Soaking the Rich

I think it would be fair to say that Pete’s favourite business reporter, Robert Peston, is somewhat skeptical of the 50% tax rate:

    What’s more, the IFS says that the Treasury is actually being too optimistic, on the basis of the best economic model of the impact on revenues of tax-rate increases. This model predicts that the Treasury will actually lose money on the new 50% rate, once the reduced harvest from indirect taxes is taken into account.

    Now we’re in the realms of behavioural uncertainty here. But there is a clear implication that if the Treasury simply wanted to raise a big sum of money fast and cleanly, it would have gone for other kinds of tax rises.

    Which in turn implies that the 50% rate is less of an economic necessity and more a return to Labour’s 1980s ideological view of fairness in taxation, that taxing the rich is a good in itself for the way it closes the gap between rich and poor.

    The prime minister insists that New Labour – or Labour reconstructed as a party of financial aspiration which celebrates wealth creation – isn’t dead. But many will say that the budget tells a different story.

A number of points here. Firstly, while the IFS claims to be non partisan it tends to recommend some fairly neoiberal polcies, and while I have no doubt there will be some level of tax evasion by the rich I take the claim that it actually cost money with a rather large pinch of salt. It doesn’t, however, change the substantive point. This will have minimal impact on the deficit that the government is running up. In order to close that type of gap, increases in income tax, VAT or national insurance would likely be needed, and I expect we will see those coming down the line in the short to medium term.

But a return to the battles of the 1980’s? In the first instance, this was a rather crude political move designed for a reaction from the Tories. It definitely had more than that behind it, but claiming it as ideological U turn is pushing it a bit too far for me. Partly, I think this is a necessary setup for the tougher choices down the line. With huge deficits to turn around, there is likely to be calls for solving the problem by soaking the rich. I think those calls could easily extend beyond the left to have a more populist appeal. Well, the rich have been soaked. Perhaps not as bad as they might have been, but none the less they have taken a substantial hit. That will make it easier for a government to propose policies that will adversely impact those in the middle and at the bottom end. Even a future Tory government will benefit from this.

It is also worth recalling that the 50p top rate tax has been floating around for a long time now. There was debate in the Labour Party over whether or not this should be implemented even at the zenith of New Labour. The argument was resolved against introduction in some part due to the idea that these were the fruits of important innovations and greater taxation here could harm the economy, in some part due to a culture that stated that inequality doesn’t really matter. Given what has happened in the past year, both of those assumptions look somewhat shaky and it doesn’t surprise me that the ground has shifted within Labour. But the idea that we could move back to 90% top marginal tax rates, much less the rest of the 1980s Labour programme, seems fanciful, and I suspect that many within Labour would take issue with the idea that any tax rise on the rich automatically equates to abandoning the “politics of aspiration”. It is important to find the right balance, and to ensure that those at the top cannot kick the ladder away behind them.

The whole thing can be read here