Winning the argument on taxation is the key to reviving the left

One issue yet to be dissected by contenders to the Labour crown is taxation – and more specifically its principles. We may still be licking our wounds from one of our worst electoral defeats in history, but timidity is no recipe for renewing and building a revitalised progressive force to counter the growing threat posed by the ConDem coalition government.

One issue yet to be dissected by contenders to the Labour crown is taxation – and more specifically its principles. We may still be licking our wounds from one of our worst electoral defeats in history, but timidity is no recipe for renewing and building a revitalised progressive force to counter the growing threat posed by the ConDem coalition government. We need to be as radical as we are ambitious.

The big challenge is to set out our vision for society. Integral to that is the tax system. So far the leadership roadshow has largely ducked the opportunity to engage in a genuine debate about the nature of tax. We cannot miss this moment to realign the economic debate in favour of progressive ideals.

Four principles should inform any new tax system for the left. Firstly, it must be progressive. This means seriously re-considering the merits of personal allowances. Analysis conducted by Left Foot Forward has demonstrated the regressive nature of income allowances, which provide a universal and indiscriminate tax cut for all earners. Middle to higher earners gain disproportionately more from this.

The coalition government’s recent announcement for an increase next April will only further increase this tax subsidy. A radical alternative is to abolish them altogether, or reduce them to a lower level, while introducing greater marginality in higher rates. The current system is arguably too flat, with individuals earning £8,000 paying the same 20 per cent rate on their tax liable income as someone earning £40,000.

A more progressive system would be to have lower and more variable rates for differential income, i.e those earning between, £5,000-£10,000 have a 2 per cent rate, £10,000-£15,000 5%, £15,000-£20,000 10% etc. These extra marginal rates for lower earners could be funded through the abolition of universal allowances. And to ensure part-time workers, or those on very low incomes do not lose from this new system, appropriate changes can be made to benefits and tax credits.

Social justice is equally important. Taxation is one of the most powerful ways in which to shape socio-economic relations. We need to ensure that any new system does more to help the weakest and poorest in society. One of the ways we can achieve this is replacing council taxes with a local income tax. Council taxes are highly regressive, as they hit lower-earning households harder as a percentage of their income. A local income tax would be an effective and efficient way to account for wealth.

To make this policy even more progressive, councils representing poorer districts and regions could be given a grant by central government to encourage them to have lower rates of income tax than the national average. Another idea is for 1 per cent of the bank bailout when repaid to be put into a national endowment fund for poor communities to access.

Public support for taxation is crucial in preventing alienation and disenchantment. The system needs to speak to people’s basic sense of fairness. This means capital gains tax should be fully aligned with marginal income tax rates, thereby abolishing any discrepancies and avenues for tax avoidance. Capital gains are merely another form of income and no strong argument exists for its differential treatment. The scale and nature of the cuts planned by the coalition government will disproportionately hit poorer households more. This cannot be right or fair.

Those who were bailed out by the government, or those who have done well in the good years should be expected to make a more considerate tax contribution. A fair system will have a bigger banking levy than the £2bn currently planned, a wealth tax in the form of a mansion tax (as argued by Left Foot Forward), and a financial transactions tax, ideally coordinated internationally, but done unilaterally if not. Previous analysis has demonstrated this can be done without harming individual countries’ economies.

The final principle to shaping a new tax system is competiveness. Taxation should be used to forge a stronger, just and more sustainable economy. Our economy is grossly imbalanced and heavily dependent on a few industries. We are vulnerable. We can change this through introducing tax incentives and measures to generate a more dynamic and resilient economy. We need to move wealth outside of London and the south-east.

Lower business rates and start-up costs in poorer areas could help generate economic opportunities in hitherto non-investable areas. The Tory plan to discount National Insurance employer contributions for the first 10 employees up to a value of £5,000 for new companies has merits. However, cutting corporation tax at the expense of capital allowances and abolishing Regional Development Agencies is highly damaging. We should be nurturing growth industries, not hurting them.

Sweden successfully cut its deficit in the mid-nineties by prioritising investment in human capital and potentialities. Education, skills and jobs helped Sweden not only to tackle its deficit on schedule but actually accumulate a budgetary surplus. They also enjoyed the highest growth figures of all OECD nations in the past decade, and weathered the latest financial crisis better than most.

