Piecemeal tax reform is not enough

During party conference Labour took a tough stance on taxation, but the party’s economic competency must be strengthened further by making the case for radical tax reform. Tax is on the agenda of both Labour and the Conservatives, but their piecemeal approaches to tax reform ignore the opportunity we have to reconceptualise our taxation system and its ultimate purpose.

Despite policy announcements of a ‘mansion tax’ on properties worth over £2 million and a crackdown on tax avoidance to raise £1.1bn in revenue, Labour remains susceptible to claims of an £18.5bn ‘black hole’ in its spending plans. Meanwhile, the severity of George Osborne’s two-year, working-age benefits freezes, projected to save over £3bn by 2017/18, indicates the pressing importance for Labour to make a clearer, more radical argument about how it intends to raise much-needed revenue in the next parliament.

Government has a few options for fiscal tightening: it can raise taxes, reduce departmental spending or cut welfare, either by reducing its value or limiting entitlement. The government’s choice in which of these it prioritises is not pre-determined, but is a distinctly political choice. However, neither Labour nor the Conservatives openly acknowledge that tax rises in the next parliament are understood by experts to be almost unavoidable. In the short-term interests of deficit reduction, a new government in May 2015 will need to take steps to increase revenue even if only to maintain its current ratio of 80:20 spending cuts to tax increases.

Ed Balls’ pledge not to increase borrowing to pay for Labour’s promises is a start. However, the party needs to make it clear that deficit reduction does not necessitate welfare reduction. Osborne’s cuts to social security reveal who is and who isn’t prioritised by the Conservatives. Further retrenchment of public services threatens existing service structures and is impractical and publicly unpalatable. This must be challenged by Labour.

And long-term pressures require more than piecemeal approaches to revenue, but rather conscious debates about the future state of society. Demographic pressures posed by an ageing population demand increased investment in public services and social security provision whatever party, or coalition, takes power. This also makes further spending cuts even harder to pursue without substantial detriment to our public services.

The Conservatives are not only unwise to ignore this: they are also being untruthful about post-2015 necessities. David Cameron’s pledge to cut taxes for thirty million people via personal allowance expansion, abolition of the pension handover tax, and raising the 40p income tax threshold, will constitute a total of £7.2bn that will need to be found elsewhere. Every political promise has its cost.

Labour has been more honest about the need for increased revenues, although it must do more to shape actively the emerging debate on its own terms. Its ‘mansion tax’, though controversial, takes tentative steps towards shifting tax burdens away from earned incomes and towards property, by which wealth across generations is entrenched. The tax’s £2 million threshold, together with renewed energy targeted at tackling large-scale tax avoidance suggests that a greater burden of deficit reduction would rest on the shoulders of the wealthiest under a Labour government.

A message is beginning to emerge which will shape the way we think about tax: economic recovery demands the full and, crucially, proportional participation of all in society. Meanwhile, pledges clarifying the nature of public service investment, such as promising the training of 20,000 more nurses, will help justify increases in taxation by making it clear to voters where the increased revenue is going.

But Labour must be wary of pursuing such policies at the expense of losing sight of the overarching challenge – making the British tax system fit for the 21^st century. A focus on tax avoidance should not distract Labour from confronting the confused manner in which tax mechanisms operate in sum.

Radical reform

Elements of what a reformed system might look like are slowly coming together. To go further, Labour’s introduction of a ‘mansion tax’ could be located within cutting-edge debate about radical reform more generally, allowing the party to shrug off the left’s traditional spectre of increasing income tax.

For instance, wouldn’t reducing the burden of 12 per cent national insurance contributions on the non-taxable working poor redistribute wealth more effectively than untargeted and universal extensions of tax-free personal allowances? Isn’t tackling tax avoidance for short-term revenue gains best pursued alongside the introduction of new and sustained revenue streams via an Alternative Minimum Tax for corporations, a single rate applied to all income above a certain threshold designed to undermine avoidance loopholes? Wouldn’t the ‘mansion tax’ (detrimentally presented by the Conservatives as a ‘tax on family homes’) be more publicly acceptable if pursued alongside other tax of wealth and property, such as the Land Value Tax?

At its heart, talking about tax and revenue is not simply about deficit reduction or co-opting George Osborne’s rhetorical priority of ‘balancing the books’. Instead, it’s about funding the sort of high quality public services we expect and the responsibility of government to make provision for its citizens. Indeed, recent polling suggests the public is not necessarily averse to the payment of higher taxes for better services.

Britain needs a simpler, more transparent tax system, requiring governments to be bolder and not simply tinker around the edges for short-term gains. Demographic pressures demand the need for new revenue streams, made possible through devolved taxation, and shifting tax burdens away from income and onto wealth, alongside other options.

By taking the initiative here, Labour could shape the emerging debate, establish itself as the party of intelligent, fair and transparent taxation, and challenge the Conservative’s predominance as the party of sound economic sense.

Daisy Srblin is a research fellow at the Fabian Society. She tweets at @DCSrblin