One Nation Taxation

November 13, 2012 11:15 am

Our relationship with tax has changed. For decades tax was simply the means of paying for the spending that growth permitted within our economy. Labour or Conservative, but most especially under Labour, current tax income pretty much balanced current tax spending over time and government borrowing was used to pay for investment in our schools, hospitals and other infrastructure. That was, pretty much, the political consensus on tax whatever the appearance might have been.

The following graph of current income and spending since 1997 shows this:

 

Source: HM Treasury budget data 1998 – 2012

As the graph shows, until 2007 Labour ran a surplus on tax income over current government spending. More importantly though, the graph shows that when the crash happened it was not because of overspending, but because tax income collapsed. That happened because the banks collapsed, and with them activity in the economy at large also collapsed, so less tax was paid. That’s why we got a recession.

But that is also why our relationship with tax has changed: the tax equation that once pretty much balanced doesn’t anymore and there’s not a person in the UK who cannot have noticed the impact. Whether directly or indirectly it’s a lack of tax revenue that is at the heart of much of our political debate now, including that on austerity.

That’s also why tax is a One Nation issue. What the graph shows is something that’s undeniable, which is that the government now has a deficit. No one denies that this is an issue that must be addressed, but how it is addressed is now creating real difference on the subject of tax. That in turn highlights different attitudes towards this country and its people from different political parties.

The Conservatives have decided that the deficit must largely be cleared by austerity, which impacts the poorest hardest. Those tax rises they have imposed have also hit the poorest hardest: the increase in VAT to 20% is the surest sign of this. At the very same time the Conservatives have cut income tax for the richest in the UK from 50% to 45% and cut the tax rates on large companies (but not small ones) by more than 20% whilst they have also made it much easier for companies to shift their profits to tax havens.

The results have been all too obvious. At least in part because of the government’s tax policies the gap between rich and poor in the UK, whether measured in terms of income or wealth, has been getting much bigger whilst stories about corporate tax scandals are now an almost daily occurrence.

This need not be the case. A party committed to One Nation, working together to build widespread prosperity, would not say it has to cut taxes for the rich because it could not beat their tax abuse; it would set out as Labour did to close the loopholes in our laws to make sure everyone pays what is expected of them.

Likewise, a party committed to One Nation would not say to multinational companies, as the Conservatives have done, that we will from now one leave all the profits they earn outside the UK out of tax and then at the same time open the door for them to shift their profits to tax havens. It would, instead, as Labour did defend our right to tax all UK profits here, in this country.

And nor would Labour have increased VAT, hitting the poorest, and even those who don’t pay income tax, especially hard. It has said it would instead, as Labour did in 2008, have reduced VAT if recession had returned, as happened in 2011.

There is good reason for all this on Labour’s part. A One Nation tax policy recognises that tax is not just about raising money for the government, as important as that is. It is also about making sure that tax is paid by those who can best afford to pay it, which is inevitably the best off in society. And a One Nation tax policy also require that those companies who are making the most in this country should be made to pay the government for that privilege rather than paying lawyers and accountants to find ways to get round tax law, so avoiding their obligations to society as well as their tax bill.

All that’s because a One Nation tax policy is built on three ideas.

The first is that the law is upheld so that everyone, whatever their wealth, pays the right amount of tax in the right place (which means the UK) at the right time if the law requires it.

Second, it means that those with the greatest capacity to pay must pay most, not just absolutely but as a proportion of their income or wealth.

And last, tax law must reflect social policy so that if Labour thinks that markets can sometimes deliver injustice, including too little reward for some and excess reward for others, then it must be willing to change that situation to create a fairer, more equal but also more vibrant economy with opportunity for all by use of tax policy.

Tax can do that for One Nation, working together. Nothing else can do it as well. Which is why fair tax has to be at the heart of Labour’s policy for a One Nation future.

Richard Murphy is an adviser to the Tax Justice Network and the TUC on taxation and economic issues.

This piece forms part of Jon Cruddas’s Guest Edit of LabourList

  • Dave Postles

    That’s more like it. Don’t be afraid to address the issue of tax. BTW, where is Osborne’s GAAR?

  • PaulHalsall

    But, the absolute wealth in our society still keeps rising. The problem is that the wealth produced by technological and productivity enhancements has more or less all been captured by a small elite – those who benefit from asset price rises.