That is why it is astonishing the coalition government are cutting this year and dramatically scaling back key human capital projects in education, skills, sciences, and our growth sectors. We should not be abolishing the Building Schools for the Future programme, Regional Development Agencies, Child Trust Funds, reducing manufacturing and investment allowances, cutting the science budget, and scraping the 50p phone line tax for super-fast next generation broadband and capping housing benefit. All of these will impact on human potential and future growth.

Even right-wing think-tanks have come out in recent days to criticise the chaotic and disjointed nature of the planned cuts. This can be a moment for the centre-left, but only if we have a vision for society. And taxation will be key to that. So let’s put it on the agenda.

16 Responses to “Winning the argument on taxation is the key to reviving the left”

  1. manishta sunnia

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  2. Hitchin England

    Winning the argument on taxation is the key to reviving the left: http://bit.ly/cAqkQa via @leftfootfwd

  3. David Taylor

    RT @leftfootfwd: Winning the argument on taxation is the key to reviving the left: http://bit.ly/cAqkQa

  4. graham

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  5. B Latif

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  6. Jackie Fleming

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  7. Jordan Hall

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  8. Adam Corner

    RT @leftfootfwd: Winning the argument on taxation is the key to reviving the left: http://bit.ly/cAqkQa

  9. Trakgalvis

    Winning the argument on taxation is the key to reviving the left: http://bit.ly/cAqkQa via @leftfootfwd

  10. Anthony Zacharzewski

    If an election were likely in the next six months, I might agree with you, but I think this is the wrong time to start talking about technical and easily-misrepresented issues such as changes to income tax.

    It would be much better, I think, to frame tax changes as a consequence of values and moral principles which the left/progressives/etc stand for. First establish in the public mind an understanding of what you want to achieve – tax rates are not an achievement they are a mechanism.

  11. Akheloios

    Another progressive step would be to link income tax directly to median income. Anyone higher than the median wage would have their tax rate decided by how far away from the median they are in fractions of standard deviations. This would put pressure on those at the top, if they wish to reduce their individual tax burden, they need to raise the median wage of the entire country. Those whose income is lower than the median recieve tax/break/lower rates dependant on how far they’re away from the median in the other direction.

  12. paul barker

    As a Libdem Troll, I found myself agreeing with most of your points, a lot of it is already LD policy after all. Not sure if the comparison with Sweden is useful, our deficit problem is so much bigger & the world Economic context so much worse.

  13. Guido Fawkes

    “Left Foot Forward has demonstrated the regressive nature of income allowances, which provide a universal and indiscriminate tax cut for all earners. Middle to higher earners gain disproportionately more from this.”

    LFF did no such thing, nor did they previously claim what is patently untrue. LFF said it was unfair because non-taxpayers, those who receive welfare transfers from taxpayers, did not benefit.

    I think that is a good thing because it serves to encourage people to work, for egalitarian reasons LFF thinks it a bad thing.

    The other error in the statement is the claim that high earners benefit disproportionately. Actually it is the reverse.

  14. aaron peters

    RT @leftfootfwd: Winning the argument on taxation is the key to reviving the left http://bit.ly/cRrfc0 – well said re. human capital

  15. rayhan haque

    Akhelios, interesting idea. But it sounds like it could be very complex and difficult to administer. Also not sure it provides enough flexibility in the system. Are there any notable thinkers pushing that idea?

    Guido-LFF did not just say it was unfair as non-taxpayers would not benefit, but anyone earning under £10,000 (and there are millions of people in Britain who do- would not fully benefit). You only get the full benefit if your above that level. And how can you justify a universal tax subsidy at a time when thousands of low-paid workers are set to lose their jobs due to the coalition government.

    One other point, Michael Howard and David Willetts both considered the value of higher personal allowances before the 2005 election-and decided against it for some of the same reasons LFF concluded!

  16. Weekend reading, 20 August 2010 « Policy Progress

    […] Rayhan Haque (Left Foot Forward) – Winning the argument on taxation is the key to reviving the left […]

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