by Angela Eagle
Since Margaret Thatcher came to power, there has been a shift away in the tax receipt mix from direct to indirect taxation. VAT, which was introduced originally at 8 per cent as a prerequisite for joining the Common Market, has been steadily increased to 20 per cent by successive Conservative governments. It is now the third most important UK tax in terms of receipts. At the same time, top rates of income tax were cut from 83 per cent to 40 per cent by Thatcher’s Chancellor, Nigel Lawson, while the base rate has fallen from 33 per cent to 20 per cent. Income tax is still the largest revenue-raiser despite these cuts, but changes to the thresholds at which income tax begins to be paid since 2010 have taken many people out of its scope. Corporation tax was reduced from 52 per cent in 1984 to 35 per cent. It has continued on its downward trajectory and is due to have been cut by 11 per cent in this decade alone if the Conservative manifesto pledge to reduce it to 17 per cent by 2021 is met. Little surprise, then, that business taxes account for only 10 per cent of overall revenue.
Because of the changes to income tax thresholds, Treasury analysis shows that 90 per cent of income tax receipts are paid by the top 50 per cent of taxpayers, and over a quarter by the top 1 per cent. However, this highly skewed distribution does not take into account other taxes. While richer households pay more in indirect taxation in absolute terms because they consume more, analysis shows that they pay less as a percentage of their income, making indirect taxes, such as VAT, regressive. In 2016, the top 20 per cent of households by income distribution paid 14.4 per cent of their disposable income in indirect taxes, while the bottom 20 per cent paid the equivalent of over a quarter of their disposable income on these taxes. Indirect taxes, therefore, impact most on the poorest. If we wish to reduce inequality, we have to consider whether the current mix of taxes in the UK is fit for purpose.
Our ageing population and the changing ratio between those of working age and those who have retired and rely on pensions, too, requires attention. How can we ensure that there is no return to the real pensioner poverty that marred the 1980s, while at the same time being fair to the current generations of people at work? Their prospects of owning property and building up a pension over their working lives are currently far bleaker than they were for previous generations, and many have also incurred huge debts in university fees for access to higher education that was free in the past. As the ratio of retired people to working-age people continues to rise, the basis on which our pensions system was designed comes under enormous pressure. These structural changes and social challenges all point to the need for a major rethink of our tax and social security systems to make them fit for the changing realities of the twenty-first century.
And yet, within most countries, the main political parties compete on a narrow strip of political ground when it comes to how high they assert that overall tax revenue should be. There are many serious political constraints to bold thinking in this area. Prior to winning its landslide election victory in 1997, for example, Labour agreed to stick to already announced Conservative tax and spending plans. The Liberal Democrats suggested an extra penny on income tax for education. In 2017, Labour suggested raising taxes on people with over £80,000 in income by an undefined but relatively small amount, whereas the Liberal Democrats suggested increasing income tax by 1 per cent, this time to pay for the NHS. The Conservatives suggested raising the limit below which you pay no tax slightly. Part of the reason for this is that it is considered deeply unpopular and therefore very politically risky to suggest raising taxes. However, even now, there is an active debate in all parties on whether to increase taxes for a range of purposes. Conservatives like Nick Boles, who has proven to be relatively unencumbered by the rest of his party’s Thatcherite economic orthodoxies, has suggested a specific new tax to pay for the NHS. At the last election, the Conservatives suggested taxing people’s wealth – in this case their houses – to pay for their social care. This was the ‘dementia tax’ policy that probably did most to annoy their existing voters. It was widely dubbed a disaster and helped to cause Theresa May to squander a Conservative majority in Parliament. The irony of this is that the Conservatives themselves cannot escape from their own Thatcherite legacy of prioritising tax cuts above all else. As we saw in the 2010–15 parliament, the Conservatives preferred to make £40 billion in tax cuts rather than using that money to eliminate the deficit, so powerful is the attractiveness of tax cuts to voters calculated to be. Eight years of austerity policies have left the public realm weakened and crying out for major investment, but the great high-tax taboo still survives.
Behind the current orthodoxy of keeping tax levels as low as possible has been the belief that higher taxes disincentivise hard work, especially for the rich. Hayek was, of course, right at the heart of propagating these beliefs. In a televised interview with the Conservative commentator William Buckley, he demonstrated his contempt for the state’s involvement in tax and redistribution to reduce inequalities and enact social justice.
BUCKLEY: ‘Why couldn’t the role of the justice-maker come at the end of a process by taking [money from] someone who has more than he needs for the purpose of satisfying someone who has less than he needs?’
HAYEK: ‘Because if he knows that part of his income is going to be taken from him there is no inducement for him to do that particular thing. If I know that if I do a thing that will fetch a very high price, two thirds of it are being taken from me, and I can do something much more pleasant for a third of the income without paying any income tax, I’m going to do that and not … what’s beneficial to society.’
BUCKLEY: ‘But, in point of fact, a great many people who are taxed at the two thirds rate continue to be very productive.’
HAYEK: ‘Well I doubt they are as productive as they could be.’
