Labour is heading for power as an incoming party for the first time in 26 years. What will it do with it? Its leader, Keir Starmer, and its shadow chancellor, Rachel Reeves, are reluctant to say. Reeves has, however, taken one adamantine position: Labour will not introduce new taxes on wealth, as she first told the New Statesman in June and recently reiterated to the Telegraph. This is less tenable than it appears.
Labour will soon face an inescapable choice. In order to spend money in government the party will need to raise it. There is a very good way to do that. It is to shift the tax burden away from labour and on to capital, away from work and on to wealth. An agenda is coalescing in policy circles around a set of major tax changes that could spur growth, cut taxes for most people, and raise the money Labour will need. The party, haunted by ghosts, is unwilling to embrace it.
By raising taxes on wealth, Labour could, crucially, cut taxes on income. The reforms available to Labour, detailed here, would raise £28bn a year. That could fund the £28bn a year Labour once wanted to commit to green energy, or it could allow Reeves to cut the basic rate of income tax by up to 4p – a tax cut every employee would notice, and one that would silence Conservative claims that Labour is a high-tax party. By taxing capital, Labour, the party of labour, could actually reward work.
Listen to Harry Lambert discuss the great tax con on the New Statesman podcast.
Starmer and Reeves are following an electoral script written for a different era. Britain has been transformed since Labour won in 1997. One part of the country has lived through an asset boom. The other is living on wages that have not risen in real terms for 15 years, since before the 2008 financial crash. For those with assets, the crash is a distant memory. London house prices have risen inexorably since 2010, by 31 per cent after inflation. The FTSE 100 is 58 per cent higher after dividends. Real average weekly pay is, meanwhile, no higher today than in July 2006. Those who live in Asset Britain have no idea what Austerity Britain is like.
Labour is ignoring wealth at its peril. Reeves is rejecting the most consequential tax reforms open to her, despite polling that suggests each reform she has ruled out would be highly popular. They are also vital. Britain’s growth rate is in a multi-decade decline, while wealth inequality has become entrenched. It hasn’t fallen in the 17 years the Office for National Statistics has recorded it. Every year you can expect £4 in every £10 of new wealth to go to the wealthiest 10 per cent, while £1 in £10 is shared by the bottom half. In stagnant societies, capital reigns.
The Tories have lost credibility, gifting Labour a generational opportunity to be heard. There is no better story Starmer could tell than the story of tax: who it serves, who it exploits, and how it could be fixed.
The most important fact about the British tax system is that almost no one knows anything about it. If they did, it would not last for long. It not only punishes work at the expense of wealth but poorer homeowners at the expense of richer ones, the tenant in favour of the landlord, and anyone who does not inherit capital, almost all of which is passed on untaxed. (Only 3-4 per cent of the £120bn in gifts and inheritances passed on in the UK each year is taxed.) The very richest, who sit on vast estates, pay lower rates of tax than the staff they invariably employ. There is no equal starting line in life. But in Britain the rules of the game have been fixed.
[See also: Labour’s fiscal paradox]
To grasp the secrets of British wealth, you need to go to the 11th floor of an unassuming 12-storey office block in Stratford, east London. Book an appointment, request your files, show an ID at the door, and the staff of His Majesty’s Revenue & Customs will escort you to a secure room filled with ten offline computers.
In July 2021 Arun Advani – an assistant professor of economics at the University of Warwick who has spent the past six years investigating who does and does not pay tax in Britain – took a seat and punched in his code. Forty million anonymised tax records filled his screen. He had come to Stratford with a question to answer. If you increase taxes on the rich, do they in fact leave the country?
In 2017, “non-doms” – who live in Britain but do not pay tax on money they make overseas – threatened to do just that after a new reform abolished such status for long-term residents. Any who remained faced a significant tax bill. Advani knew that non-doms were inherently mobile: in any given year about 10 per cent of them migrate. But what he found that day surprised even him. The reform had resulted in hardly any additional emigration.
