For the first time since 1992, Labour will go into the next general election promising to raise the top rate of income tax. In the Blair era, as Stewart Wood, Ed Miliband’s intellectual consigliere, said at the Fabian Society conference on 25 January, such a pledge would have been “unthinkable”. But the prolonged aftermath of the financial crisis has created new political space for centre-left parties.
With austerity likely to continue for the whole of the next parliament, Labour can present a higher top rate as an essential part of a balanced deficit reduction plan. After the Conservatives attempted to broaden their appeal by declaring their support for an above-inflation increase in the minimum wage, the tax announcement has also allowed Labour to reframe them as the party of the rich. Not only do the Tories remain unrepentant about the decision to reduce the top rate from 50p to 45p, they refuse to rule out a further reduction to 40p in the next parliament.
One might imagine, after the neuralgic reaction of business leaders to Labour’s proposal, that a top rate of 50p would make the UK an economic pariah. But among OECD countries, it is far from exceptional. Denmark (60.2 per cent), Sweden (56.6 per cent) and Belgium (53.7 per cent), hardly socialist backwaters, all have higher top rates. And Spain, the Netherlands, France (which will soon introduce a 75 per cent rate) and Austria have rates of 50 per cent or above.
Company heads warn that a higher top rate would deter investors from choosing the UK, yet it is notable that not one major business relocated while the 50p rate was in place from 2010-2013. Nor did outraged celebrities such as Tracey Emin and Michael Caine make good on their vow to flee the country.
The pragmatic objection to the 50p rate is that it would raise little or no revenue because it would trigger mass avoidance. But Labour contends that this is an argument for reducing avoidance, not for cutting tax. A source told me that the party would have “more to say” on this subject over the next few months.
The biggest question facing Labour is whether the new rate would be a temporary measure to assist deficit reduction or a permanent one to redistribute income. In interviews following the announcement of the policy, the shadow chancellor, Ed Balls, emphasised that the 50p rate would remain in place only “while we get the deficit down”. Balls, who is more conscious than some in the party of the need to avoid appearing anti-business, also said he was in favour of “lower tax rates”. But in June 2010, when he was running for the Labour leadership, Ed Miliband said: “I would keep the 50p rate permanently. It’s not just about reducing the deficit, it’s about fairness in our society.”
A Labour spokesman told me that “what is permanent is our commitment to fairness in taxation”, and that “the 50p rate is specifically tied to deficit reduction”.
But it is salutary to remember Milton Friedman’s dictum: “Nothing is so permanent as a temporary government programme.” Income tax was introduced in 1799 as a short-term measure to help fund the fight against Napoleon. Two hundred and fifteen years later, it is still with us.
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