    A One Nation approach would thus focus on *national wealth* as was as national income. We need to start taxing wealth (even the Lib Dems with their Mansion tax idea recognise this). Labour should call for a both land and asset taxes as exist in Denmark and the Netherlands. Income is too easy to hide. Some assets can be hidden of course, but taxing assets would open up whole new streams of income.

    I mean, this is what “One Nation” is about, no?

    • charles.ward

      “… land and asset taxes as exist in Denmark and the Netherlands”.

      Don’t forget France.

  • http://www.facebook.com/colin.adkins.52 Colin Adkins

    Excellent piece.
    Maybe I am being a simpleton but I never understand why the rich are not just simply taxed at source and then have to ‘re-balance’ at the end of the year.
    Amongst one of the reasons for supporting reducing the 50p tax rate to 45p was that people simply re-assigned the year in which they earnt the money. People on PAYE do not have that luxury.
    Or the issue of people at the BBC being paid via a company and therby reducing their effective tax rate. If I was to organise the employees of a company or orgainsation to have their collective gross salaries paid via a company which is then paid back to them at a lower rate of tax how long do you think that avoidance measure would last?
    Or the comments of Amazon et al at the select committee claiming what they are doing is not illegal. They speaking to a committee of Parliament which could make it so – so why doesn’t law change happen?
    I also believe that people who use avoidance schemes which are demonstrated to be illegal should be subject to additional penalties as well as being made to pay the correct tas in order to disincentivise such behaviour.

    • http://twitter.com/TheThoughtGang TheThoughtGang

      “Or the comments of Amazon et al at the select committee claiming what they are doing is not illegal. They speaking to a committee of Parliament which could make it so – so why doesn’t law change happen?”
      The Single European Market. Those companies are all taking advantage of favourable tax policies in certain states (e.g. royalties in the Netherlands, low corporation tax in Ireland/Lux) whilst being able to trade across the EU. That’s what the whole EU thing is designed for. The UK government can’t do a lot about it… it’s the EU or the governments in the lower-tax countries that need to make change happen.

    • geedee0520

      A few points:
      – People on PAYE pay tax on the basis of the previous year’s earnings.
      – paying via a company was recommended by Murphy in 2003 so it must be OK http://www.guardian.co.uk/money/2003/feb/16/tax.observercashsection
      – Amazon are behaving as the EU single market wishes them to (indeed, insists) i.e. selling into the EU from one country within it without restriction.
      – Hodge needs to answer questions about her family company’s tax affairs.
      – the concept of MPs lecturing people on morality is beyond irony.

  • http://pulse.yahoo.com/_ZPXYLRVP4XOIGGDJWAL6HUO7U4 David

    I’m sorry but this is attempted historical re-writing at its worst. Blaming a sudden mismatch of income and expenditure on the “sudden” appearance of recession appears to attempt to absolve government of the responsibility of making reasonable risk-assessments and building an appropriate buffers to enable anti-cyclical policy in the event of any downturn: this was the basis of the “Golden Rule”, after all. Recessions happen regularly, typically every 10 years or so, and while this current one is the worst for 70 years or so (with the implication that a “reasonable” buffer might have been insufficient to avoid the need for some additional fiscal adjustments of tax raising or spending restriction), this cannot detract from the point that there was a grossly inadequate buffer in place when it happened, and since it happened on Gordon Brown’s watch, responsibility must be taken for this.

    After all, do we remember the downturn in 2001, associated with 9/11 and the dot-com bubble collapse? Probably not, because (as the graph shows) there was a ready-made buffer in place resulting from the fiscal policies already in place (sensibly stuck to by the incoming New Labour administration) which allowed the state to move counter-cyclically and provide stimulus to the economy when the income growth tailed off. The challenge for any sensible administration is therefore to find the right point to re-build that buffer, which demonstrably failed to happen in the heady years 2004-7 as should have happened (and under the “original” formulation of the Golden Rule it would have…).

    What I’m really saying is this: we cannot sail as close as possible to the wind, and then cast around for something to burn as fuel for the engine every time we find ourselves sailing into a headwind.

