For the first time ever, I think, in the history of this blog the following piece is jointly authored, in this case by me and Jolyon Maugham QC:
During June and July the Parliamentary Labour Party asked itself what had the electorate meant when it spoke on 7 May? Whilst doing so the Party did, almost without noticing, make two decisions that effectively embraced Conservative policy.
The first was on the reduction in the welfare cap to £20,000 and the imposition of a two-child limit on future tax credit claims. These related measures might save a little under £2bn per annum in the last year of this Parliament. The Labour leadership said that they should not be opposed: that was a decision which has already divided the Labour Party and likely marked Harriet Harman's last meaningful act as interim leader.
The second was the Conservatives' decision to further increase the individual tax Personal Allowance whilst at the same time cutting the rate of Corporation Tax for companies. Again it was decided that neither of these would be opposed: a decision which in the same last year of this Parliament is forecast to cost double what was saved by Labour's change of tack on tax credits and the welfare cap. Despite that these decisions attracted — in the Labour Party at least — almost no attention. But the disbelief of SNP and the Tories at the Second Reading of the Finance Bill was palpable.
Theirs is a disbelief that we share. We write as tax experts and as friends — but from different places on the political spectrum. Richard is not a Labour member but has advised the PCS, the TUC and Unite on tax issues, including the Tax Gap and is also the architect of Jeremy Corbyn's plan for People's Quantitative Easing. Jolyon is a leading tax QC who devised the Miliband Manifesto's Non-Doms policy and who is a member of the Labour Party who sits in the centre ground.
Whatever our differences we share the view that the next Labour leader must look afresh at Labour's current position on the Personal Allowance and Corporation Tax. These hugely expensive tax breaks disproportionately benefit those at the top of the income distribution and the wealthy. There is no evidence that they are politically necessary. And nor can it seriously be suggested that they further the aims of the Labour Party: indeed, looked at as a decision on how to allocate scarce resources, they are antithetical to those aims.
Troublingly, they represent just one example of the policy positions Labour has adopted on tax that do not support its moral purpose and which seem to us to result from its failure to think clearly about tax policy.
We know that the Labour Party in opposition lacks the technical resource at the disposal of a sitting government. This affects profoundly its ability to make the right interventions and develop sound policy. It also has, to our knowledge, no Parliamentarians with a detailed technical knowledge or who communicate confidently in the field. Vitally, it has no retained advisers who are expert in tax. But this has not just been a problem for the Party when in opposition: in Government the quality of its decision-making has also at times reflected a cultural insecurity. It has too often been timid when it could and should have been bold.
If you think this doesn't matter we beg to differ. As the decisions we've noted make plain, however closely the Party scrutinises the allocation of resources, if it ignores their collection it will not advance the interests of those it exists to serve. As the result of the General Election clearly demonstrates, the moral case advanced by the Party is not enough: competence too has to be proven and tax is too big an area for it to ignore when it comes to that vital issue.
In that case we make a simple, but we think essential request: we call on all the Labour leadership candidates to commit to increasing the tax expertise in and of the Labour Party. In or out of office its voice on this key issue is vital to its role in our parliamentary democracy. It has a duty to be competent, coherent, consistent and calculated about tax as a result whilst placing this issue firmly in the consciousness of left of centre political debate, where it belongs.
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“Labour’s current position on the Personal Allowance and Corporation Tax. These hugely expensive tax breaks disproportionately benefit those at the top of the income distribution and the wealthy”
It is stretching things to describe the personal allowance as a tax break for the wealthy. Anyone over 120k doesn’t get a peronal allowance.
Do you honestly think a policy of reducing the personal allowance will be a vote winner with low earners? Do you think they would rather give their allowance back because they are angry that the middling London worker on 50k benefits more?
All the distributional impacts on this show most benefits go to those significantly better off – not those that Cameron and before him Clegg claimed
Richard
Do you have a link to any studies that show this (for the income tax allowance at least)? I must say I think that Jim has a point: he’s right that the personal allowance doesn’t benefit anyone earning more than £120k.
