Duncan Bowie on why Labour needs to come clean on wealth redistribution through a range of progressive taxes
Whenever Labour politicians make a commitment that a Labour government will increase spending on a specific service, it is understandable that they face the question of how this will be paid for. Labour both wants to be seen as a party of fiscal rectitude – in contrast with the experience of Conservative governments, especially during the brief Truss/Kwarteng regime – but nevertheless is aware that any mention of increased taxes scares the electorate. No party wins elections (or not so far) by promising more tax, and the Labour leadership has made recent attacks on the Tories as the party of high taxation.
The party advisers have been considering a range of tax reform options for some time, but are unlikely to reveal their thinking in the coming months and are unlikely to be specific in their manifesto for the general election, whenever that may come. With the Conservatives adopting a windfall tax on electricity and gas suppliers, Labour has suggested that their main solution to any budget deficit or need for increased spending would be met through windfall taxes, but without specifying who the tax would be applied to and how it would be calculated.
This is not good enough. Tax is not just necessary to fund the welfare state (as well as defence and security) but is critical to achieving a more egalitarian distribution of wealth and income, which has traditionally been a core socialist objective. Even those members of the Labour Party who may not be too enthusiastic about having more of their wealth and income redistributed to those less well-off than themselves nevertheless recognise the need for government funding for key services, such as the NHS, the police and other emergency services. Moreover, this is not just about central government but about key services provided by local authorities and other public or semi-public services, such as rail and bus transport. With decades of under-investment and successive privatisations, local government and ‘public’ services more generally are in financial crisis – even though in many of the privatised services, it is the directors of the private companies running services on which the public as a whole depend that are still doing very well.
In recent years, proponents of what is called ‘new monetary theory’ argue that not only the balance of payments deficit is not that important, but that a government needing to increase expenditure can always print more money, pointing to the experience of ‘quantitative easing’ in the 2008 global financial crisis. The argument is valid to a limited extent, so long as this approach is not taken to the point where investors and the financial markets as a whole don’t lose confidence in the ability of the government to manage the process. The experience of the Truss/Kwarteng regime has, however, demonstrated the consequences of fiscal mismanagement and committing a government to unfunded expenditure. This is why Labour demonstrating fiscal rectitude is even more important than it was six months ago.
However, fiscal rectitude does not mean Labour should leave the current system of taxation untouched. Moreover, two more years of Conservative government will lead to further cuts in basic services, so Labour, on coming to power, will need to take urgent corrective action, and this requires increased revenue income. A significant increase in borrowing to cover revenue deficits is not an option.
Firstly, the relationship between taxes on earned income and taxes on interest from investment, savings and other forms of untaxed income needs to be rebalanced, which means higher rates for the latter. Secondly, we need a more progressive income tax system, with higher rates for the highest earners. Thirdly, we need increases in the rates of corporation taxes for the largest and most profitable corporations, while taking into account the need for reinvestment.
Local taxes require reform. As set out in useful reports from Fairer Share, we need a much more progressive property tax system to provide additional funding for local government and a fairer distribution of the burdens of funding local services. This means a council tax system which relates to property value, with much higher levels of taxation on the most valuable properties. There is also a case for relating tax to levels of occupation, with much higher taxation on empty and second homes, but also with higher taxation on properties which are significantly under-occupied.
Clearly, where household income is insufficient to fund a higher tax (for example, where a pensioner dependent on state pension or other limited income owns a valuable property), payment can be deferred until death or disposal of the property. Such an approach also incentivises downsizing and more effective occupation of both existing and new housing stock. Local authorities should have greater flexibility to set their own council tax rates, with the current central government cap removed. Councils are, after all, subject to democratic accountability, and administrations will be voted out if they get the balance between service delivery and revenue-raising wrong. Councils should have the power to raise other local taxes – for example, cities and other areas with significant tourists should be able to raise a bed tax on tourists, including occupiers on Airbnb, as do many other cities in Europe and elsewhere, which will provide significant revenue to fund services they use but which only existing taxpayers pay for.
The current system of housing taxation both inflates house prices and fails to stabilise the housing market. It also taxes people buying their first home, while not taxing the capital gain made by most homeowners when they sell, so stamp duty should be abolished and replaced by a system of taxing the capital gain made by households on disposal. This is a capital gain which is often made by the children of owners rather than by the owners themselves. The inheritance of property, combined with the operation of the ‘bank of Mum and Dad’, is now a major factor in the growth of inequality in the country. So, as well as housing taxes being reformed, we need to reform inheritance tax, whether it is the inheritance of property or other assets, through the introduction of a lifetime gifts tax. These reforms would probably be more effective in terms of wealth distribution than a more generalised one-off or annual wealth tax, as such a system would lead to a significant reduction in wealth inequality over the longer term.
Land value taxation is often put forward as a solution to inequalities in wealth and income, but the world is very different from the time the proposition was put forward by Henry George. The most effective way of using undeveloped land which is suitable for development (and this excludes agricultural land and land which genuinely meets environmental protection objectives) is for the land to be taken into public ownership, rather than leaving the land in private ownership and then taxing the landowner and/or developer. All this does is disincentivise appropriate development and increase the cost of development and, therefore, the price of the market housing built on a site. The best approach to delivering new affordable housing is for the local authority or other public body to have the power to designate the land for a specific use (such as socially rented housing) which depresses the land value. Additionally, where the landowner refuses to make the land available for development, the local authority should have the power to acquire the land at its existing use value, so any capital gain is accrued by the public sector, not by landowner or private developer.
Some of these proposed tax changes would actually be popular, at least with lower- and middle-income households, who would all benefit. We need a comprehensive and coherent approach we can explain to the electorate. Taxation is necessary, but it does not have to be a vote loser.