10p tax: one-and-a-half cheers for Ed Miliband

I’ve been pretty scathing about the Labour Party on this blog, so a bit of credit where it’s due: Ed Miliband’s eye-catching announcements today committing Labour to a 10p lowest tax rate, funded by a so-called mansion tax, are a step in the right direction.  It’s some way from the New Jerusalem that some enthusiastic Tweeters, for example, appear to be claiming, but it’s significant.  It’s also tactically adroit; it responds to claims that Labour is light on policy, and the poaching of the Liberal Democrats’ cherished mansion tax policy is a clever sideswipe, a reminder that  Liberal Democrats in Government have failed to achieve even their more modest aims.  It’s also good to see Labour apologising for the politically bizarre decision to abolish the 10p tax rate; Tories have been crowing that this shows inconsistency but in fact most people know that acknowledging your mistakes and learning from them is what grown-up people do.  It’s a powerful contrast to George Osborne’s credo: never apologise, never explain.

Encouraging things include:

  • A clear commitment to redistribution – Labour spent a lot of time talking about “predistribution”, a chimerical idea that appeared to have less substance the more one examined it.  Labour is clearly talking the language of redistribution, in the recognition that it is fundamentally popular.  It’s a commitment that sits a little uneasily with the One Nation Labour rhetoric (more of which in a moment) but it is certainly welcome to see Labour shifting the debate in this direction
  • Shifting the balance from taxes on income to taxes on wealth – again, an important development; recent evidence that wages have fallen back to 2003 levels have masked a much bigger, long-term change: that the proportion of national income taking the form of wages has, in recent decades, fallen dramatically in relation to profits and rent.  Nearly all the benefits of growth (such as they are) have been realised as rents and profits; to the extent that Labour is addressing this issue, this is in my view a positive development.
  • Getting to grips with the economics of housing – one of the most dangerous fallacies of our time is that rising house prices are a good thing.  A tax on house values challenges this assumption.  Labour has been saying some encouraging things about housing lately – especially on the subject of reforming the rented sector; again, this is a sign that Labour may have moved on from its obsession with promoting home ownership.

But  Miliband’s comments are also, in my view, an indication of how far Labour has to go before it can claim to offer a really credible radical alternative to the Coalition.  In particular:

  • The big questions of tax and spending are still not being addressed – none of Miliband’s announcements break out of the austerity mindset.  Of course Labour is wary of making uncosted tax proposals; but Labour remains committed to keeping Coalition cuts and potentially making more.  These announcements do not move that debate on in any way.
  • The mansion tax remains a highly risky option – the principle of taxing large houses has a lot going for it; mansions cannot be squirrelled away in the Cayman Islands.  But you have to have a bureaucracy to value the properties and administer the tax, and it seems to me that this is far from straightforward; and a tax that cannot be administered cost-effectively and consistently is inevitably going to be brought into disrepute.  Moreover, it means that tax revenues are at least in part contingent on the state of the housing market; speculation and rising housing prices, which are socially damaging, would be perversely beneficial to the tax base.
  • The 10p tax rate benefits the well-off too – it’s fiscally a pretty blunt instrument (which perhaps is why Labour – in what would have been a rare triumph for macroeconomic theorising over political expediency – dropped it).  There are other ways of raising living standards for the lowest earners, like the tax credit system that the Coalition has decimated; Danny Alexander is actually right (even a broken clock is right twice a day) when he argues that taking the low-paid out of tax altoghether can be more progressive, although doing so without offsetting increases at higher level denudes the tax base.  Ultimately there is a larger problem of low pay, with low-paying employers in effect being subsidised by the state (and in the case of workfare participants, being given a workforce for free) that Labour is not addressing here.  And of course the very poorest people in society pay no tax at all (including some elderly people living on very low incomes in homes that could be caught by the mansion tax).  It is difficult to see how the 10p tax rate can be effective other than as a package of changes to benefits and tax credits – and possibly some real increases in the minimum wage; but these are nettles that Labour remains deeply reluctant to grasp.  Liam Byrne is still talking the language of reinventing Beveridge, abandoning universal benefits and cutting further – it’s a frivolous response to the situation we face.

