Taking tax out of the ‘Too Difficult Box’

Tax is at the heart of the relationship between the citizen and the state. The fundamental conflicts around John Hampden’s trial in 1637 for his refusal to pay King Charles’s taxes for ship money, and the Boston Tea Party in 1773, laid the foundations of the modern British and US states.

How ironic, then, that it is so difficult to have a realistic discussion about tax in modern politics. The rise of the radical right, epitomised by the elections of Margaret Thatcher in 1979 and Ronald Reagan in 1981, was fuelled by the fact that the income tax base had grown substantially. Indeed, while there were 3.8 million ‘taxpayers’ in 1938/9 (as married couples were then considered one ‘taxpayer’), this increased to 14.5 million in 1948/9 and then 21.6 million ‘taxpayers’ (actually 25.9 million individuals) in 1978/9. By 2010/11 the number had reached 31.3 million individuals. Tax had moved from a concern for a small minority of the population to a majority preoccupation and so became a genuine, widespread political issue.

Since that Reagan/Thatcher ideological triumph over 30 years ago, mainstream political parties across the world have usually ducked the challenge of arguing for higher levels of taxation to pay for better quality public services. And those who have tried have generally been defeated. The only, small, exception in the UK was the Blair government’s decision in 2002 to raise national insurance by 1 per cent with the promise that the extra revenue would go to the NHS.

We can see the political power of the opposition to any form of increased taxation in a number of the important tax decisions, or more accurately non-decisions, of recent years.

Firstly, both Labour and the Conservatives feared the political consequences of revising the base of council tax, set in 1993, to take account of increased property values. It seems that change was postponed indefinitely, increasingly distorting the funding of municipal services. It has also led to the absurd proposition of a ‘mansion tax’, specifically designed for political reasons only to be paid by a very small number.

Secondly, the current system of university tuition fees might well have been replaced by a (in my view inferior) graduate tax. However, the then chancellor believed that New Labour could only pass one tax increase in a parliament, and he thought that the 2002 increase in national insurance was it for 2001–05.

Thirdly, the current incoherence of VAT is a result of pre-election pledges made in the 1990s and subsequently repeated. VAT is paid on digital books and newspapers but not on their hard copies, on food bought in restaurants but not in supermarkets, and so on for no clear rhyme or reason.

These are just three recent examples of the way in which the interrelation between tax and short-term political pressures makes political parties bow to the prevailing anti-tax wind. In general the centre-left, including the Labour party, has failed to rise to the challenge thrown down by the anti-tax right wing.

To do so we need to start from the premise – implicit in the success of the right – that people will only be ready to pay tax if they: know where the money is going and how it is spent; believe that the purpose of the spending is worthwhile; and believe that the money is spent efficiently and is well-managed.

Labour needs to engage wholeheartedly with this agenda to challenge, and then defeat, the anti-tax campaigners who currently dominate the debate, to our national disadvantage.

To do this there are practical reforms Labour can make. To strengthen transparency we need hypothecation of taxation, notably for the NHS. In addition, ‘copayment’, where beneficiaries of public spending make an appropriate and socially just contribution to costs, as with university tuition fees and congestion charging, will strengthen the public sense of contribution. However, the Treasury’s traditional opposition to such change plays into the hands of the anti-taxation campaigners. And Labour chancellors should not go along with it.

The public needs to support how their tax is spent. So Labour needs to acknowledge that public spending which might easily have gained public support decades ago now needs serious re-evaluation in modern conditions. Issues as diverse as the justice of our current welfare system and the appropriateness of the enormously expensive renewal of Trident must be considered properly.

Finally, Labour needs to commit unequivocally to the most effective management of the public sector, including efficient use of resources. Over the decades many techniques have been tried to promote such efficiency, including wholesale privatization, ‘outsourcing’ and the private finance initiative. Labour has found this whole debate very difficult indeed, partly because of its relationship with public sector trade unions, whose members are paid by taxpayers’ contributions. However, the party needs to make itself the champion of the most efficient use of public resources. It is no doubt a hard challenge. But Labour must take tax out of the ‘Too Difficult Box’ and return it to the core of our national political debate.

Charles Clarke is a former home secretary and editor of The ‘Too Difficult’ Box: The Big Issues Politicians Can’t Crack

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 www.fabians.org.uk/the-future-of-tax