BUCKLEY: ‘All right, let’s say they are less productive than they could be, but how do you answer the question that the demands of justice are perhaps approached after you have permitted a natural distribution of the proceeds through the market mechanism?’
HAYEK: ‘There are no possible rules for a just distribution in a system where the distribution is not deliberately the result of people bringing it about.’
In one respect, Hayek was absolutely right: the only way to create a just distribution of income and wealth is for people to bring it about. That is one of the core beliefs of democratic socialists, who see the state and the tax and redistribution system as core mechanisms for creating a fairer, more equal society and achieving a greater measure of social justice. The myth of a ‘natural’ market distribution, however, is false. As we have shown, markets operate in a social context and are not independent of the society they exist in, so there is nothing innate or natural about the distribution they deliver.
For Hayek, a pivotal doctrine is that tax is a bad thing and therefore tax rates must always be kept as low as possible, especially for the very rich. His argument that people are motivated solely by financial reward and not ‘what is beneficial to society’ has become a central doctrine of Conservative politics. Right-wing politicians all over the world argue that allowing people to keep more of what is erroneously termed ‘their own money’ (as if it wasn’t earned with the collaboration and solidarity of both other people and a state that creates the conditions for their success, whether in terms of infrastructure, education or the other myriad support mechanisms) will increase incentives and guarantee that the market will deliver the most efficient and desirable result. For Hayek and people like him, therefore, reducing rewards by redistributing resources via taxes blunts incentives and is therefore undesirable.
The problem is, as William Buckley hinted at in the interview above, there is no evidence for these assertions. We have dealt with the fallacies of this argument already, but suffice it to say that the market fundamentalist false narrative, which regards taxation as a form of grand larceny by the state, is overcome by the assertion that taxation is in fact the membership subscription for a decent and civilised society. Democ
ratic socialists believe, therefore, that so long as there is democratic accountability (we get to influence how the revenues are spent), taxation is something we should all be proud to pay. It is our individual investment in our own future security and in the wellbeing of our society. It is a part of the social contract. As such, there should be no opt-outs, no avoiding the obligation for each individual to pay their dues, no free-riders and no cheating. If cheating, avoidance and evasion are rife, this only creates cynicism and understandable resentment, which in turn undermines the implicit contract that all should pay their fair share.
Without tax revenues, a state can do very little in the way of improving the lot of human beings and supporting the society in which they live to flourish. Tax can be used to provide transfer payments from those who have to those have-nots who would otherwise be destitute, to fund essential public services like health, education and retirement or to invest in infrastructure such as telecommunications or roads, which in turn facilitate the efficient running of the economy. This creates a virtuous cycle.
Without tax revenues, the state can do nothing whatsoever to combat the social injustice, poverty and inequality which untrammelled and morally blind market forces invariably deliver. And it can do little to uphold human rights and dignity, which are the essence of a civilised society. It cannot organise the effective defence of that society from attack, nor can it project its values abroad. Without tax revenues, the collective will of those who constitute society cannot be expressed in a practical way. Thus, over time, the state in most industrialised societies has tended to take an increasing level of national income in taxation to finance social provision and ensure political and social stability and human progress. As the industrialised societies that have introduced healthcare systems have aged, there is even larger demand for expenditure, since they now have to look after older people for longer too. There is clearly a limit to how much income should be taken in this way, but deciding on what that limit should be is a political decision, which can only be legitimised by being taken democratically and endorsed through the ballot box.
In the twentieth century, the advanced industrialised nations all developed collective social provision, which was made available to all their citizens by increasing the taxes on income. Typically, this provision consisted of access to some form of education, health and retirement arrangement, and it often included a form of employment insurance too. Following the cataclysm of the First World War, a form of income tax was introduced by all the major nations of Europe to pay for reconstructing the huge levels of damage which had resulted from the conflagration. The ever-present threat of revolution symbolised by the Bolshevik uprising in Russia reminded those in power that the patience of the poor and exploited was not endless, and it helped change the minds of those who wished to retain a nineteenth-century minimal state (which had spent around 10 per cent of national income, mainly on defence, prisons and protecting property rights). After the Second World War, the amount taken stabilised at between 40 and 50 per cent of national income, depending on whether you lived in more socially equal Sweden or less equal America. However, since the 1980s and the dominance of market fundamentalism, this assumption that social provision is an essential part of the role of the state has been challenged as Hayek’s extreme libertarian ideas have asserted themselves ever more boldly and in more extreme forms. The very notion that collective provision is desirable has been replaced by an ideological assertion on the political right that only ‘losers’ and ‘shirkers’ rely on public services, and that all tax is theft. It is time this nonsense was challenged. And it is time the globalised tax-avoidance game was closed down for good.
