Tax reform is essential, so make it a virtue

An incoming Labour Government will face fiscal challenges unknown for generations. While the instinct to run a mile from wholesale tax reform there is little doubt that it is long overdue and in the long term unavoidable. John Howarth argues that Labour must learn to think like a taxpayer.

Among Labour’s Shadow Cabinet, who are still known a great deal better in Labour Party circles than among the electorate, Bridget Phillipson has a reputation for thinking before she speaks. As Shadow Chief Secretary to the Treasury she needs to.

Speaking last week to a ‘Labour to Win’ event, Ms Phillipson said:

“We need to be alive to the concerns people have about tax and the economy … It’s no good having the correct view on everything if no-one trusts you to put it into practice. That means we need to be disciplined about the spending promises we make now – both about the response to the pandemic and about the next Labour government. The government spends huge amounts of money, but it doesn’t spend it all wisely and it doesn’t spend it all well.”

Labour members and policy thinkers need to listen carefully to Bridget Phillipson. A Party which trails its main opponent on leadership and economic credibility will not win an election. The catastrophic incompetence of the Johnson administration and the calm, forensic approach of Keir Starmer has gone a long way to restoring a monumental deficit on leadership but, unsurprisingly at this early stage, Labour continues to trail on economic competence.

However the economic challenges facing a still hypothetical incoming Labour Government in 2024 or thereabouts would appear monumental. Lurking in a distinctly unglamorous corner but affecting just about everything else is taxation policy. However else Labour may change it is unlikely to move from the social democratic desire to put resources into the public services. Capital spend on infrastructure can, of course, be financed through legitimate borrowing, but it is revenue expenditure for which the public sector cries out and that much be financed, one way or another, through taxation. The message, that commitments in a post-covid, economy must be plausible, may yet prove the easiest notion to sell to both Labour’s membership and Labour’s base.

That dilemma, roughly summed up by the question; ‘from where is the money going to come?’, is made more complex by a uncomfortable fact that successive governments have chosen to ignore or exacerbate: the UK’s tax base is shrinking. Some of the changes to the tax base are direct consequences of Government policy, others are structural. Together they present a dilemma that it will be increasingly difficult to ignore in an economy battered by successive events.

To summarise the dilemma limiting the room for manoeuvre of a Labour Treasury:

  • There are fewer people paying income taxes – in modern times the largest stream of revenue.
  • Despite the rhetoric, a higher proportion of income tax revenue comes for the highest earners
  • The corporate tax base is declining
  • Oil is not, and will not again be, the source it once was
  • Duties are declining with the behavioural change they seek to effect
  • The pattern of tax incentives and disincentives long since stopped making sense
  • Business rates are a persistent boil yet to be lanced, while council tax remains a blunt instrument
  • The population is aging and living longer creating more demand for health and social care
  • And of course, there is a Brexit effect – when firms move out of the UK, so do their tax payments

That’s just a limited snapshot of the problems that are not going away any time soon. The response of Governments has been to muddle through; to see the implications of these largely structural changes as difficulties as future problems. That is all very well on the back of a growing economy where receipts from taxes on consumption such as VAT rise, increasing activity brings in duties and ad-hoc consumption taxes on such things as air travel and insurance premiums to fill gaps. In a post-covid, post-Brexit world those old certainties are no longer with us and if a Government seeks to address the deficiencies in both the funding and delivery of public services addressing the deficiencies of the tax base cannot be ducked for long, the future is here.

How might Labour approach the problem?

It’s a little early in the electoral cycle to be making announcements on anything but the most immediate necessities, but it’s high time Labour start some serious thinking.

As governments have attempted to plug gaps in revenue with pasty taxes, caravan levies and even one or two measure that made it to the statute books they have created a perverse range on incentives and disincentives that make no sense and a coherent whole. Alongside this illogical mish-mash governments have sought to dodge the bullets on direct taxation and have created a series of contradictions. The distinction between national insurance and income tax alone is the legacy of different times while a series of arbitrary, perverse and, in a digital world, entirely unnecessary rate thresholds have created a system anything but transparent. Worse, however, in a world where ‘self-employment’ is not so much an entrepreneurial choice but an enforced status ever more convenient for some forms of business, the basis of self-employment taxation is hopelessly outdated. Business taxation that results in a corner shop paying more tax than a major multinational is not working as intended by anyone. These are just a few examples among many that drive the perception of a shambolic, inexplicable and just plain unfair tax regime.

Tax has never been comfortable territory Labour. To address the issue successfully Labour needs to learn to think like a taxpayer. That means understanding the notion that even those who accept the rational argument for progressive taxation don’t actually enjoy paying tax. It means dropping the easy and lazy notions that ‘closing loopholes’, ‘cracking down on tax dodgers’ and ‘cutting out waste’ will ever deliver what’s necessary. Neither will it be good enough to rely on notions such as ‘taxing the rich’ or ‘making companies pay more’. That’s not to say they shouldn’t, but what matters here is what works to fund the programme of government and that means understanding what works; taking a look at the empirical evidence at what policies result in redistribution rather than simply play to the gallery.

The serious and consistent revenue streams needed to deliver effective public services and to re-boot the bargain of ‘what you get’ and ‘what you contribute’ at every level of the system necessitate a comprehensive review of tax policy. None of this stuff is easy, but the lesson of Labour in Government has always been where difficult but intractable problems have been left to the other lot their solutions have proved problematic and painful for those Labour seeks to protect most and often also for those Labour should be seeking to enable.

The sureal world of Brexit and covid, where a Conservative government throws money in bucketloads at problems seemingly without a care, can lead Labour to conclude that ‘from where will the money come?’ no longer needs an answer. Perhaps not for now, but it certainly will be asked from 2023 onward and without an answer there is no credible alternative government.

The underlying principles of a modernised tax framework need not be new: fairness, transparency, the contributory principle, redistribution and reward set alongside the requirements of climate action and digital transformation. Labour may as well make the unavoidable need for taxation reform a virtue.