It may of course be that the studies stop at anyone earning £120k (or thereabouts), since that is already well into the 98th percentile of incomes; but I can’t really see how Jim is anything other than correct about this.
There are plenty of other things which certainly do benefit the wealthy disproportionately (and which would absolutely benefit from scrutiny and much more serious engagement from Labour) – CGT allowance, CGT rates being lower than income tax rates, the ease with which IHT can be avoided, NI being a lower rate above a certain threshold, plus any number of other reliefs. But I can’t see that, once you are above £120k, the personal allowance is among them.
I can quite see that the PA is of value only if you earn enough to take advantage of its full amount, but I don’t think that’s what Jim was getting at.
I’d like to see some serious analysis of inequality, and just why it is that Labour would be not only morally justified but simply displaying common sense to impose much, much higher taxes on those on mega-incomes (or put another way: if you taxed a banker on £3m at a flat 80%, he’d still take home more than double what someone earning £250k starts with). If you’ve ever wondered why it is that even really well-off people can’t afford houses, this – in a nutshell – is why.
(and I’m a tax lawyer and CTA!)
The IFS have done a lot in this
Easy to find
I hope I address much if the rest in my new book
You’ve ignored the question.
I presume we agree that those on 120k+ are not impacted by the personal allowance?
So the question remains, do you think that reducing personal allowances for the very low earners would be politically popular? Do you think that the benefit the lower earner gets from extra cash in their pocket is outweighed in their minds by the fact that a middle earner gets a bigger boost?
The low earner would get more benefit by serious restructuring of the much broader system
Right now they are being conned
The IFS agrees
Well it makes sense as part of a package – but then that was rather what I was getting at! I wasn’t disagreeing, merely seeking to see whether the income tax PA was an issue in itself. I can see that it helps someone earning (say) £70k more than someone on £8.5k (poor souls, literally and metaphorically), but once you get into mega-incomes (actually that’s inaccurate: ‘high but not society-trashingly huge’ would be better), this one measure itself is withdrawn. Look forward to reading the book.
What alternatives are there to help lower earners out once you get to zero income tax:
1) Tax credits paid for by reducing personal allowances for medium earners. Perhaps. But this is simply taxing the medium earners to pay more benefits which isn’t a vote winner
2) Different rates of VAT for low earners verses medium earners, funded by reducing personal allowance of medium earners. This would be an adiminstrative nightmare.
At the end of the day I don’t see how they are getting conned by not paying any income tax. To think that you need the mindset that any tax rise is good for low earners, as long as it hurts the middle earner more.
A basic income
Search Murphy and Reed Class Think Tank and you will find it
On low incomes, far more is taken from each extra £ earned via clawback of tax credits than in income tax. The “emergency” budget included an increase in the taper rate for tax credits from 41% to 48% – that’s a similar effect to a 7p rise in income tax. And a cut in the amount that can be earned before clawbacks from £6,420 to either £3,850 or nil (depending on circumstances) – a similar effect to cutting or abolishing the personal allowance.
So if you look at the combined tax and benefit system, people on low incomes are already seeing their personal allowance cut, and tax rates increased. Raising the income tax personal allowance won’t offset that. You really have to look at the combined system to get a fair picture. The combined changes are massively detrimental to people on low incomes, while raising the personal allowance benefits people on higher incomes.
A minor point: people earning up to £140k can get the benefit of the full personal allowance providing they contribute £40k to a pension. It is when you earn £150k or £160k that you are likely to get no benefit from the personal allowance.
Search Murphy and Reed Class Think Tank for my response
Labour have a blind spot on tax. They fear the tax-and-spend label; and some senior figures in the party fear that they might fall under scrutiny for the moral decay of HMRC – famously, the Vodafone affair – which happened on their watch.
Perhaps I should be blunt here: a substantial faction of senior figures in the Parliamentary Labour Party – retired ministers and current front benchers – are entirely ‘On Side’ with latter-day Conservative thinking on taxation being of and for the unimportant.