In other words, Labour still has a long way to go.  The real issue is that the economic logic requires a willingness to increase public expenditure, and that restoring public expenditure cuts – most particularly benefit cuts – remains an essential step that Labour remains reluctant to take.  And it needs to stop hiding behind the One Nation Labour banner.  The rationality of One Nation is that as the rich get richer, we all benefit – it’s basically trickle-down Toryism.  Labour needs to realise that there are real conflicts between the interests of wage-earners and asset-owners, and needs to get off the One Nation fence, if it’s going to offer a radical answer to austerity.  The logic of Miliband’s announcement points that way.  But far, far more is needed.


5 thoughts on “10p tax: one-and-a-half cheers for Ed Miliband

  1. Re “Danny Alexander is actually right (even a broken clock is right twice a day) when he argues that taking the low-paid out of tax altoghether can be more progressive”.

    I think it’s important to note that a progresive tax system is one in which people pay tax at a progressively increasing rate, not one in which they are too poor to pay tax at all.

    The increase in personal allowances does not “take the low-paid out of tax altogether” as they still pay VAT and other indirect taxes, which by their nature tend to be regressive. This is not mere pedantry. Over the lasy 30 years, the evolving tax regime has shifted the burden from income and wealth taxes (property, CGT, dividends) to consumption taxes. This is not progressive. It’s a major factor in the growth of income inequality.

    A truly progressive system would also employ a single marginal rate of tax – i.e. you pay the same rate on all of your income and that rate increases in line with income. This avoids the decidely unprogressive outcome whereby all current gains in terms of allowances and lower rates of tax tend to benefit high-earners in full.

  2. Progressive taxation is all very well and it’s a matter of sheer practicality that those better off pay more. It costs a lot to keep the modern socialist state running and you can’t get money out of poor people.

    But let’s not demonise those who make that greater contribution as somehow having got their wealth just by good fortune or by pure rent-seeking (though some undoubtedly have). Most, like me, will have studied hard, applied themselves diligently to their careers and been thrifty in their spending habits.

    The top 1% already pay nearly 30% of income tax and those in the 50% tax bracket contribute £47Bn to the treasury. How much more do you want?

    The externalisation of the reasons for the rich/poor divide “it’s not my fault they had unfair advantages” is bound to appeal to the idle and spendthrift and is encouraged by the Labour (and LibDem) parties.

    If you want to look for predatory rent-seeking in modern society look no further than the monopoly public services that provide poor service at high cost in the interests of the workers and managers rather than those who pay for the service (through taxes) or those they are meant to serve.

    • The externalisation of the reasons for the rich/poor divide “it’s not my fault they’re idle and spendthrift” is bound to appeal to those who enjoy unfair advantages and is encouraged by the Conservative (and UKIP) parties.

  3. Can’t say I’ve heard the Tories say that but maybe you’re right. As for UKIP, I did read an election leaflet of theirs recently. Certainly the sort of stuff that appeals to the lizard brain of a wide section of English society but probably not those who have had “unfair advantages”. If you’re an Arab oil sheik living in Mayfair you probably don’t care too much about the sort of stuff UKIP go on about. If you’re at the lower end and your wages are being depressed by a ready supply of immigrant labour, you probably do. The Polish plumber was after all a boon to middle class Londoners but I’m not sure the local plumber quite saw the advantages.

    I think it’s a question of what people mean by “unfair advantages”. I’m just saying don’t put about the impression that everyone in the top 1% either inherited their wealth or somehow cheated to get there. That’s just the politics of envy. (Btw, tax the oil sheik, by all means, but don’t overdo it or he might take his money elsewhere).

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