Taxing questions
Demoralised Labour backbenchers, watching helplessly as their government disintegrates and the prospect of electoral humiliation looms, have at last found a cause to which they can rally: higher taxes on the ‘super-rich’, both private and corporate.
In the first of those categories, the target is anyone with an annual income of £250,000 or more. In the second category, the proposal gathering support not only on Labour benches but also in opinion polls is for a windfall tax on utility companies which have jacked up the prices of electricity and gas so dramatically in recent months, blaming soaring wholesale energy markets, yet still have the gall to announce handsome profits.
Behind this bandwagon — currently driven by the Guardian’s Polly Toynbee — are two impulses. The first is an old-fashioned socialist urge to penalise the allegedly undeserving rich and lash out at the perceived evils of capitalism — and to use the proceeds to maintain benefits for the poorest segments of society, including, for example, the elderly on fixed incomes who struggle to pay inflated domestic heating bills.
The second impulse is to do something about the catastrophic state of the public finances. Public sector net borrowing surpassed £19 billion for the first four months of the current fiscal year and is likely to exceed £50 billion by the end of it. With economic growth already at zero and the flow of tax revenues dwindling as slowdown turns to recession, Gordon Brown is set to break all records for debt levels and fiscal deficits before he departs. Growth is not going to solve the problem for him, because there will be very little of it between now and June 2010, the last and most likely date for a general election. To restore the Treasury’s balance, either public spending must be slashed, or taxes must rise. Both impulses are understandable in current circumstances. But would penal taxes on the rich and profitable be effective — and what might an incoming Conservative government do instead to achieve George Osborne’s declared twin aims of ‘fairness’ and sound public finance?
The shadow chancellor has already said that he has no intention of slapping extra taxes on the super-rich, and he is right to take that position. Some fortunes amassed in Britain in recent years are well deserved, others less so — but all are highly mobile, and as with the tax grab on non-doms, the net result of a swingeing tax on top earners could well turn out to be a net loss to the Treasury as the wealthy shift themselves, their cash, their businesses and their investment portfolios abroad. In the recovery phase after the downturn, Britain will need entrepreneurs and venture capitalists more than ever: now is not the time to drive them away.
As for one-off, retrospective windfall taxes — previously deployed in Margaret Thatcher’s first term against high-street banks accused of profiting too well in the early 1980s recession, and by the incoming Blair government against privatised utilities — they are plainly unsatisfactory in principle. Who is to say what constitutes ‘excess’ profit in today’s heavily regulated energy industry, in which no one can predict with certainty where input prices will stand in a few months’ time, and which is being asked to invest £100 billion in new nuclear and other generating capacity over the next 15 years? The bulk of that investment is likely to come from French, German and other foreign utility companies: again, why threaten them with tax disincentives when they have a world of other investment possibilities to choose from?
But if these are bad ideas, where are the good ones? First and foremost, what is needed is an all-out attack on wasteful public spending. That may be anathema to Gordon Brown, but the Conservatives must have a detailed plan, to be executed as soon as they come to power, to rationalise NHS bureaucracy, to disband Labour’s grossly unproductive structures of regional government, radically to simplify the Brownian paraphernalia of tax credits for poorer families and red tape for businesses, and to find ways to encourage a portion of the welfaredependent population back into economic activity. No one has yet put a figure on the annual savings that might be achieved without harming frontline public services, but it is certainly a big number.
As for personal tax rates, the clear longterm aim should be to bring them down in line with a reduction in the scale of the state they have to pay for. The Tories must make it crystal clear that this is their strategic objective. Equally, the state of the public finances means that Mr Osborne’s room for manoeuvre in this area of fiscal policy will be narrow in the short term.
On the other hand, it would be good politics and good economics to declare now that an incoming Conservative government will reduce business taxes in order to boost growth and maintain Britain’s global competitiveness. And it would make sense to offer increased tax incentives for personal savings — currently at a dangerously low ebb, but vital to individual wellbeing in old age, to the funding through bank deposits of the currently moribund mortgage-lending system, and to overall investment in the economy.
By common accord, Britain faces the most difficult economic circumstances for a generation or more. Very tough decisions are required, if not from this failing government, then from its expected Conservative successor. But knee-jerk socialist tax attacks on capitalism are simply not the answer.
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