Tax has always been the ground on which elections are won and lost, and the battle in the run up to next May looks no different. David Cameron wheeled out £7.2bn of income tax cuts at conference, which will undoubtedly be the centrepiece of the Conservative manifesto. The Liberal Democrats are fighting to win public recognition for increases to the personal threshold already introduced by the coalition. Meanwhile, Labour’s frontbench is under strict instruction from shadow chancellor Ed Balls not to make any announcements that could be construed as unfunded spending commitments.
However, the politically toxic nature of the tax debate means it is near-impossible for politicians to have an honest and upfront debate about how government raises revenue. Dropping the slightest hint of long-term tax reform behind closed doors can lead to frenzied denials by party press offices. This was a lesson learnt by both Oliver Letwin and Andy Burnham over the summer. Secret recordings of the former appeared to indicate Letwin’s potential support for a hugely-regressive flat tax, while Burnham was recorded as saying there should be a public debate about whether proceeds from a reformed estate tax might be used to maintain a basic safety net for the care of older people.
The result is a tax system full of anomalies, with incremental change layered over incremental change, and a tax code spanning 11,000 pages. The overall pressure on headline tax rates is downwards, as both parties look to capture headlines by promising tax cuts. Instead, tax revenues have been maintained through fiscal drag, as growing numbers of people are caught by static tax thresholds as wages rise.
Despite the huge fiscal challenges faced in this parliament, the coalition will have delivered over £12bn a year of tax cuts by 2015, mostly through increases to the personal allowance. This has taken a growing number of low earners out of the income tax system altogether. But these reforms have proportionately benefited more middleand high-income earners, and have been partly paid for by cutting tax credits aimed at supporting low-income families with children. The overall impact has meant these families are significantly worse-off as a result of changes to the tax-benefit system. And if Cameron wins the next election, the further tax cuts he pledged in October would make the overall bill for tax cuts to around £20bn a year in total by 2018.
Yet demographic pressures including an ageing population means pressures on the public purse will continue to increase. Indeed, the growing consensus amongst experts is that the NHS, already facing its tightest settlement since its foundation, needs more resource than it has been allocated just to maintain, let alone increase, standards of care. Big cuts to local government funding have seen support for older care dramatically reduced even though demand is steadily rising. At the same time, the triple lock on state pensions will get increasingly expensive. It’s no surprise then that Treasury officials are reportedly raising concerns about the feasibility of making these tax cuts whilst still trying to balance the books.
What does this mean for the centre left? The tax reform debate within the Labour party has tended to be fairly polarised: between those on the right, against any type of reform that creates losers; and those on the left, whose arguments for more redistribution generating higher overall yields are too often divorced from a discussion about what extra resource might be used for.
The truth is neither of these positions is wholly sustainable. Accepting the Conservative position on tax cuts as abaseline would result in Labour having to make even more drastic spending cuts in the next parliament than it has already committed to. But equally the left has never successfully made an abstract case for higher taxes that is powerful enough to overcome some strong gut instincts held by many members of the public, such as a natural scepticism of handing money over to the state for it to be spent on their behalf, and a strong desire to pass something onto their children.
Instead, the centre left needs to start from a realist position on tax, focusing on building support in a few strategic areas. One might be the reform of housing taxation. Property is an under-taxed asset, helping to fuel the rising house prices that drive a growing gap between owners and renters. Council tax bands are based on a hopelessly out-of-date property valuation from 1991. Progressive reform of council tax to properly reflect the differences between today’s house prices might be difficult to pull off politically, but could help to stabilise the housing market, as well as raise more revenue for local services, such as older care. The second could be a limited income tax increase specifically earmarked to help plug the gap in NHS funding: Gordon Brown’s 2002 penny increase on national insurance proved to be remarkably popular for a tax rise.
Neither matching the Conservative proposals on personal tax nor proposing wholesale reform of the tax system are realistic options going into the next election. Instead, the centre-left needs to carve out a more pragmatic position.
Sonia Sodha is a freelance policy consultant. She writes leaders for the Observer and was previously a senior policy adviser to Ed Miliband
This article originally appeared in the Winter 2014 edition of the Fabian Review. For more information on the Fabian Society’s tax reform programme, visit http://www.fabians.org.uk/the-future-of-tax