Brown’s Decade: Was it taxing?

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Gordon Brown's record of holding office as the UK's Chancellor of the Exchequer for a decade is an extraordinary political achievement. In taxation terms such claims are inappropriate. In Gordon Brown's ten years in charge of UK taxation little has changed. Proportionately over the period as a whole he raised the same levels of tax as his Tory predecessors did in the previous decade. The revenues he raised have not change the structure of the UK economy or society. Perhaps more remarkably for a Labour Chancellor, the UK's commitment to supporting tax havens survived under his tenure to such extent that at the close of his time in office the UK has become the most populous tax haven in the world according to an IMF study. It's enough for some to say that his contribution has been to make the UK the billionaire's first choice of residence.

Few would have predicted this. Brown came to office dedicated to eliminating Tory sleaze. Labour party political broadcasts from the mid-1990s show Stephen Fry and Hugh Laurie lampooning tax abuse by large corporates, the wealthy and those offshore. In 1993 Brown wrote 'The Chancellor should end the tax abuses which reach to the heart of our public finances by indulging the super rich at the expense of all the rest of us'[i]. He repeated that pledge in a Labour Party conference speech where he said 'A Labour Chancellor will not permit tax reliefs to millionaires in offshore tax havens.'[ii] And he was dedicated to tackling tax avoidance and providing certainty in taxation. As he wrote in opposition "The taxpayer is entitled to take advantage of the law to minimise his or her tax bill" followed by the statement "as a matter of principle we believe that the citizen is entitled to know where he or she stands before the tax law." He concluded "It is the complexity of the present system that has encouraged the growth of a flourishing avoidance industry."[iii]

Ten years on the situation looks different. Gordon Brown has succeeded in raising tax when many doubted his ability to do so. He has balanced his 'golden rules'. Time and again he has confounded the City and economic pundits by finding tax revenues to balance his books. And he has done this whilst apparently cutting tax rates. The corporation tax rate was 33% when he came to power. It's been 30% throughout much of his tenure. Soon it will be 28%. The top rate of income tax might have been constant at 40% throughout his decade in office but the basic rate has fallen from 23% to what will, during his likely tenure as Prime Minister be 20%. And capital gains tax has fallen from what was typically 40% to rates as low as 10%. Despite his tax rate reductions he's succeeded in raising substantial amounts of tax. In absolute terms that sum amounted to £316 billion in 1997-98, increasing to over £500 billion in the last year[iv]. Surprisingly though the ratio of tax raised to GDP over his whole ten years of office is at 38.56% is identical to the second decimal place to that for the Tories in the preceding ten years. Prudence was ever a part of Brown's tax strategy. (NB: Based on Institute for Fiscal Studies data and HM Treasury data; calculations and extrapolations the author's own)

And yet at the end of his time in office Gordon Brown is the Chancellor of the most populous tax haven in the world according to an IMF study. The passing of the Income Tax Act 2007 has made the UK tax legislation the bulkiest in the world, the volume of legislation having doubled since Brown came to power in 1997. An estimate by the Tax Justice Network suggested that at least 40% of all tax legislation from 2004 to 2006 was directly related to tax avoidance, suggesting the issue has far from gone away. And there are frequent suggestions that Britain is now the tax haven of choice for the world's mega-rich, only three of the top ten in the Sunday Times rich list for 2007 having actually been born in the UK whilst those featured in that list have seen their wealth increase by an average of 260% over the last ten years in contrast with an average 120% wealth increase for the population as a whole.

The dichotomy is obvious. Brown on the one hand is the prudent, careful Chancellor who has kept a tighter reign on government finances than probably any Chancellor in living memory. On the other the Chancellor is reviled on the left for running 'tax haven Britain' and on the right for being the greatest meddler ever in UK tax affairs.

The answer is in fact as obvious. Brown has not had a tax strategy for the UK. He has had two. There has been a domestic strategy and an international one, and the policies used for each have been fundamentally different. It is the domestic strategy to which Brown and the Treasury wish to draw attention: it is the international strategy that has attracted the attention of the wealthy.

The domestic strategy has been consistent. Brown has been unambiguously political in pursuing his agenda whilst seeking to secure the revenues he needed. The early tax cuts were designed with this objective in mind. They won political favour. They were matched, and have been matched time and again by moves to raise revenue elsewhere. That is a process that has not, despite the name attributed to it been one of stealth taxation: it's been too explicit for any such attribution. So in early budgets there were the notorious moves to abolish advance corporation tax, which simultaneously prevented tax credit repayments to pension funds. Single windfall taxes on previously privatised utilities raised about £5 billion. Innovative financing, such as the sale of digital phone licences raised much more. Moves to raise council tax have been increasingly regressive. Later moves involved a reversal of early policy on cutting national insurance: it's now at rates well above those he inherited. Additional national insurance charges on benefits in kind have hit employers, whilst the self employed have seen politically popular moves to encourage them to incorporate their businesses, followed by expressions of surprise that they took opportunity to do so, and subsequent reversal of the policy.