Those who left had paid derisory amounts of UK tax in the first place. The non-doms who paid meaningful tax in Britain did not leave at all. They worked in jobs that were more lucrative here than anywhere else. Abolishing non-dom status in full, Advani calculated, could raise at least £3bn, maybe more. Critics who claimed abolition would cost the UK were lost in ideological abstractions. But Advani had the data. He was looking at the receipts.
“Tax advisers will say that people are going to leave,” Advani says, “but I have the data for everyone in the country for more than 20 years. And we can look at the reforms. And they didn’t leave. We can just show you: they’re in the country. I can count them.”
In February 2010, the Bank of England released an online video that was less innocuous than it seemed. In four minutes it sought to explain a new financial concept: quantitative easing (QE). The Bank, a soothing female narrator said in the manner of an answering machine, had begun buying government bonds from insurers, pension funds and banks with newly created money, in order to encourage economic growth in the aftermath of the 2008 financial crisis.
By buying government bonds from these firms, the Bank was doing two things: it was providing them with fresh cash, and it was making it less attractive for them to hold government bonds. To make a return on this new money, firms would buy other assets: shares, company bonds, property. “As purchases of these other assets start to increase, their prices rise,” the narrator explained, switching into an oddly passive, hypothetical tense as she described a very present reality. The Bank had committed to £200bn in QE in November 2009, three months earlier.
[See also: Tax wealth and reward work]
“Of course, higher asset prices also make some people better off,” the narrator conceded in an aside, adding only that this would provide “an extra boost to spending” as the newly enriched felt more secure. When the economy improved, the Bank would, the video concluded, later “sell assets to remove the extra money it has put into the economy”.
I remember watching this video at the time. I did not fully absorb its implications. Neither did the Bank. Far from being unwound, QE became the Bank’s primary policy tool throughout the 2010s, fuelling an ever-greater asset boom. It was deployed in the name of stimulating the economy again in 2012, when £175bn in new money was created to offset the impact of austerity. It was deployed to ensure financial stability after the Brexit vote in 2016 (£70bn). And it was deployed to help government finance borrowing and cover the cost of the Covid pandemic (£450bn).
“Everything’s been done to make the wealthy stay wealthy,” an asset manager at Ruffer, which manages £25bn in client money, conceded to me recently. “Whole investment strategies have been based on the belief that the Bank would blink as soon as there has been any risk in the markets. And they’ve been right.”
The fact that QE would inevitably “make some people better off” was irrelevant to the Bank; it was not part of its mandate to manage inflation and ensure market stability. Responsibility for alleviating the effects of QE lay with the Treasury. It was for the chancellors of the day, from George Osborne to Rishi Sunak, to tax the boom being fuelled by the central bank. They did the opposite. In 2016 Osborne reduced the tax rate paid on profits from capital (capital gains tax) to 20 per cent – less than half the top rate of income tax. It was a tax cut for the 1 per cent, paid for by six years of austerity imposed on everyone else.
Few people in the 1 per cent understood what austerity meant in the 2010s. But Gary Stevenson did, and that knowledge made him millions. He had grown up beside a railway track in Ilford, east London, the son of a Post Office worker on £20,000 year. In 2011, in his early twenties and working at Citibank, Stevenson made a contrarian bet: interest rates would not rise.
He agreed to lend money in a year’s time to other banks at rates of around 2 per cent. They thought they were locking in a cheap rate ahead of a rapid recovery and a return to higher rates. Stevenson thought recovery was years away, and they were agreeing to pay many times what it cost him to borrow. (Rates were at 0.5 per cent; they did not reach 1 per cent until 2022.)
Rates wouldn’t rise until confidence had recovered – and no one he had known growing up was spending. They were struggling. The well-heeled bankers he was trading with had no idea what the Great Recession felt like. It hadn’t hit them. The UK stock market, buoyed by QE, was two years into a fresh bull market.
Stevenson won the bet. He repeated the trade throughout the 2010s: once more at Citibank, where he became one of its most profitable traders, and then on his own after he quit in 2014. He earned more before he was 30 than his father earned throughout his life.
