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
    0

    Comment number 435.

    GP 430 Higher tax rates - class war and all that goes with it do not lead to peace prosperity and economic wellbeing. Quite the reverse. To think that we are all socialised by the state seizing surpluses generated by one group and handing it to another is plainly misguided. These are the politics of victimhood learnt helplessness, covertness and hatred cloaked in false moral indignation.

  • rate this
    +4

    Comment number 434.

    There is nothing "fair" about stealing someone's earnings at a 50% tax rate. It is exactly that - theft.

  • rate this
    -2

    Comment number 433.

    I retract my last comment re. the Class War ending in '97 when Tony Blair famously claimed that it was over.

    How ironic that I thought he meant Labour voters had won.

    The right (and the allegedly left and centre) continue to wage war on the poor, the young, the old, the weak and the sick, but they only call it Class War when someone dares to complain and suggest an alternative.

  • rate this
    -2

    Comment number 432.

    Higher rate tax is key to a balanced recovery.

    Post WWII we had a consensus that progressive taxation was desirable. By the 1980's the super-rich got their act together and turned the tide.

    They control the assets, they appropriate the profits, they accumulate the wealth at an increasing rate, they are not about to give it away.

    Class War started in 68, ended in 97 when Blair surrendered.

  • rate this
    0

    Comment number 431.

    I have near earned near the £150k limit but I do think that looking at headline salary costs can be misleading. When my kids were small, after childcare to allow me to be out of the house for 12 hours a day and the costs of commuting on delightfully crowded South West Trains, I was lucky to take home >25% of my gross salary. Expensive housing costs to be near a station and the rest soon went

  • rate this
    -3

    Comment number 430.

    The reduction of higher rate tax from 60% to 40% did not herald a golden age of national prosperity.

    This change was introduced at the start of the disastrous 3rd term of Thatcherism, 1990's recession, 15% bank rate, black Wednesday, stagnation of the property market, widespread negative equity.

    This was not good for the country, it was good for the top earning 1%.

    It is time for change.

  • rate this
    -3

    Comment number 429.

    Failure to raise higher rate tax continues the no brainer for business owners to milk all the profit out of their businesses rather than reinvesting the profits to grow the business.

    60% higher rate tax causes management to moderate top salaries and bonuses.

    The right have succeeded in making income & corporation tax untouchable while VAT and National Ins'nce have soared.

    It is time for change.

  • rate this
    -4

    Comment number 428.

    However clever and hard working the super-rich are it is impossible to justify the amassing of enormous personal wealth by the 1%. They cannot take it with them when they die and their legacies will only expand the pool of the idle rich.

    The reduction of high rate tax from 60% to 40% in 1988 was the big payback for Maggie's masters.

    Blair's failure to raise it displayed his true colours.

  • rate this
    -4

    Comment number 427.

    60% high rate tax served us well from 1979 to 1988.
    Extreme greed reduced it.

    If wealth is spread more evenly the sum of human "happiness" would be greatly enriched. The super-rich who are relegated to simply "very rich" would still be very comfortable within a more equally prosperous society.

    This is unlikely to happen because those blessed with great riches are like dogs blessed with bones.

  • rate this
    -2

    Comment number 426.

    Do the people squealing about the imposition of a 50p tax rate, on earnings over £150k, believe that its impact on the management class will be more demotivating than 5 years of zero or below inflation pay increases and reductions in workplace benefits and pensions has been for millions of workers? What makes them so special? Without a motivated workforce no business will achieve its potential.

  • rate this
    +2

    Comment number 425.

    No, I was thinking more along the lines of simplifying tax with a flat rate tax across the board, removal of tax credits etc. you'd probably need to raise wages, but the concept of letting people keep more of their own money appeals, rather than give with one hand and take with the other
    Free goods at supermarkets however, will probably be classed as theft

  • rate this
    0

    Comment number 424.

    423Tc1234
    How about a lower tax rate for all putting more money in your pocket, rather than expecting government to redistribute the wealth for you
    ~
    1. I have/I am!
    2. Nice idea. So, indirects that subsidise lower top tax IT rates get payback from HMRC? Supermarket customers are handed free goods for profit they contribute to Co. Execs pay & bonuses. I like it!

    How about my flat rate?

  • rate this
    +1

    Comment number 423.

    @418 up2stuff
    High tax payers contribute most revenue already, so it's unfair to keep blaming anyone with more money than you for your woes. There is always someone else with more - deal with it!
    How about a lower tax rate for all putting more money in your pocket, rather than expecting government to redistribute the wealth for you

  • rate this
    -1

    Comment number 422.

    372. The J Hoovers Witnesses - was rated down for supporting the E word - but we're in the EU and that makes people ENTITLED to lots of stuff.
    Universal income is on the agenda. Just as well because tech advances will obliterate swathes of jobs sooner than you might think; high grade work, law, accounting, design etc. won't escape.

    Times are changing. Hard work as a virtue is a belief trap.

  • rate this
    -1

    Comment number 421.

    @409/413 Will
    Economists at the time considered top tax rate83% to be excessive & the UK economy was driven by high earners. Various h/earns carried out a media campaign to that effect.

    That standard thinking has changed. We now think that economies are driven from the bottom up, not top down. Certainly the UK evidence tends to support that.

  • rate this
    +1

    Comment number 420.

    @413/414 Will
    What would be really fair with flat rate taxes is to have every tax based on income level & everyone pays at the same rate.

    How about that? Do you like that idea? It is the fairest way of all, based on the ability to pay with total tax rate equality.

    Are we agreed then?

  • rate this
    +3

    Comment number 419.

    Here we go again, 50p tax is a disaster. Well not so long ago top earners were being taxed 50p and I don't recall a flood of wealthy ppl exiting the UK. Those earning £100K or more can afford to pay more tax, the rest of us who work to so they can earn so much money, can't.

  • rate this
    -2

    Comment number 418.

    @413/414 Will
    The greed saddens me; not content with 30x pay when others have only a fraction of that, they want to pay less & less tax.

    Why not go the whole hog: tax 1% of high earners @10%, put mid-rate on 20% and make everyone else pay 60%? The rich can get richer while the economy dies.

  • rate this
    +3

    Comment number 417.

    The problem with things like this is that we mix up what is actually important.

    Is a 50% rate fair is not the same as is it fair to pay someone such sums. They are not one in the same.

    Also people attack legal tax avoidance as being wrong but how many illegally buy cigarettes et al that are cheap due to no tax? Seems people are against tax avoidance if they can't take advantage off it

  • rate this
    -3

    Comment number 416.

    Thoughtcrime @415
    "considered greedy to want to keep the money we EARNED
    apparently not greedy to want to take (what) someone else EARNED"

    Need to think on use of "EARNED", & on "oppressive" as applicable to our sub-contracts by virtue of their context: a non-democratic social contract, a struggle to 'repudiate' against entrenched defenders of social inequality, de facto anti-democratic, spiting

 

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