Why Labour should lead the argument for higher wealth taxes

Insisting on taxing the rich to pay for increased public spending now will help weaken arguments for cuts later. 

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Front pages over the weekend suggested that the Chancellor, Rishi Sunak, was considering significant tax hikes for the wealthy to plug the so-called “black hole” in the UK's finances as a result of Covid-19. The Treasury is reportedly contemplating rises totalling up to £30bn from changes to capital gains tax, corporation tax and pensions tax relief. Predictably, backbench Tory MPs and their tame media reacted with horror, claiming that such measures will hit “wealth creators” just when their efforts are needed for the recovery.

Voices on the left, however, have also questioned the necessity of tax increases, noting that the government faces no serious impediment to its ability to finance the exceptionally high levels of current spending. With British government interest rates the lowest in history, today’s economics suggest they are correct: there is at present no meaningful constraint on government borrowing. Yet Labour needs to win a general election in four years’ time, and although under no circumstances should it relapse into fretting about the deficit, it must begin making the arguments today that will enable the party to secure victory in 2024.

The short-term political case for pushing tax rises on the wealthy is obvious. By laying down clear demands about how the cost of the crisis should be borne, Labour can set up an argument to its political advantage for the rest of the year. Given that some of the measures the Treasury is said to be considering are already party policy – notably equalising income tax and capital gains tax rates – and that polling consistently indicates public support for well-targeted taxes on the richest, there are few immediate political drawbacks to supporting them.

Given the tensions at the centre of the Conservative government – between No 10’s desire to avoid austerity and promote “levelling up”, the Treasury’s wish to restrain borrowing, and Tory backbenchers’ aversion to tax increases – the most likely outcome is some form of fudge or stalling. Rumour has it that the government’s Spending Review (expected in November), announcing how much money will be allocated to each department over the next three years, will be cut back to just a single year. Meanwhile, Sunak faces a looming headache over the pace and timing of furlough withdrawal as unemployment surges and a second wave of the virus threatens. He will be sorely tempted to defer unpalatable choices, perhaps even by delaying the Budget.

If the Tories do decide to increase taxes on the wealthy, Labour can claim credit and insist the government use the additional funding for public services. If the Tories backtrack, they will be revealed as the party of the incompetent and feckless rich – unable to manage the crisis or take its consequences seriously because they are too busy protecting the interests of the wealthiest even as others suffer. By putting the screws on the Tories now, Labour can position itself to take advantage of their ongoing muddle – and start to set the economic agenda.

But it’s what happens over the next four years that Labour needs to concentrate on. The uncertainties of the coming period are grave, from the fallout from Brexit to further pandemics to climate shocks, but we know two things are here to stay: high levels of government debt, and the long-term costs of Covid-19. We cannot allow that increase in debt – affordable as it is today – to become a justification for future austerity. Insisting on taxing the rich to pay for increased public spending now will help stave off arguments for the supposed necessity of cuts later on.

Coronavirus is already leaving very real and painful costs in its wake. There is no soft-soaping or wishing away the challenges of our new reality. A safe, effective vaccine has yet to be produced, and we have barely begun to contemplate the difficult questions and conflicts that will ensue over its production and distribution: who will make the vaccine? Who will receive it first? Who will pay for it? Even should a viable vaccine be discovered, Covid-19 is unlikely to be eradicated completely, instead remaining an endemic disease, inflicting real, long-term economic costs from bio-surveillance and probable re-vaccinations. And assuming we manage to keep Covid-19 down to that level – no guarantee in a world where global co-operation on health and economic issues is seriously weakened – we still face the prospect of future epidemics, with outbreaks becoming more frequent as the natural environment disintegrates.

Entire industries will need to change how they operate and in some cases wind down altogether. Airlines and hospitality are the most conspicuous early victims, but as working from home becomes pervasive, the commercial property market and high streets are suffering too. Health and social care expenditures will need to increase, even above the eye-watering projections that have already been made to cope with an ageing population. With new and unexpected costs imposed on the economy, and jobs being lost even if others are created, overall economic growth may well be difficult to revive – even to the anaemic levels seen since the 2008 crash. Any plans for future government spending will need to be robust enough not to depend on a return to supposedly “normal” rates of growth. 

There is no winding the clock back to the pre-Covid world. The past has gone, and the future poses challenges that none of us would wish for – but which we must face if we are to have a chance of shaping it politically. Substantial shifts in resources and economic activity will need to take place. Monetary compensation might be available to cushion some of this disruption – as we have already seen with furlough payments – but there is nothing we can pay to avoid making the changes themselves. The primary political question we must ask is not “can we afford to do this?”, since these new costs are not optional, but “who will pay for this?” This is why taxation matters, since changing who pays how much tax affects the distribution of available resources in our economy. It is the first, necessary step towards detailing a programme for a Labour government, committed to social justice in an environmentally unstable world.

James Meadway is former economic advisor to shadow chancellor John McDonnell, and is currently writing a book on Corbynomics

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