 chieving a more equal and fairer
society has been a basic objective of the Labour
Party since its foundation. This was epitomized
in its 1945 election slogan ‘Fair Shares For All’.
But there is little sign that New Labour any longer
subscribes to this ideal. Although the government
have taken a number of measures to help the least
well off, such as Pension and Tax Credits, they
have taken care to do little or nothing which would
adversely affect the most affluent. There has been
no deliberate attempt to reverse the Thatcherite
revolution, which shifted the balance of power
away from workers and unions, in favour of those
at the top –a shift which was partly a consequence
of the sharp increase in unemployment to over three
million in the 1980s, and partly the result of
a right wing determination to ‘put the unions
in their place’. Unemployment has fallen
since 1997, but much of the Thatcherite legacy
remains. The Institute of Fiscal Studies has estimated
that after allowing for benefit and tax changes,
the Labour government’s measures have halted,
but not reversed the growth of inequality.
While the changes in social security have been
redistributive, the reliance on means testing has
had serious adverse side effects. This is particularly
obvious in the pensions field where it is clear
that the means tested Pensions Credit deters people
on lower incomes from saving for retirement. In
addition the complications of the system mean that
that many people are not applying for, and missing
out on, the benefits to which they are entitled.
Gordon Brown is credited with the idea that combining
the administration of means tested benefits with
that of collecting taxes would remove the stigma
traditionally associated with means testing, but
the practical difficulties of combining the two
have proved disastrous. The Tax Credit system has
become a complete shambles.
In the case of pensions, there is now a very wide
consensus (excluding the Treasury) in favour of
raising the basic state pension to a level which
would minimize means testing - and then index it
to earnings rather than prices. I would also argue
for replacing the present means tested system of
child benefits with a flat rate system. In both
cases the benefits should be treated as taxable
so that the least well off would benefit most.
The paradox of the present system is that the
poorer you are, the higher the proportion of any
extra income the state takes back in either reduced
benefits or higher tax payments. There are now
over two million people who stand to lose 60 per
cent or more of any extra income through cuts in
means tested benefits. This level of ‘withdrawal
rates’ compares with the Income Tax rate
of 40 per cent paid by the better off on their
additional income. So we now have a regime where
those at the bottom of the income distribution
pay the highest marginal income ‘tax’ rates,
while those at the top pay substantially less;
and those in the middle pay the lowest. This may
be good for the marginal voters in ‘Middle
England’ - if they realized how lucky they
were - but it is not one which anyone would consciously
design as a recipe for a fairer society. Do the
rich really need greater incentives than the poor?
Leaving benefits on one side, one aspect of the
present structure which is little recognized is
that taking both indirect taxes on expenditure
and direct taxes on income into account, those
on the lowest incomes pay as high a proportion
of their income in taxes as those who are best
off. This is because, while Income Tax is progressive,
indirect taxes are the reverse, with the worst
off paying a higher proportion of their income
on indirect taxes such as VAT, tobacco and alcohol
duties. It is estimated that in 2003/4, households
in the lowest fifth of the income scale paid as
much as 28 per cent of their incomes in indirect
taxes, whereas the top one fifth only paid 11 per
cent. This more than offset the fact that the lowest
fifth paid only 10 percent in direct taxes as against
25 per cent for the top fifth. In total, taxes
take much the same proportion of people’s
income at all income levels The tax system as a
whole is not progressive. The redistributional
effects of the public finances stem from the fact
that in relation to their incomes those on lower
incomes benefit more from equal access to public
services such as health and education and from
the benefit system.
The moral is that in looking at ways of raising
extra money to finance improvements in public services
such as health or education, or to raise the basic
state pension, we should concentrate on taxes on
income and wealth. There is, for example, a good
case for increasing the top rate of tax from 40
to 50 per cent for those at the top, and for removing
the upper earnings limit on national insurance
contributions. Taxing increases in land values
resulting from planning permission for development
should also be on the agenda. We should beware
of the distributional effects of increasing indirect
taxes as a means of achieving health or environmental
objectives. Taxes on alcohol and tobacco, or fuel
or road charges tend to hit those on low incomes
the hardest
Whilst the tax and benefit system requires a critical
review, it is as important, or more important,
to reverse the increase in inequality in incomes
before tax which took place in the Thatcher era,
and is now in danger of becoming a permanent legacy
of the neoliberal counter-revolution. From 1979
to 1994-5 real incomes of the richest tenth of
the population rose by 60 per cent; but those of
the poorest tenth only rose by 10 per cent - and
after allowing for higher housing costs actually
fell by 8 per cent. The change in the economic
balance of power associated with the reemergence
of mass unemployment was accompanied by a striking
change in attitudes. Salary levels and perks for
those at the top, which would previously have been
regarded as obscene, became widely accepted, and
are now taken for granted. At the bottom, we do
now have the minimum wage, and this should gradually
move up relative to the average.
One route to achieving a fairer society is to
ensure a greater voice for ordinary workers and
the unions that represent them. This is where participation
and consultation at all levels of a firm are vital.
We should be welcoming EU measures to encourage
this, not opposing them. The success of German
firms shows how valuable this can be in ensuring
firms take the long term view which is essential
in developing technology based or capital intensive
industries – rather than the short term view
which afflicts firms dominated by financial markets.
The government should be actively encouraging union
participation both within firms and at industry
wide level. It should also establish machinery
for regular consultations with the TUC and CBI
on economic policy and employment issues.
Worker directors are now a forgotten subject,
but my own experience of them in the British Steel
Corporation in the 1970s was that they played an
invaluable part in ensuring that management decisions
took into account workers’ views and that
workers felt they were having their say. One small
step, which would have widespread public support,
would be to make it mandatory for employees to
be represented on company Renumeration Committees.
This would help to limit disparities in pay and
excessive rewards for directors.
Most basic of all, we must return to genuine full
employment. The present five per cent level of
unemployment is well above the levels both Labour
or Tory governments considered acceptable in pre-Thatcherite
days. In addition there is considerable hidden
unemployment, particularly in the older industrial
areas. It is all very well the government thinking
that changing the rules on Incapacity Benefits
will get more people into work, but this ignores
the chronic shortage of jobs in the areas mainly
affected. We need more effective regional policies
and incentives for industrial development in these
areas, and a willingness of the Bank of England
and the Treasury to run the economy at a higher
level of demand. At present the Bank’s remit
is (in true neo-liberal style) limited to achieving
a target rate of inflation. It should be widened
to include that of maintaining a high level of
employment.
This is only part of the agenda for achieving
a fairer society in all its aspects, but greater
equality of income and a stronger voice for workers
and unions are a key element. and a Labour government
should not to be afraid to acknowledge this.
John Grieve Smith is the author of There Is
A Better Way: A New Economic Agenda For Labour. |
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