As are the ambitious junior ones, who seek their patronage.
A quick look at retired ministers’ financial interests reveals the source – and the depth – of opposition to the Corbyn agenda: in their view, he is dismantling the raison d’etre of the modern Parliamentary party and the foundations of a 21st-Century political career.
I hear that there’s even some political opposition, in the sense that differences in aspiration for the forms of governance, society, and economic order might be mentioned in some criticisms of Corbyn. But, these days, I am inclined to dismiss such talk as window-dressing for identical economic agendas.
Off topic I know, but a colleague has drawn my attention to an article in Forbes magazine by someone called Tim Worsthorne which is nothing but an ad hominem attack on yourself.
It seems on a quick reading (which is more than it deserves) to be bordering on the libellous and I think that at the very least you should demand a right to reply.
Worstall has been writing this stuff about me for about 10 years
In itself that probably is enough to suggest why I can’t be bothered to respond
“We write as tax experts…”
Even if you do say so yourselves!
Indeed we do
If a tax QC cannot be considered as such or be considered incapable of identifying another as such then we live in a very strange world
Which may describe your world
Evidence (and to a great degree expert) based decision making is something that has been lacking in government pretty much since the time of Plato – if an `educated gentleman` cannot make the correct decisions who can?
Jolyon comes across as one of the most objective writers about tax and I’m glad he is in on this – and this is said with no disrespect to you Richard whatsoever.
The counter-narrative needs to stick together and having someone like Jolyon adds to the debate and can tinge Corbyn’s policies going forward with realism.
On the theme of sticking together can I say something about your comments about Picketty Richard in another part of your blog?
You came across as a little dismissive of his work (I’m reading Captial now) seeming to suggest that he says lot about a narrow subject matter.
In his defence I would say that he has had to support his assertions in such a lengthly way as there is no doubt that he would have been ripped to shreds by the neo-lib dominated media. I find him to be a diligent and honest researcher who has worked really hard to put together what constitutes probably the best stab at a longitudinal study of the behaviour of wealth. His is no mean feat.
He has had to make sure that his figures add up and also explain how he came to his conclusions. I think that he has – and continues to – defend his work very well in the face of those who would pour scorn on it.
He also does take time to link his central thesis to other wider issues that appear in your blog.
I also think that he is a reasonable fellow, he does not have an ego problem and is very modest.
Robert Peston and others deserve the glare of your immense intellect – but Picketty – Non!
Sorry if it seemed I was slighting Pimetty
Definitely not
But his solutions are not realistic (I generalise)
Fair enough. I’ve not got that far yet but hope to finish by the time a certain other book is on sale if you get my drift……
🙂
If you are seriously suggesting that labour reduce the personal allowance then they really will get annihilated at the next election even if it was as part of a broader package
I am saying things much ore radical than that in my forthcoming book
Thank you for writing this. You made good points about the benefit cap and increased personal allowance, which is the antithesis of the principle that underpins the welfare state: ‘From each according to their ability, to each according to their need.’ It’s hard to see this as anything other than deliberate destruction, and bad news for society as a whole.
Regarding the increased personal allowance, a couple of things have been bothering me for a while. They might be too political and not technical enough for this blog, and if so I apologise.
A great deal was made about ‘taking the lowest earners out of paying tax’ which makes sense on the face of it to most people. Yet:
1. If indirect taxes such as VAT are kept higher as a result, it means that low earners are paying more of their income in taxes than the better off, increasing wealth inequality.
2. It’s a very underhand and despicable way of excluding the poorest from having a stake in the most emotive governmental budgetary decisions, such as welfare spending, public service provision ad infinitum. i.e. because they are not taxpayers (even though, as in point one, they’re actually paying more).
How this would be rectified, I’m not certain. As an earlier poster said, it would be unpopular to try and reverse, in isolation at least. But it is something that should be addressed, I think.
Search Murphy & Reed Class Think Tank and read part 2 of the paper
“It seems that people who pay tax also vote.”
