The meaning of Labour's tax rise

Tony Blair 1997

People often moan that politics and politicians never change, but there has been a big shift in the attitude of the Labour Party in its attitude to big businesses and high earners, from the period when Tony Blair led the Labour party in opposition in the mid-1990s to today's opposition Labour Party.

When Blair was in charge, I was the FT's political editor. Therefore, I took a particularly close interest in Blair's relations with the big-cheese bosses and plutocrats.

His calculation was that Labour could not win if it was seen to be opposed to what he defined as aspiration and wealth creation. So most of his waking minutes were devoted to wooing business, especially big business, and creating the impression that a Labour government would raise neither the top rate nor basic rate of income tax.

The epitome of this policy was his burning ambition - which was only ever half fulfilled - to secure the endorsement of Richard Branson (before the election, the great brander created the impression he was on New Labour's side without actually saying anything explicit).

New Labour's determination to impose a windfall tax on the privatised utilities might have looked in some way anti-business. But in practice the remuneration and pricing policies of these companies had so alienated most "proper" private-sector business folk that they just about gave the party the benefit of the doubt.

And, by the way, it is reasonable to conclude today that this was conviction politics on the part of Blair, given the colossal amount of money he has made from advising big businesses and multinationals since stepping down as Labour's leader.

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In the spectrum of views that constitute the Labour Party, Miliband appears to be slightly to the left of Blair”

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All of which does seem a world away from today's Labour party under Ed Miliband.

He would and does say that he wants to support the growth and proliferation of smaller businesses.

But his plans to impose a price freeze on energy companies, to break up the biggest banks and to raise the top rate of tax from 45p to 50p is angering the boss class, to the extent that quite a few are breaking the habits of a lifetime and making critical public statements.

So what's changed between 1996 and 2014? Well to state perhaps the most obvious and least interesting distinction, in the spectrum of views that constitute the Labour Party, Miliband appears to be slightly to the left of Blair.

But so much else has changed of an arguably more fundamental sort.

In an economic sense, the UK was four years into a strong recovery in 1996 and living standards were rising sharply - which may have helped to curb popular resentment, to an extent, of higher earners.

And in the zone of ideology, Thatcherism was still massively in the ascendant - Margaret Thatcher had shifted the middle ground of politics and converted Blair and the top of New Labour to the idea that economic growth and prosperity were best secured by the unleashing of market forces.

How different from today. We are in the early months of a recovery and living standards for most people have been squeezed for many years and are not yet improving.

Also the banking crisis of 2008, which triggered the long dark years of recession and economic stagnation, has made respectable again the idea that the private sector cannot always be trusted to deliver optimal economic outcomes for all of us (ahem).

Then there are two other things.

Newspapers, which have a tendency to be hostile to tax rises and intervening in markets, had much bigger circulations in the 1990s than today. And Labour now has the ability through social media to go round them.

But perhaps for me what is most striking is that Labour seems to have calculated that it can win the election by hanging on to the support of LibDem refuseniks, or those marginally to the left of the centre who voted LibDem last time but have been alienated by its participation in the coalition.

He does not seem interested in eroding the Tories' residual support.

Or to put it another way, Miliband seems to believe he can win the election by standing largely on the left, which is so different from Blair's strategy (and tactics).

Which means that the dividing lines between the two bigger parties do feel much more as they did in the 1970s, rather than in the 1990s.

What about the actual costs or benefits of raising the top rate of tax, to the Exchequer and the economy?

Well if I haven't dwelled on these, it is because the evidence is murky.

After Labour introduced the 50p tax rate just before the last election, there was a huge amount of what is known as income shifting and income converting: bonuses, for example, were brought forward and paid before the new tax bit; income was converted into capital, so that it could avoid income tax; and various other devices were employed to dodge the higher rate, sometimes permanently, sometimes temporarily.

As for whether it drove wealth creators from the UK, there the facts are even harder to find - a few hedge fund superstars have moved to Switzerland (which not everyone weeps about), and lots of French capitalists have moved to London, to escape President Hollande's even higher taxes.

There might be a good deal of income shifting and converting again, if the rate went from 45p to 50p, which would reduce the take from the imposition of the higher rate.

But the amounts of money gained or lost from the tax rise, as the Institute for Fiscal Studies has said, may be pretty trivial, probably less than a percentage point of the annual hole or deficit in the government's finances.

Which is why what is more interesting about the planned tax rise is what it says about battle lines in politics, and the parties' attitudes to high earners and businesses.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 15.