And all the while the tax planning industry sought to mitigate tax due by those whom they serve, who are clients that can afford to pay their bills. A prevailing theme of Brown's period in office has been his attempt to beat this industry. He has scored hits despite the claim of one accountant in 2005 that "No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken." In December 2004 he effectively closed all tax avoidance schemes that had become a feature of City bonus payments as more and more esoteric planning arrangements involving payments in such things as fine wines, carpets, currency futures and platinum sponge. Despite claims that this law was retrospective it has survived challenge. The national insurance and tax avoidance industry that featured so heavily in this sector has had to look elsewhere for business.

This was matched by the introduction of rules requiring the disclosure of tax avoidance schemes within days of their being marketed. The scheme has worked despite continuing abuse from what the Revenue estimates to be less than one hundred 'spivvy' tax planning boutiques. As soon as it was introduced the Revenue learned of large numbers of schemes that would have otherwise been unknown to them for years hence. The scheme was updated and extended in 2006. The number of disclosures has fallen. It's generally assumed that this means that the level of abusive planning, which rode the crest of a wave in the heady dot.com days and arrived in the UK from the USA, has fallen. The measures to contain it, which represent so much of Brown's legislative legacy may lie unused on the statute book for decades to come as a result. This strategy has worked, even if it's been the cause of considerable complaint. Falling tax rates have been matched by sustained revenue for HM Treasury.

The profile of the tax paid has changed however. Between 2001 and 2007 (for which period comparable statistics are available) the proportion of income tax as a part of total tax revenue fell slightly, national insurance contributed more than 1% more of the total, the VAT contribution fell by the same amount (almost certainly as a result of fraud) whilst corporation tax revenues rose by just over 1% to a little over 11% of total tax revenues. This reflects the buoyancy of the economy in that period. As the proportion of profits in GDP has risen during Brown's tenure the actual proportion of corporation tax paid as part of GDP was constant over the period. This can only be explained by a fall in the effective rate of corporation tax actually paid on profits. Capital gains tax receipts showed the same constancy.

So did all the tinkering achieve anything? Has there been any redistribution, for example, as a result of there being a Labour Chancellor? It is possible that the wealthiest 5% in society increased the tax they paid as a proportion of the total by about 1% to 24.3% over the period for which data is available whilst the bottom 25% of income earners might have seen their share of tax paid fall by 0.6% to 8.3%. Tax credits help explain the benefit fore those on the lower end of the scale. At the upper end the explanation is obvious: those people have become better off. The Gini coefficient of inequality has remained static because of the minimum wage but the Thatcher legacy of increased inequality has not been reversed. This is unsurprising since the UK tax system remains regressive overall, with the lowest decile of income earners suffering the overall highest tax rate, whilst the highest decile having the second lowest overall rate despite their disproportionately large earnings. Nothing Brown has done has changed that which suggests that for all his effort, Gordon Brown has maintained the status quo in pursuing his domestic tax strategy. Against the challenge of the combined tax avoidance industries he's collected taxes consistently from the same people over time.

Remarkably, and more surprisingly, consistency has also been his parallel achievement with his international tax strategy. This is remarkable because whilst the domestic environment was, to significant degree one over which he had choice, the international tax arena has changed enormously over the last decade. In 1997 the OECD had not launched its attack on harmful tax competition aimed at tax havens. The EU had not launched its similar attack in the form of the Code of Conduct on Business Taxation (preside over throughout its history by Dawn Primarolo as a UK Treasury Minister). The EU Savings Directive, designed to limit offshore tax abuse on savings income was but a twinkle in the eye. And the disasters that hit the US tax planning industry which resulted in the demise of Andersens and the trial of KPMG partners were unimagined. So too was significant EU cooperation on tax.

Throughout this period Brown has stood remarkably firm. As much as he has been the tax avoider's foe in the UK he has been their friend offshore, which in this case means anywhere but the UK. Lip service has, of course, been paid to all these initiatives, but on occasion little more than that. The EU Code of Conduct on Business Taxation is an example. The Code was designed to eliminate discriminatory tax regimes doing two things. The first was those practices designed to induce business to a location but where the process involved was considered unacceptable by international standards. The second part was more significant. This was designed to prevent the erection of 'ring fences' where a special tax regime was available for companies owned by people not resident in that company's country of incorporation when similar benefits were not available to locally owned corporations. The particular target of this policy was tax havens where it was normal for locally owned companies to be taxed (at 20%, for example, in Jersey, Guernsey and the Isle of Man) but for non-resident owned companies in those places to be completely untaxed. The Code was emphatic. These arrangements had to go.

The UK did all it could to delay implementation of this Code in the offshore world, helped no doubt by Dawn Primarolo's insistence on behalf of the UK Treasury that the Code related solely to business tax and would never be extended to personal tax. As such the UK's tax havens were encouraged to shift their 'ring fence' to the personal tax domain. All in varying degrees have done just that, thus maintaining the status quo by passing new laws which have been discussed in advance with the UK Treasury and have been deemed acceptable by the UK's Department for Constitutional Affairs, as is required in these places.