As a boy, Stevenson had thought of the rich as those on big salaries. In the public’s mind, taxing the rich meant taxing well-paid work. But as Stevenson became rich himself a reality dawned on him: among the wealthy, income was secondary, a sop to the taxman. The ownership of assets was the real game, and assets were taxed far more favourably than labour.
“It doesn’t matter what you do for a job,” he says today. “You can’t compete with wealth. It confers its own income, it compounds, and you don’t need to work for it.” At Citibank Stevenson paid more than half of his income in tax. The Duke of Westminster, he notes, inherited £9bn in 2016 through a trust and reportedly paid only a fraction of that in tax. “It’s hard not to see the tax code as a class-based system.” Stevenson says: “We are living in a new aristocracy.”
We think of aristocracy as a relic of Britain’s feudal past. But what if it’s the norm? In 2013 the French economist Thomas Piketty argued in his seminal book Capital in the Twenty-First Century that we are returning to a world where wealth and power is concentrated in ever-fewer hands.
Piketty claimed to have assembled a greater range of historical data than any previous economist. This data, he argued, revealed a fundamental fact of capitalism. The rate of return on capital, which he called “r”, has almost always been greater than an economy’s growth rate, which he called “g”. Piketty saw profound implications in this fact. If “r > g”, then wealth accumulated long ago will grow more quickly than wages earned in the present. Inherited inequalities will be ingrained. “The past,” as he puts it, “will devour the future.”
This rule, Piketty showed, had been an underlying principle of society until the First World War, as returns on capital (of 4-5 per cent a year) have been consistent throughout history but economic growth is only a modern phenomenon. In the century between 1913 and 2012, growth was, for the first time in history, high enough to exceed the return on capital and reduce inequality.
The mistake, Piketty believed, was to treat this as the natural order. He thought the 20th century was unique. Two world wars depleted wealth, dragging down the return on capital, while the global postwar recovery led to growth rates that may now be beyond developed countries, whose populations are ageing and shrinking.
Piketty, born in 1971, saw evidence for this in his own lifetime. Growth has slowed in the West since he was a boy. The UK, for instance, despite growing strongly under Tony Blair after the recession of the 1990s, grew at only 2.1 per cent a year between 1980 and the publication of Piketty’s book in 2013. It had grown at 3.1 per cent a year between 1961 and 1979. Privatisation, the supposed saviour of the British economy, did not fuel growth, which has since fallen even further, to 1.6 per cent a year since 2014, and is not expected to rise above 0.5 per cent until 2025.
It is the return on capital that has shot up in Britain since 1980. Inequality has risen with it, and inherited wealth is once again taking on the social importance it held in the Victorian era.
“Money pads the edges of things. God help those who have none,” EM Forster has Margaret Schlegel, a child of wealth, say in Howards End (1910). “I stand each year upon £600 [£60,000 in today’s money]… and as fast as our pounds crumble away into the sea they are renewed.”
Forster understood that wealth was much more than merely another form of income. So did James Meade, a British economist who in 1978 published a seminal review into the UK tax system for the Institute for Fiscal Studies. “Wealth gives opportunity, security, social power, influence and independence,” Meade wrote, arguing that “equity requires that wealth itself should be included in the base for progressive taxation.”
It was not enough to tax income progressively only to tax wealth more favourably. Those who held capital stood on islands above the sea. The point of the tax system was to redress that, not perpetuate it.
Meade, assisted by a young Mervyn King (the future governor of the Bank of England), called for an annual wealth tax in his 1978 review. But the moment had already passed. Labour had failed to implement such a tax after winning the 1974 election, having committed to doing so in its manifesto. Denis Healey, Labour’s chancellor at the time, later reflected that he had “found it impossible to draft” a wealth tax “which would yield enough revenue to be worth the administrative cost and political hassle”.
By the time of the 1992 election – the first Labour expected to win since losing power in 1979 – the energy in the party had shifted entirely away from taxing capital. John Smith, Labour’s then shadow chancellor, instead promised a new 50p income tax rate, focusing debate where it has remained ever since: on taxing labour, not wealth.