    It is not just the tax rate but Balls has also has said Lab should have spent even more before the crash.

    In 2007 Lab spent 41% of GDP in public sector. On average tax delivers 35.5% GDP to govt to spend.

    Balls clearly believes Greece is a wonderful economic model

  • rate this

    Comment number 14.

    We should be asking how he's (apparently) going to get to the position of a budget surplus by the end of the next parliamnet,assuming labour get in. Instead everyone is talking about something that makes the square root of b*gger all difference to acheiving that. Red herring...

  • rate this

    Comment number 13.

    Most people realise if the Daily Mail are against something it must good for the working men and women of this country. The rich have to pay their fare share. Savers, renters and people on benefits have been clobbered by this government, so it's about time the well off weighed in a bit of cash. Good for Labour. Let's hope they keep their promise to build more social housing too.

  • rate this

    Comment number 12.

    We are not talking about the super-rich here. £150k+ would include many lawyers, doctors (consultants), business managers and BBC commentators. If I was in the bracket, would I want to expand my business and create more jobs with the extra work, stress and hassle for me if I was going to lose over half my income in tax (incl NI)? It will choke economic growth.

  • rate this

    Comment number 11.

    Perhaps if we got to grips with those big businesses that trade in this country and avoid paying tax we would not need to consider raising tax rates.This issue seems to have been swept under the carpet but we can still see the bulge.

  • rate this

    Comment number 10.

    Populist sound bite that will probably cause more headlines than its worth.

    Without a coherent plan any party is blowing in the wind.

    Balls like Ed is not making ground.

    We need a new breed of politics that consigns the party system to 20th. century history text books UKIP does not fit the bill.

    We need solutions to issues not dogma
    The GE 2015 is going to be a big disappointment

  • rate this

    Comment number 9.

    Clearly as Robert states the announcement is about politics not economics so why does the BBC editorial discuss the economics, surely it would be better if Preston could ask his sources for the internal polling numbers and focus group reaction?

  • rate this

    Comment number 8.

    What the "unleashing of market forces" achieves is often a race to the bottom, in many walks of life, until work inescapably means grindingly onerous, with "efficiency" removing any scope for fun. Also work, or the search for it, becomes the totality of most people's lives, making them in turn meaningless, through what Marx called Alienation. On that point I'd say he was right.

  • rate this

    Comment number 7.

    Well, a 50% tax rate it won't affect me...

    ... however as a matter of principle I think it is wrong to force anybody to spend more time working for others than for themselves and their family, no matter how rich they are.

  • rate this

    Comment number 6.

    As a PriSec class worker my pension is dependant on companies making profits so that I can have a decent income in retirement.
    PubSec class workers (i.e. MP's) don't have to worry about business making profits as their pensions are underwritten by the earnings of PriSec class workers!
    Would Balls and Co. be so keen to destroy profitability if their pensions and retirement were on the line too!

  • rate this

    Comment number 5.

    Blair-wooing big business and promising not to raise taxes-All these years when people voted for him they were actually voting Tory!
    Milliband - slightly(!) to the left of Blair promises to raise the highest rate and then the highest earners will move abroad,just like they're doing in France.
    Hmm.Socialism does not pay?

  • rate this

    Comment number 4.

    I agree - this is about ideology, and it will be very popular. The super rich pay hardly a penny in tax anyway and their off-shore shelters are hardened against something as simple as a 50p top rate, so they won't suffer. The vast majority of people in this country earn much less than 150K and will be in favour of anything that evens things out. It's a good move and a good vote-catcher.

  • rate this

    Comment number 3.

    Instead of a tax rise tax avoidance/evasion needs to be better controlled. Looking at closing loopholes used to avoid paying the appropriate amounts of tax would be far better as it would show that politicians are serious about making things fairer for everybody.

  • rate this

    Comment number 2.

    So here we go again! Currently we are in austerity, maybe shortly we will be back in tax & spend. Seen it all my life. So bloody tired of cyclical politics.

    Vote Conservative - some get what they vote for.
    Vote Labour - some get what they vote for.

    Whoever wins - everyone gets what they didn't vote for.

    Its time for new politicians, new thinking & enlightened politics for everyone..

  • rate this

    Comment number 1.

    Current mouthings from all parties are not about ideology (knee-jerk or carefully considered), they are merely about winning votes and bear little or no relation to what any party might do if elected.

    It's all just sound bites, propaganda, without clear evidence to support ideas, to demonstrate their merits... and, alas, unchallenged by those who repeat them rather that report journalistically.


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