation tax.

Labour would not only reverse the Conservatives’ corporate tax cuts, increasing the headline rate from 19 per cent to 26 per cent, it would also reform the way tax is levied by moving towards a system of unitary taxation. Such a model would prevent multinational corporations from shifting their profits to low-tax jurisdictions in order to avoid corporation tax.

Unitary taxation has been endorsed by a swathe of tax experts and the free-market OECD is now co-ordinating countries across the world in an attempt to implement the policy. Should it succeed, the traditional warning that corporations will flee the UK in order to avoid tax will be moot. 

Enter the Institute for Fiscal Studies. Director Paul Johnson appeared all over national TV yesterday arguing that Labour’s economic plans were “not credible” because the burden of higher taxes will ultimately constrain wages and investment. To be kind to the IFS, Johnson is raising a debate that has been raging amongst economists for years – the debate on the “incidence” of corporate taxation. Effectively, this is an argument about who actually ends up paying corporation tax. The IFS says workers, Labour says the rich.

Corporations cannot technically “pay” tax because they are not people (despite what US courts would have us believe). They can impose the tax on shareholders by reducing distributed profits, on workers by cutting wages, or on consumers by hiking prices. The other option is to pay the tax by cutting investment, which would constrain future profits and therefore be borne by shareholders. The IFS claims that any attempt to increase corporation tax would simply be passed on to workers and lead to lower investment that would damage the economy.

Economists disagree about the incidence of corporate taxation. As I showed in a paper in 2017, there is ample evidence that taxes on corporate profits are likely to be borne by shareholders. The problem is that Johnson has presented his personal view on a contentious and fiercely debated topic as fact. The one-sided way in which this argument has been presented should immediately call into question the IFS’ status as an “independent” think tank.

But perhaps even more significantly, Johnson has refused to assess Labour’s wider economic policies, which include a dramatic expansion of trade union rights and reforms to corporate governance. The evidence suggests that the incidence of corporation tax varies from country to country depending on the strength of organised labour. There is obviously a point to be made here that the burden of taxation will fall on those groups with the least power within the corporation.

Structural economic reforms such as the repeal anti-union legislation and putting worker representatives on company boards rebalance power within corporations – and indeed within society as a whole – away from capital and towards labour. It is reasonable to assume workers would use this power to resist paying a greater portion of the burden of corporate taxation.

In the case of public investment, Johnson has refused to account for the fact that Labour will be investing vast sums of money into the economy – £400bn by 2030 – that will more than account for any fall in private investment resulting from higher corporate taxes. And this investment is being directed towards an issue private corporations are refusing to address: climate breakdown.

The subtleties of these arguments are not going to come across on the doorstep. All many people will hear is a powerful man on the TV saying Labour’s plans to improve peoples’ lives are not credible. This view will be reinforced by their personal experience. After a decade of wage stagnation, the housing crisis and rising debt, most people simply do not believe that things could be any better.

The thing is, they can be – and this election might be the last chance Labour has to prove it.

Grace Blakeley is the New Statesman’s economics commentator and a research fellow at IPPR.