Smith’s plans were initially well received. But when Labour failed to win power, they were considered to have doomed the party. The 1992 loss set the tenor of Labour’s approach to tax for a generation. Today the party remains in the grip of an ideology advanced most fanatically by Philip Gould, the New Labour strategist, that Labour can only win by operating within the prism of Tory tax plans.
“Commentators never understood,” Gould wrote in The Unfinished Revolution in 2011. “They saw a big Labour lead, thought Labour was certain to win and therefore accused us of being too cautious.” But Conservative defectors, he argued, pointing to polling data, feared Labour would “betray them on tax”. It was “only Labour’s strategy of relentless reassurance that turned opinion poll leads into a real majority” in 1997.
These articles of faith are now three decades old. But are they right? John Major, an incumbent prime minister, was much more popular than the Labour leader, Neil Kinnock, in 1992. John Smith, whose tax plans had supposedly sunk his party, was on course for Downing Street when he died in 1994. Gould glided past these facts. Starmer’s strategists still invoke Gould when they are pressed on tax but Gould’s theories, if they applied at all, date from a different political world – before QE, before Capital, before the great British asset boom.
We have come a long way from 1978. When Healey failed to implement a wealth tax he consoled himself that inequality was falling anyway. That is no longer true. Inequality, Piketty argued in Capital, is U-shaped. Having fallen during the 20th century, it would rise in the 21st. In Britain, and across the developed world, inequality has risen dramatically over 40 years.
The UK is splitting apart, fuelled by a tax system that entrenches inequality. The consensus behind change is broad. A former senior Treasury official I spoke with supported all of the ideas that follow here. He had raised similar ideas with successive chancellors of both parties. With the exception of Nigel Lawson, he said that none were interested. It was all considered too difficult. Taxing property was seen as political death. But, he added, a great deal has changed since the financial crisis.
By making the case for tax reforms on wealth whose time has come, Labour could acquire the definition it has lacked under Starmer. The agenda open to Labour’s leaders should not be confused with the party’s Corbyn-era policies, which focused on taxing highly paid employees, or with the tenets of Tony Blair, who never sought to even the inequalities of wealth and now thinks taxes should fall. Blair is a poor guide to the present. The value of privately held wealth in Britain has doubled as a share of GDP since he entered No 10 and the tax code has only become more weighted in capital’s favour.
There is no greater front on which Labour could fight than council tax, the least defensible tax in Britain. If you live in Burnley, where homes are cheaper than many other parts of the UK, you will on average pay 1.1 per cent of the value of your home in council tax every year. If you live in a typical property in Kensington and Chelsea, where council tax has scarcely risen but homes have rocketed in value since QE – leaping from 24 times earnings in 2010 to 38 times earnings in 2022 – you will pay 0.1 per cent. The burden of council tax is ten times as great in Britain’s poorest areas. No party that wants to level up Britain can uphold it.
It is regressive by design and labyrinthine in complexity. Labour could abolish council tax and stamp duty, a tax that only serves to freeze the property market. Every property owner in the UK would instead pay 0.5 per cent on the value of their home. That would raise as much revenue while cutting taxes for three in four people, according to the Institute for Public Policy Research. Proportional property taxes such as these are commonplace in US cities. Britain is the aberration.
Council tax has been a 30-year tax break for wealth – for nominally left-wing Guardian readers in Camden and Islington and propertied Tories across the south-east of England. Their tax would rise, but the property-rich would retain the greatest privilege our tax code affords them: the right to avoid capital gains tax on the home they live in. House prices in London have tripled in real terms since 1991. London homeowners are sitting on colossal gains or have already realised them entirely untaxed. The city can absorb a small annual property charge. The public strongly supports this. Three times as many voters back this idea as oppose it, according to polling for the New Statesman by Redfield & Wilton, including a majority of Londoners.
