Why talking about tax rises presents a political opportunity for Labour

Progressive taxation provides a ready-made narrative with intuitive moral appeal, which Labour should make its own.

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The first major intervention by Rachel Reeves, Labour’s new shadow chancellor, marked a potentially promising change of direction for a party that has otherwise begun to look seriously adrift. Taking the opportunity of Joe Biden’s proposed global minimum corporate tax rate, intended to dramatically squeeze tax-avoiders, Reeves mounted an effective campaign to highlight the Tories' unwillingness to sign up, culminating in a parliamentary vote on a minimum global rate Monday (25 May) that nicely highlighted the government's support for global tax-dodgers. It told a simple and effective story that Labour would do well to build on as it sets out its economic programme.

Labour’s support for the international minimum rate, proposing a hike in the UK’s own corporation tax rate that would raise £13.5bn, is a move away from the party’s somewhat muddled position in the March Budget, in which it found itself opposing Rishi Sunak’s corporation tax rises. There was no political justification for such opposition – corporation tax rises are universally popular with voters, including a majority of Conservative voters.

And the economic justification offered – that raising taxes in a recession worsens the recession – was scarcely any more grounded in reality. Not only does the empirical evidence indicate that the effect that corporation tax rises have on spending is minimal, but basic macroeconomic theory shows that if tax rises are matched by government spending increases, the overall effect is expansionary, as the government is pumping money back into the economy. (This effect is called the “balanced budget multiplier”.) If the intention was to try to burnish Labour’s pro-business credentials, the effect of the party’s misconceived opposition to the tax rise was that it managed to look simultaneously fiscally incontinent and less concerned about fairness than the Tories. If Labour had stuck to the position its MPs were elected on in 2019 – of increasing the headline rate of corporation tax, but reintroducing a lower rate for small businesses – it would at least have headed Sunak’s chicanery off.

[see also: Philip Collins on the rise of the new Toryism]

But worse than the technical flaws in Labour’s argument, the party’s refusal to consider tax rises indicates it is still in denial about our new reality. Covid-19 is not going away any time soon: until we get to the point where much of the world is vaccinated, the virus will remain an ever-present risk. And since the government largely determines how we respond to that risk – imposing lockdowns and other restrictions, and deciding how soon to relax them – it also has an unusually high degree of control over the economy, and thus a high degree of control over the narrative around the economy. This control, in turn, gives the government a high degree of freedom: Sunak can argue for any set of tax rises or spending cuts he likes for as long as the economy remains subject to existing Covid restrictions, or the potential for new restrictions, because the government is now, to a far greater extent than before the pandemic struck, determining the direction of the economy.

From Labour’s perspective, so long as the economy is either stuck under some form of Covid restriction, or just emerging from one, there will not be a point at which a conventional economic recovery begins, and so no “right time” for tax rises, according to the conventional economic logic the party is following. If Covid doesn’t fade into background noise in the near future, the party will be left speechless, even as the government gets on with talking up its commitment to “levelling up” or the “green industrial revolution” or the latest splashy announcement on its communications grid.

And Labour will have to argue for tax rises if it is to come close to meeting the expectations of its supporters. The other side of Covid’s impact is the long-run costs it is imposing on the economy. The UK’s aging population meant that the costs of healthcare and social care were already rising pre-pandemic, and the Health Foundation estimates that in the medium term, Covid will impose additional NHS funding pressures of around £10bn a year. Running a wider deficit can cover some of this, but securing funding for public services into the future, and doing so fairly, will have to be done through taxation. By the next election, the party will be facing huge demands for funding.

The hard fact is that Labour will have to ditch its attachment to managerialism and learn to think more closely about the economic story it wants to tell. The great thing about taxes, from this point of view, is that they can create little parables, illustrating a wider moral point. Someone pays a tax and, by matching it to spending, someone else benefits: taxation offers a ready-made narrative about fairness and just rewards, if a party plays it right. It is a quick and easy doorstep story to say Labour will tax big corporations to pay for social care, for instance. Robin Hood is the familiar, moral tale of the kind that the philosopher Quassim Cassam has urged the party to adopt.

It should be easy for Labour to talk about making sure some of the winners from the first years of the pandemic – big corporations and the very wealthy – make a fair contribution to rebuilding the economy. The detailed LSE/Warwick University wealth tax proposals, forecast to raise a £260bn windfall from millionaires, could be used not to “repay the debt” – with interest rates at a record-low, this is just pouring money into a black hole – but to set up regional wealth funds, transferring resources into the parts of the country that are crying out for investment. It’s a simple, radical story that Labour could make its own.

[see also: When red walls come tumbling down]

James Meadway is an economist and Director of the Progressive Economy Forum.

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