Labour should champion a ‘Zero-Based Review’ of our Tax system

One of the best and bravest decisions made by the party leadership in 2013 was to commission a ‘zero-based review’ of public spending.  The commitment to a, “root and branch review of every pound the government spends”, reflects the determination of the Shadow Treasury team to plan assiduously for a tough inheritance in 2015.  The spending review affirms Ed Miliband’s willingness to make tough choices and reminds Labour voters that no element of public spending should be exempt from scrutiny.  It is sound economics, good politics and provides a meaningful riposte to critics who continue to label Labour as ‘fiscally irresponsible’.

However, public spending is only half the story.   To come armed to the 2015 General Election with a complete economic strategy, I believe the time has come for a parallel, ‘zero-based review’ of our tax system.

If I were to design a zero-based review, I would want the party to tackle two key themes:

1. How do we design a tax system that is fairer and more progressive?
2. What (if any) tax rises would Labour need to spell out at the election for 2015/6 & 2016/7?

The question of whether our current tax system is fair and progressive is the most important of all.  The health of the public finances will fluctuate over time, but our constant should be a tax system that promotes aspiration, asks for a fair contribution from those with the broadest shoulders and is progressive. The status quo does not come close.

I am not an economist by training, but a cursory look at the current system presents an alarming picture. We have VAT at 20%, an indirect tax that conclusively hits the poor harder than the more affluent. Council tax bands have not been reviewed since 1991, helping the asset rich (through no fault of their own) to further increased their advantage over the rest. Inheritance tax is an important principle to those of us on the centre-left; but the current incarnation is universally derided as a ‘voluntary tax’, with those who can’t afford professional financial advice being the most likely to pay. Finally, we have a curious consensus over income tax, whereby everyone earning between £42,000 and £149,999 are taxed at the same 40% rate.

I won’t pretend to be able to tackle the flaws of each of these taxes in a single blog, but I will offer a simple prospectus for ‘big picture’ reform.  As a Labour Party, I think our ambition should be to reduce the tax burden on lower and middle incomes (crucial to combatting the cost of living crisis), ask a little more from the top 10% and raise significantly more revenue from assets than we currently do.  That isn’t a vision for a permanently higher tax economy, but it is for a fairer and more progressive one.

That said, higher taxes in the short-term look inevitable.  As the IFS has repeatedly warned, there is a gaping hole in George Osborne’s spending plans that look set to be filled by a tax hike post the election.  Unless we are willing to countenance spending cuts deeper in 2015/6 & 2016/7 than those already prescribed by this Government, a tax rise will be needed to meet the shortfall.  Let’s be under no illusions, the Conservatives will be very happy to repeat their trick of 2010; deny the need for tax rises and then pick an indirect tax like VAT to ratchet up as soon as they are re-elected.

Labour cannot afford play the same game as the Conservatives.  We don’t need to make a decision today, but if we are 6 months out from an election and it remains apparent that a short-term tax rise will be needed, we have to be straight with the country.   Either way, it makes sense to start to running through the scenarios now, under the banner of the zero-based tax review.

Tax will forever be a topic subject to huge political risk and I’m acutely aware that the Conservatives’ would like nothing more than to repeat their 1992 ‘bombshell’ campaign in 2015.  But silence on tax is the greatest risk of all; the public deserve an honest debate and a zero-based tax review would be the perfect place to start.