    Now all of this does not mean a discussion about re-balancing the economy to grow the tax-raising power of the state in exchange for greater services is not legitimate: merely that using the excuse of the recession to do so without an understanding of the need for a buffer is irresponsible.

    After all, what happens once every loophole is successfully closed, and the rich successfully taxed to the fullest extent, and another (global) recession hits

    To me, this is a core discussion One Nation Labour needs to have.

  • http://pulse.yahoo.com/_ZPXYLRVP4XOIGGDJWAL6HUO7U4 David

    I’m sorry but this is attempted historical re-writing at its worst. Blaming a sudden mismatch of income and expenditure on the “sudden” appearance of recession appears to attempt to absolve government of the responsibility of making reasonable risk-assessments and building an appropriate buffers to enable anti-cyclical policy in the event of any downturn: this was the basis of the “Golden Rule”, after all. Recessions happen regularly, typically every 10 years or so, and while this current one is the worst for 70 years or so (with the implication that a “reasonable” buffer might have been insufficient to avoid the need for some additional fiscal adjustments of tax raising or spending restriction), this cannot detract from the point that there was a grossly inadequate buffer in place when it happened, and since it happened on Gordon Brown’s watch, responsibility must be taken for this.

    After all, do we remember the downturn in 2001, associated with 9/11 and the dot-com bubble collapse? Probably not, because (as the graph shows) there was a ready-made buffer in place resulting from the fiscal policies already in place (sensibly stuck to by the incoming New Labour administration) which allowed the state to move counter-cyclically and provide stimulus to the economy when the income growth tailed off. The challenge for any sensible administration is therefore to find the right point to re-build that buffer, which demonstrably failed to happen in the heady years 2004-7 as should have happened (and under the “original” formulation of the Golden Rule it would have…).

    What I’m really saying is this: we cannot sail as close as possible to the wind, and then cast around for something to burn as fuel for the engine every time we find ourselves sailing into a headwind.

    Now all of this does not mean a discussion about re-balancing the economy to grow the tax-raising power of the state in exchange for greater services is not legitimate: merely that using the excuse of the recession to do so without an understanding of the need for a buffer is irresponsible.

    After all, what happens once every loophole is successfully closed, and the rich successfully taxed to the fullest extent, and another (global) recession hits

    To me, this is a core discussion One Nation Labour needs to have.

    • Dave Postles

      You mean like the critical path analysis and risk-assessment undertaken by the banks and financial services sector worldwide? Many of us have other ideas about where the dissimulation, malversation, manipulation, and lack of foresight resided, and it was less with governments. What contingency plans did the banks have for revelations of mis-selling PPI and derivatives, money-laundering, manipulation of LIBOR and whatever else in which they were involved? I was a leech on society working in the public sector, but I’m sure as hell pleased that I never got involved in the speculative element of financial services. The time for remorse is still not over.

      • http://pulse.yahoo.com/_ZPXYLRVP4XOIGGDJWAL6HUO7U4 David

        Ah the old: well [X] didn’t do a better job, so I can excuse [Y].

        If the whole world thought like that, we’d only ever head downwards.

        • Dave Postles

          Not at all: it’s a matter of causation. The financial services sector was responsible for the economic collapse and has continued in its devious ways regardless.

          • http://pulse.yahoo.com/_ZPXYLRVP4XOIGGDJWAL6HUO7U4 David

            Are you sure that Governments and regulators both here and in the US played absolutely no part in it? Do you believe that house prices and the other asset bubbles were justified in 2007?

          • Dave Postles

            No: short and simple. The regulators did not cause or compel the banks and insurance companies (e.g. AIG) to engage in sub-prime; the banks and insurance companies did it of their own volition. Now they are foreclosing throughout the world and we read of suicides in Spain because of foreclosures. At least in the US, rats like BoA etc have been prevented from some of their most extreme foreclosures, although enough damage has already been done.

          • charles.ward

            “The regulators did not cause or compel the banks and insurance companies (e.g. AIG) to engage in sub-prime”

            What about the Community Reinvestment Act.