Yes, thank you. I’ll read the rest of this paper over breakfast and share!
“We know that the Labour Party in opposition lacks the technical resource at the disposal of a sitting government. This affects profoundly its ability to make the right interventions and develop sound policy. It also has, to our knowledge, no Parliamentarians with a detailed technical knowledge or who communicate confidently in the field.”
I think this is a very telling comment that for many years the Labour Party has lacked expertise particularly in monetary system and taxation matters. I am mindful that in the late Eighties the Labour MPs David Blunkett and Clive Betts as Sheffield City councillors were valiantly engaged in the use of a “trojan horse” vehicle (a housing association) in order to continue building social housing after Margaret Thatcher cut back on local authorities ability to construct such housing (money was borrowed from a major foreign bank to fund construction). The idea of using People’s QE along with a National Investment Bank is to my mind similar to Sheffield City Council’s “trojan horse” solution yet neither Blunkett or Betts had the necessary access to advisers when they became Labour MP’s particularly on the workings of Britain’s monetary system to continue their work in supporting a large affordable homes programme by seeing the connection between the BoE’s QE money from nothing programme and a bond issuing government owned “trojan horse.”
PS. The Sheffield City Council social housing “trojan horse” ran successfully for several years but then foundered on the housing association it used becoming insolvent and the City Council over-stretching itself financially on other building projects particularly in regard to sporting facilities to host the World Student Games. In other words Sheffield City Council could not take advantage of being a “money issuer” as opposed to a “money user.”
Richard,
There’s an argument from the MMT community, which say that “Governments do not need the savings of the rich, nor their taxes!” . Prof Mitchell has exactly this title to his posting of yesterday on his blog Billy Blog.
Although I’m in general agreement with the workings of MMT this is one area which gives me some problem. I’ve spent my lifetime thinking the rich should pay more tax, and certainly shouldn’t be allowed to dodge their taxes as they do. So its a little bit disconcerting to find that MMT which makes perfect sense in all ways that I can make out, is suggesting this might not be the case.
So how to bridge the gap? Taxation according to MMT is primarily not to raise revenue but to control inflation and establish a value for the currency but there are secondary reasons for imposing taxes too. Such as taxing smoking. Taxing CO2 emissions etc. The left want to tax the rich to reduce the imbalance of wealth in society.
Another way of looking at it would be to say we are taxing the rich now to prevent the possibility of inflation in a future economy.
So, we may want to impose the tax for a secondary rather than a primary reason in MMT terms. Is this such a big problem? I don’t believe it should be but it’s one area of disagreement between MMT and the left which hasn’t been resolved.
I think you’re missing the point
MMT argues for tax but for social reasons and for reason of controlling inflation – but not to raise revenue. In essence that is not needed: in theory money printing covers that
Redistribution is a social reason for tax
So the rich are not needed to pay for things
But they would be taxed – of course
I see no conflict
Blog forthcoming on this very soon
I agree that there should be no conflict but there is was one comment from a guy called Bob who said “The left are acting like idiots.”
Bill himself titled a previous piece “Corbyn should stop saying he will eliminate the deficit” which from an MMT viewpoint, of course he should. But politically it’s very difficult to fight a battle on all fronts. So, while we may think to ourselves that it would be better if he stopped saying that, I think we should be astute enough not to put it directly into print in quite such blunt terms!
Anyway I’ll look forward to your posting.
All the best.
PM
Very good article Richard, and good to see you and Jolyon collaborating on something!
best
Howard
I think the pac hearings rather put the nail on the coffin of the industry assisting either of the big political parties. Why should they help if all they are going to do is be criticised for it? Hodge herself asked if PwC would h
ha elp with the tax simplification project in the pac and the answer was “not if I’m going to get criticised for helping “
Which is why the argument is that Labour should develop its own expertise
Why not read what we wrote?
You say “it has no retained advisors ” which I read in a client context. if you are suggesting they should employ tax experts from practice then they would seriously need to increase the pay. Not unlike the problem hmrc had attracting top talent in fact