LETTING THE RICH RUN RIOT
Market fundamentalists conveniently assert that the ownership of great wealth is a sign of merit in itself. Actually, it is not. Thomas Piketty, in his magisterial book, Capital in the Twenty-First Century, explains how the modern dynamics of our globalised economy has meant that in the absence of determined public policy, wealth actually accumulates ‘explosively’ over time. This is because the returns to capital are now routinely exceeding the levels of economic growth, something that is even more apparent in the low-growth era which has characterised European economies and especially Britain since the 2008 global financial crash. Piketty predicts that, left unchecked, this phenomenon will generate even more extreme inequalities, which will in turn fuel popular anger and undermine faith in the democratic values that are at the core of our political system and that many of us have taken for granted all our lives. He points out that the concentration of wealth generated by the market fundamentalist era has returned Western industrialised countries to levels of inequality that have not been seen since the Belle Époque in France, the nineteenth-century pre-trustbusting days of America’s industrial monopolists and, in the UK, the Victorian times so evocatively captured by Dickens in some of his darkest fiction.
Piketty’s analysis shows that, in the current climate of laissez-faire globalised capital markets, fortunes can grow and perpetuate beyond all reasonable limits and beyond any rational justification in terms of economic or social utility. They grow whether the owners are working or not; they are unrelated to merit, effort or value added in any meaningful way. Such fortunes can also be conveniently sheltered offshore in opaque and secretive tax havens, so that it is actually now very hard to know the ownership of the world’s assets with absolute accuracy. But, if returns to capital are routinely outstripping economic growth, as Piketty demonstrates is currently the case, then we need determined international action to counter the resulting concentration of wealth in fewer and fewer hands.
Despite the clearly co-ordinated attempts to discredit his data (which he helpfully and transparently made easily available to all) on the publication of his book, we believe Piketty’s warnings must be heeded – and fast. There is already evidence of a ratchet towards his dystopian vision of ever-more-concentrated private wealth amidst rising anti-democratic anger and populism. Unchecked, as he says, this will threaten democracy itself.
A glance at the Bloomberg Billionaires Index indicates that Piketty is on to something. It shows that, in 2017, the top 500 richest individuals in the world became a staggering $1 trillion (£750 billion) richer than they had been only a year earlier, thanks in part to a soaring stock market. That is an increase four times that of the previous year. By December 2017, they controlled $5.3 trillion of assets, which roughly equates to a quarter of the value of the whole US economy. Jeff Bezos, the founder of Amazon, topped the list and saw his personal fortune increase from $34.2 billion to $100 billion in one year – a gain that is roughly the same size as the whole of the GDP of Bolivia.25 Surely we cannot be content that some individuals are now as wealthy as entire countries, their fortune and power set to continue accumulating simply because of its sheer size and the favourable tax treatment that money can buy and that assets currently enjoy? It is true, some rich individuals give generously to charity. But others use the proceeds to fund the plethora of think tanks and political action committees that focus on maintaining their fortunes, ensuring that they are left unscathed by the tax authorities. The whims of rich men, be they good or bad, should not be the foundation on which our world is constructed. It does not take a mathematical genius to work out that this level of wealth accumulation is unsustainable, even in the medium term. Any merit which might be implicit in controlling wealth or being remunerated on this colossal scale is out of all proportion to the economic or social utility of any initiative to create a business which any one individual might be personally responsible for. Its persistence is then unjustifiable and undesirable – ethically, economically, socially and politically.
Market fundamentalists have sustained their damaging global edifice which lauds low taxes and lionises the ‘entrepreneurial rich’ by claiming that it is only by incentivising their effort with personal remuneration on this obscene scale that economic progress and growth can be achieved. In fact, there is no empirica
l evidence for this self-serving claim – a truth which was recently reinforced by a very surprising source. In its dry-sounding Half Yearly Fiscal Monitor, the IMF confirmed the singular lack of evidence for the connection between the remuneration of the super-rich and economic growth. When even the promulgators of the notorious ‘Washington Consensus’ join the forces of the reformation, we can sense a profound change in the air. Indeed, the IMF even went further and agreed with the democratic socialist ‘heresy’ that progressive taxation is a good way of controlling the excesses of wealth accumulation by the few that we are now witnessing. They therefore advocated levying higher taxes on the super-rich. It also observed that excessive inequality erodes social cohesion and can actually reduce economic growth if it is allowed to become too excessive. This admission alone is potentially transformational, because it flatly contradicts the market fundamentalist dogma that has been dominant for so long in our political and economic discourse. The fundamentalists, from Mrs Thatcher on down, have always maintained that taxing the super-rich is self-defeating as it weakens their incentive to make money and lowers economic growth. Now we see an admission by the IMF that this is a false statement and it is an assumption which must now be disregarded by policy-makers. The IMF go on to argue that achieving (socially) inclusive growth will require a more progressive tax system overall, especially in the developed countries, where both income and wealth inequality have worsened because of the rising income and wealth accumulations of the people in the top 1 per cent of the population. They see scope for increases in taxes on the super-rich and suggest that different types of wealth tax also be considered. They point out that to achieve a properly progressive tax system, income from capital (payments from profits, interest and capital gains, which is often taxed at a lower level or attracts other tax advantages) should be included and taxed at a level which ensures that progressivity is protected. This is because income from capital is distributed far more unequally that that from labour and must therefore be taxed accordingly.