    • PeterBarnard

      I’m not so sure on this, David.
      Although the margin of receipts vs expenditure may have been somewhat “thin” in the years preceding the 2008/2009 recession, higher margins in the fiscal years 1988-89, 1989-90 and 1990-91 did not prevent the necessity for the government to borrow to finance current expenditure (for the first time in HM Treasury records beginning in 1967-68) between 1992-93 and 1996-97 (inclusive). Such was the legacy of Conservative “sound public finances” and Thatcher’s housewife’s economics : even in the recessions in the mid-1970s and early 1980s, government current receipts always exceeded current expenditures.

      To put things in a historical perspective, it may have been more informative to show the chart extending all the way back to 1967-68.

      As I have mentioned before, there has been a lot of deliberate, ie politically motivated, hysteria generated over the state of the public finances.

  • Daniel Speight

    It’s time that the Gini coefficient on income equality should play a leading role in our economic policies. Never again must a Labour government preside over a widening of income between the richest and the poorest. Taxation has a part to play in making this a reality, just as it did in the post-war years.

  • http://twitter.com/PeterKenyon Peter Kenyon

    Isn’t there an international/global dimension to taxation policy as well?

  • http://twitter.com/TheThoughtGang TheThoughtGang

    We had a borrowing-fuelled boom. That means that we (as citizens, not the government) were spending more than our income, and all of that spending wound it’s way into the tax system. If the economic activity which led to the banking crash was illusory, then so was the tax revenue that came with it. The slowdown/recession which has followed is a correction. It’s disingenuous to attribute the fall in tax revenue to the banking crisis, unless one also gives credit to the banks for funding the boom which raised tax revenues to that level in the first place.
    If one desires tax revenue in line with the pre-crash trend, then that’s something to be argued for. However, don’t pretend that our real economic activity ever truly supported that level of tax income. We just had the government taking their slice of the money that (everyone now agrees) the banks should not have been lending.

  • Dave Postles

    Yes, three cheers for Margaret Hodge and the PAC.

  • David B

    Tax policy raises a number of issues. Does this mean we will change internationally accepted accounting policies, and what will we do if other countries do the same to us?

    A key element of the campaign against the reduction of the top rate of tax is that a reduction in the tax rate will not result in an increase in revenue. Yet here we are discussing how companies manage tax by using accounting rules. Therefore if companies can manage tax so can individuals. Surely it is better to reduce tax rates therefore reducing the need for tax management rather than entering an arms race with tax payers and esculating the cost of administration of the tax system.

    Finally a government needs to minimise the effect of revenue raising so that employment is maximised. Using the tax system to micro manage the economy is doomed to create legions of winers and losers. That is not a one nation policy

  • jaime taurosangastre candelas

    So what does the data reveal? Apart from a slightly questionable chosen start point of 1997, there is no mention of inheriting, agreeing and maintaining Majorite-spending plans (income in excess of planned expenditure for 3 years), but then a total failure to adhere to even the basic tenets of Keynesian economics, which Labour pretends to admire except when it comes to wasting money on buying votes with welfare.

  • http://www.fcablog.org.uk Christie Malry

    Where do you get your data from? Because HM Treasury statistics (clearly show current deficits in every year since 2005. So either you’ve picked your data very selectively, or you’ve massaged them in some improper way in order to derive the conclusion you want. Which is it? Either way, because you start with the wrong input data, you end up with an erroneous conclusion.

  • Speedfriend

    What the author fails to recognise is that from around 2001 until the financial crisis, almost all the GDP growth came either from government spending or from sectors related to financial services, construction and real estate. Almost nothing came from ‘real economy’ sectors. With changes to banking regulation and inflation targeting, Gordon Brown allowed market interest rates to get too low and unleashed a bubble in the UK. This had the effect that most of our much vaunted gdp growth was illusionary and so were the tax revenues that came with it. In the mistaken belief that boom and bust had been eliminated, he proceeded to spend the additional tax revenues and borrow some more. Instead he should have recognised we were enjoying bubble tax revenues and kept spending under control, ion which case we would be able to boost it now.

    The simple fact is that the UK was headed for disaster regardless of the global financial crisis, that was just the catalyst that pushed us over the edge. Allowing a situation to develop where mortgages were available at base rate, at 10x earnings, for 115% loan to value and with no checking of income is a recipe for disaster. All this explains why we had a much worse crisis than 95% of the other countries in the world.

    While I agree with a lot of what the author says, to say that spending wasn’t an issue is laughable.

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