Labour need a Personal Tax Road Map

This tax year the highest earning 5,000 people in the United Kingdom will pay around £9bn of income tax. That amounts to around 5% of the total income tax paid. And it is Labour’s intention, should it be in Government, that this burden on the wealthiest shall increase further.

The Party’s manifesto includes measures to raise the so-called additional rate of tax from 45% to 50%; to withdraw the remittance basis of taxation from non-doms; and to tax as income rather than capital performance bonuses – described as ‘carried interest’ – earned by certain types of fund manager. Whether these measures generate additional tax revenue – or mere column inches – will depend upon whether it can persuade those 5,000 people to stay, or cause others to join or replace them.

Labour is absolutely right to believe the wealthy will continue to want to live in the United Kingdom. It is – and will remain – politically stable, an attractive place to invest, with an educational system in international demand, and an unrivalled cultural mix. This has long been – and should remain – our real offer to the internationally mobile.

We’ve never sought to go head-to-head on tax with Monaco, or Switzerland, or Belize. We don’t need to compete with the Poundstore nations. Our offer is about quality of life – but that doesn’t mean price can be ignored. It can tip to New York those who might otherwise move to London. It could – critically, if handled poorly – precipitate the departure of those who might otherwise stay. To pretend otherwise is hubris.

How should any new Labour Government face up to that challenge? How can it continue to capitalise on the attractiveness of London to increase the ranks of the wealthy who choose to make the United Kingdom their home?

Roll back the clock to 2010. The then new Government faced challenges of its own: the need to encourage investment – foreign and domestic – in a cold fiscal climate. It did this through a Corporate Tax Road Map in which it set out its stall to the business community: “Come here, invest here,” was the pitch, “and we will deliver to you a stable fiscal mix for the life of the Coalition.”

As a piece of advocacy, it delivered in spades. If you ask – as I have had occasion to do – tax professionals, tax directors, the business community what single tax decision was the best the Coalition made, agreement coalesces around the road map. Businesses like low rates of corporation tax – although a recent KPMG survey revealed they rank a distant third to low interest rates and a flexible labour market as key to our recovery – but what they love is certainty. And that’s what the Road Map provided.

The 2010 challenges are not so very different from those an incoming Labour administration would face: the need to make a case for the wealthy to call London home. A Personal Tax Road Map could, it seems to me, do that job.

Such would undoubtedly be a more ambitious exercise than its Corporate tax equivalent. The Coalition eschewed suggestions it should attempt a Road Map for personal taxes. This is in good part because personal taxes make up a much larger part of the overall tax mix: individual income taxes – including National Insurance Contributions – contribute on their own around half of our overall tax take. Prudent Government does not lightly tie its hands to such important fiscal levers.

But then Coalition policy was to cut the tax burden on the wealthiest – the blended income tax rate paid by the highest earning 5,000 has fallen from just over 43% in 2012-13 to just over 39% in 2014-15. And a new Conservative government has promised that rate would fall more should they be returned to power. It’s not to the wealthy the Conservatives need to make their case.

Labour, on the other hand, needs that piece of advocacy. It needs to renew the promise unambiguously made by Ed Balls not to raise the top rate beyond 50%. It needs to reassure global employers that the replacement for the jettisoned non-dom regime will be shot through with considerations of practicality and yield. That it will be a Government that recognises that for the fruits of success to be shared fairly you first have to grow them. The present Shadow Cabinet absolutely understands this – but it still needs to make the case.