Daily Tax Report: International

INSIGHT: U.K. Tax Plans—For the Many From the Few

Dec. 5, 2019, 8:00 AM

Since the financial crash of a decade ago, there have been persistent controversies about both the most practical means of keeping western economies growing and the fairness of the policies enacted to fulfill that goal.

In the U.K.—and the EU generally—what has come to be called “austerity” was the dominant policy choice. Terrified by both the run on Northern Rock (the first run on a U.K. bank for 150 years) which had threatened to undermine confidence in the U.K.’s financial system and the example of Greece’s debt “doom-loop,” where it seemed the economic viability of a whole nation was called into question, the Conservative Party decided to make significant cuts to public spending (exact amounts are disputed) with the intention of reducing the deficit and protecting the U.K.’s creditworthiness.

As we approach the U.K.’s general election on December 12, 2019, the morality and effectiveness of the austerity policy is once again being intensely questioned. Was it ever the right thing to do?

Many economists felt at the time that, instead of chopping away at public services, it would have been better to engage in heavy Keynesian counter-cyclical investment in order to encourage the economy to grow its way out of trouble; but the counter-argument to counter-cyclicism was that government spending (contra Keynes’s original prescription) was already too high, that there had been too much government largesse during the boom years of New Labour for such a stimulus to be safe.

Nevertheless, it was thus the narrative we have lived with for a decade was established: the “few”, the banks and bankers—who caused the credit crunch in the first place—were bailed out by the taxpayer; while the “many”—everyone else—saw an underfunded public sphere descend into squalor.

There is plenty to dispute in the detail of this picture (consider, for example, how the Clinton administration’s push to extend home ownership in the U.S. teed up the global sub-prime mortgage debt crisis) but a sense that the remedy for the great recession was profoundly unfair has become commonplace.

Magic Money Trees

Prime Minister, Boris Johnson, is not a figure one would automatically associate with austerity; but the fiscal policy U-turn executed by the Prime Minister since his victory in the Conservative leadership election has been spectacular to behold. The tires are still smoking. Not only has Phillip Hammond, the last Conservative Chancellor and deficit hawk, been replaced by Savid Javid, he has been ejected from the Conservative Party itself. Though the issue between Johnson and Hammond is notionally the risk of a no-deal Brexit, there is no doubt that Johnson has encouraged Hammond’s defenestration to be considered symbolic of a fundamental shift in Conservative attitudes.

Johnson has been busy making pledges from the get-go of his premiership: 20,000 police here; 50,000 nurses there; it would all, according to the Conservatives’ election manifesto, be a part of “getting Brexit done”. For Johnson’s new Conservatives, borrowing is no dirty word and concern about the deficit an apparently embarrassing, well-soothed and discarded anxiety. “Spreadsheet Phil”, farewell.

As the Brexit debate showed over many years, Johnson is not a believer in trade-offs and sacrifices. In a Johnsonian future, spending will go up, but taxes need not rise. In his planning, Johnson seems to be simply ignoring the likely severe detrimental impact (identified by Sir Ivan Rogers among many others) on U.K. services in the event of the light-touch Free Trade Agreement Johnson has promised being successfully concluded with the EU by the end of 2020.

More Spending, Less Taxes, and Cake for All

The one significant concession in the manifesto to the traditional Conservative Party goal of balancing the books was to suspend the implementation of a cut to corporation tax from 19% to 17%. Even this modest gesture appeared to cause Johnson great discomfort. “We will not,” the manifesto declares, “raise the rate of income tax, VAT or National Insurance.”

The Prime Minister often says that he will unite the country, and, reading the Labour manifesto, one has an odd feeling that this may actually be already happening. For his true political philosophy has become ideologically dominant. Not his Brexit-positivism, his new-found enthusiasm for fighting climate change, nor his sudden commitment to promoting the sciences in the U.K.; no, it’s the original Johnsonian principle of cake-ism that is in the ascendancy. “My policy on cake,” as Johnson memorably put it, “is pro having it and pro eating it.” In this, the opposition appears to be in full agreement with him.

Take VAT: “VAT is a regressive tax that hits the poorest hardest and we guarantee no increases in VAT,” thunders the Labour manifesto. Indeed, it is not only the poorest who will be spared by the party. Labour has made great play of its commitment to not raise taxes of any kind for 95% of U.K. taxpayers, while at the same time increasing day-to-day annual spending by a cool 82 billion pounds ($107 billion) (and that’s before the circa 60 billion pound one-off cost of resolving the Women Against State Pension Inequality (WASPI) pensions issue or any costs associated with plans for nationalization are factored in).

On the Shoulders of the Few

“For the many not the few” has been the signature slogan of Jeremy Corbyn’s Labour leadership, and it is those few, the 5% (in fact, 3% of U.K. adults) who are the object of fiscal attention in the manifesto: “we will end the unfairness that sees income from wealth taxed at lower rates than income from work.”

Income tax for high-earners will rise; but perhaps more significantly, capital gains and dividend tax rates will be aligned to the new income tax levels. Most audaciously, the manifesto proposes an automatic transfer of share capital from business owners to employees and the state:

“We will give workers a stake in the companies they work for—and a share of the profits they help create—by requiring large companies [companies with over 250 employees] to set up Inclusive Ownership Funds (IOFs). Up to 10% of a company will be owned collectively by employees, with dividend payments distributed equally among all, capped at £500 a year, and the rest being used to top up the Climate Apprenticeship Fund.”

Naturally, there has been a great deal of media interest and comment about these changes and the plausibility of Labour’s claim that tax receipts would rise to the desired level as a consequence of them.

The Institute of Fiscal Studies (IFS) has said flatly that the plan is “not credible”, and its reasons for doing so are striking and thought provoking. The problem for Corbynomics is that we in the U.K. are already too dependent on the “few.” Some 42% of U.K. adults pay no income tax at all. Just 3% of the U.K.’s adult population is responsible for generating circa 50% of the U.K.’s income tax revenue. The U.K.’s tax base, and therefore our public services, are extremely vulnerable to behavioral change among this section of the population.

Corbyn’s Labour Party has worked itself into the peculiar position of aggressively stigmatizing for selfishness and greed exactly the small group of people it would absolutely rely on if it were to deliver on its manifesto commitments. Labour is quite right when it says that the overall tax burden it desires is merely mid-range for a G-20 economy; but the distribution of contribution is strikingly askew. The middle and working classes are intended to be relatively free riders. Again, consider VAT: and compare Labour’s view of the tax to that of the Scandinavian countries Corbyn professes to admire: rates there are consistently 5% higher.

Labour’s manifesto has been described as “radical” and “dangerous”; but strip away the rhetoric, and there is an underlying confused timidity in the offering. For Corbyn’s Labour, quite as much as any neo-Thatcherite party, seems to take it for granted that the “many” will not consent to pay for socialism, that “real change” will actually only come through a slightly coerced noblesse oblige on the part of the “few.”

In this election, the anti-populist Liberal Democrats, with their pledge to raise income tax by a penny, and their pregnant silence on VAT, appear to be the true tax revolutionaries.

Nicholas Hallam is Chairman of Accordance, U.K.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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