A proportional property tax would not raise revenue, but it would even the burden between poor and rich households. That would galvanise the economy, as the rich save and the poor spend. But Labour will also need to raise fresh revenues in order to cut taxes for those in work. There is a compelling way to do so: by applying National Insurance, a tax paid by workers, to landlords and speculators, the primary beneficiaries of QE, who profit without working.
Arun Advani, the economist who turned up in Stratford to study non-doms in 2021, has shown that this could raise £10bn. The former senior Treasury official with whom I spoke thinks such parity is long overdue. (Parity is arguably generous to the asset-rich; until 1984 “unearned income” was taxed at a higher rate than work.) Rentiers, the official said, should pay their fair share. Voters agree. This is terrain on which to win. Yet Labour is running from these ideas. Supporting them, its leaders think, would be tantamount to throwing the election, as one senior shadow minister has put it. The only major tax reform they back is the full abolition of non-dom status, even though these more impactful ideas are just as popular, if not more so.
There is a third reform Labour could evidently embrace: reversing George Osborne’s 2016 capital gains tax cut. Treasury analysis at the time had shown that 28 per cent was the revenue-maximising rate: a higher rate would deter entrepreneurs; a lower rate would cost Britain money. Osborne duly cut the rate to 20 per cent. Reversing that cut could raise £7bn. In 2018, before she disavowed change, Reeves went further, proposing to equalise capital gains rates with those on income tax, which could raise twice as much.
There are more radical options available to Labour, but the moderate reforms outlined here would give those affected little basis to object. And few would be affected: most people already pay National Insurance on their earnings and don’t have any investment income, while 99 per cent of taxpayers do not pay capital gains tax. The reform with the broadest consequences – council tax – would still only increase tax for one in four households, many of them in London constituencies that Labour win in landslides.
Every era has its climate of ideas. It is for parties to recognise them. “Everyone knows tax has to shift from income to wealth,” says an academic who has worked closely with Reeves. The trick, he says, is to make changes in tax seem normal. That is what is striking about Reeves’ current insistence on ruling out these reforms: the public want them.
Labour doesn’t think it needs to do any of this. Instead it expects to emulate Blair and simply grow the economy. But Blair was lucky. He was elected just as the economy began to improve, which allowed him to skirt the “trilemma” every prime minister faces: that in order to invest in anything new you have to cut, borrow or tax.
Margaret Thatcher was even more fortunate. She was gifted the North Sea oil boon, which (along with privatisation) furnished her with today’s equivalent of £60bn in tax for every year she was in power. Such is the pot luck of inheritance. Labour’s plan to grow is, in the short run, no plan at all. You cannot speak growth into existence, as Liz Truss can attest. Labour’s best hope for growth is to fix the flawed incentives of Britain’s tax code.
There is one more major reform Labour is refusing to adopt: a tax on the very richest. Britain’s inheritance tax system is riddled with asset reliefs and trust exceptions. Those with the greatest estates pay the lowest rates. Estates worth at least £10m pay an average of 10 per cent (the nominal rate is 40). Fixing capital gains tax, as Advani puts it, “is not going to get money from somebody who has £100m. They don’t need to sell their assets. They borrow against them, and when they die they’ll pass on those assets free of tax.”
The only way to raise money from the very richest is to charge a wealth tax, as Labour once won an election promising to do. A tax of 1 per cent on wealth over £10m would fall on around 20,000 people – the 0.1 per cent. In the 1970s Healey thought the revenues on offer didn’t justify the cost. Advani’s research has, however, shown that a one-off version of the tax could today raise £11bn. He estimates capital flight would be rare, as it was for non-doms. And evasion is less possible than people think. The wealth of the very richest is boundless yet bound in by Britain. Land may be leased out but it cannot be moved. Estates can always be taxed. It is a political choice.
Labour has never fought against capitalism. It once sought to alleviate its inequities through control of the commanding heights of industry. Now it risks governing without a creed. Yet one is on offer. In Britain the rules of the tax game have been stacked against working people. The question for Labour is simple and deafening: are you going to fix that or not?
[See also: Can Labour afford to be ambitious?]
This article appears in the 30 Aug 2023 issue of the New Statesman, The Great Tax Con