Worse, the UK has positively assisted the Isle of Man to introduce a 0% corporation tax rate to get round the Code's requirements, and to put a ceiling on resulting personal tax bills by providing direct and indirect subsidies to the Isle of Man treasury of not less than £270 million a year, which is almost half of its annual income. This direct subsidy from the UK has enabled it to lead the 'race to the bottom' in offshore tax rates. Gordon Brown cannot be unaware of this.

His reason for allowing these things to happen has been twofold. First, it is vital to the UK that the EU Code of Conduct is restricted to business taxation. If it were extended to personal taxation then the UK's domicile rules would undoubtedly fall foul of that Code. These are a ring fence that provides a benefit to people whose national commitment is other than to the UK unavailable to those whose national origin is in the UK. This has continued despite, as has recently been suggested, such discrimination possibly being illegal under the UK's Race Relations Act since 2003. Second, the domicile rules are of little use to the UK if there aren't convenient nearby offshore locations in which the wealth of those persons who wish to utilise them can be recorded as being located whilst they live virtually tax free in London. As such for Brown's policy to work the havens had to stay, and New Labour's promise to reform their activities, made when they came into office have been quietly forgotten.

In combination these factors suggest that the retention of the domicile laws or a commitment to offshore is not motivated by a belief that the VAT that these wealthy persons pay in the UK justifies the loopholes they abuse. They are instead symptomatic of the UK having a fundamental economic problem that can only by plugged by using tax competition to attract cash to the UK. This problem is a legacy of the Thatcher years. First the UK has given up on many of its former industries, including manufacturing. As a result it runs a perpetual trade deficit. This has to be financed and financial services do that. Second, despite the trade and current account deficits UK politicians want a strong independent currency to keep inflation at bay. Large inflows of external savings keep sterling buoyant, but it only stays on a tax free basis.

The dilemma this has created explains the UK's quite deliberate obstruction to the second major EU initiative on tax, the EU Savings Directive. This was introduced to tackle the problem of tax evasion by those who seek to place their funds outside their country of residence with the intention of not declaring the income for tax in the place where they live. This is, obviously, most effective when the state in which the funds are relocated does not tax them when the interest is paid. Europe's desire was twofold. First it was to ensure that all funds held (bar those of companies) could be attributed to the individuals who might own them, even if managed through a trust arrangement. Second, they hoped to arrange for a withholding tax when interest was paid and an information exchange arrangement between the countries in which the funds were located and the country in which the owner resided to make sure all such investment income was subjected to appropriate tax, split between the states involved. The UK undermined this process in two ways. Firstly it led the opposition to tax withholding. This is because London has been a tax haven for the Eurodollar market since at least 1958, and that market is dependent upon interest not being deducted at source on the payments made. Second, it allowed the Directive to be negotiated with the European Commission believing that it would require information exchange on funds held in trusts. Trust law is only found in Common Law countries and as such is mainly a matter for UK concern and expertise in Europe. Only after the Directive was signed did the UK make clear that it could not apply to trusts as drafted. This both supported the significant trust business in many UK dependent territories, and especially Jersey, and created a significant loophole for those seeking not to comply with the Directive's requirements. It will take many more years before this defect is remedied.

The result of this policy of supporting tax haven activity whilst maintaining the domicile rules and by operating as tax haven to support the over-blown presence of the City in the UK economy, has meant that the UK has attracted substantial numbers of wealthy foreigners to live in the country. In its commentary on the Blair legacy the BBC noted that 'The wealthiest Britons have become far wealthier in the past ten years, something which critics attribute to non-domicile tax concessions favouring the rich.' This policy has not been benign. Apart from the very wealthy many of those who have exploited the domicile rule have worked in the City. Their bonuses, some no doubt paid tax free offshore, have fuelled the UK housing market, both at the top end and in the buy-to-let sector. In addition their presence may have reduced opportunity for UK based professional people: the number of people claiming non-domicile status rose from about 65,000 in 2002 to 112,000 in 2005. Undoubtedly the lower effective cost of employing such people has been an effective state subsidy to the City. And the high exchange rate they have helped support has reduced Britain's ever diminishing manufacturing sector to a rump. In the meantime resentment abounds as it is clear that a dual tax system is in operation, managed on what might appear to be a discriminatory basis.

The conclusions are clear. Brown has achieved his objectives. He has raised the tax he has needed, but in doing so he has had to be tough. He would not have needed to be so tough on tax avoidance if he was not simultaneously promoting tax avoidance: the obvious folly of which is the current 'tax amnesty' for those UK tax residents who have not declared income on their offshore bank accounts; accounts on which they may well have had no tax liability if they had been living in the UK as a non-domiciled person.

The problem he leaves for his successor is that this strategy is time worn. The EU is running tired of the UK's excuses. The political capacity for taxing a majority in the UK whilst a minority are given favour appears to be running out. Like Blair Brown may be quitting his job at a good moment. Unlike Blair, Brown will retain responsibility for his legacy and will have to account for it as his premiership progresses.