Nathan Gamester is a Programme Director at the Legatum Institute.
So, Ed Balls has announced that he would re-introduce the 50p top rate of income tax if Labour wins the next election. Mr Balls’ announcement has caused economists, Conservatives and business leaders to rush to the opinion pages to denounce the idea as bad economics. Boris Johnson in the Telegraph described the “pop-eyed” Ed Balls as having been proved “completely wrong” on this issue. Also in the Telegraph, 24 senior business leaders penned an open letter calling the idea a “backwards step” that would lead to a loss of jobs and have the effect of “discouraging business investment in Britain”. And writing in City AM, my colleague Graeme Leach labelled the plan “an act of political opportunism devoid of any economic sense”.
Broadly speaking, arguments against Mr Balls’ policy announcement fall into three categories: 1) the economic argument, 2) the competitiveness argument, and 3) the fairness argument. So far, opponents of the policy have focussed on the first and second of these believing that the argument will be won intellectually. But this won’t be enough to cut through to the millions of working men and women who, unlike the very wealthy, have not seen a cut in their income tax in the last few years. Put simply, conservatives need to win hearts not just minds if they are to convince voters they are on the right side of this issue.
The Fairness Argument
Introducing the policy, Mr Balls has been very deliberate to use language such as “fairness” and “right and wrong”. Surely it’s not right, argues Mr Balls, to give the very richest people a tax cut when everyone else is making cutbacks? It’s powerful rhetoric and makes an effective emotional argument. It is one which the Conservatives cannot ignore.
Ed Balls is not stupid. He knows this policy will not win him friends in the City. He also knows that it won’t have a large effect on the Labour party base who, come 2015, will be voting Labour anyway. So, how can he convince the electorate about the benefits of an economic policy that is supported by flimsy economic evidence? Answer: appeal to our emotions. Elections aren’t won in boardrooms, they’re won on doorsteps. Mr Balls knows this. And he knows that on doorsteps he won’t be talking to constituents about the Laffer curve. Rather he’ll be arguing that his policy will make the rich pay more so that hardworking people pay less. Sounds good, doesn’t it?
The Economic Argument
The economics of this are overwhelmingly on the side of those who support a lower top rate of income tax. On the Andrew Marr show Mr Balls said that his policy would raise “£10 billion over three years” but the most recent figures from the Treasury show that the 45p rate has brought in more not less revenue than the 50p rate. Boris Johnson explains this succinctly:
“Since George Osborne did the sensible thing, and cut the top rate of income tax back down to 45p, we had seen a classic example of what economists call the Laffer curve. A cut in rates had actually produced more tax. Indeed, the top one per cent of income-tax payers are now producing a record 30 per cent of all income tax, and the top 0.1 per cent are producing 14.1 per cent of all income tax.”
So, the lower rate has brought in more money than the higher rate. This means more money to spend on those who need it most; more for childcare and hospitals and infrastructure. One response to this is that this period of increased tax revenue is due to forestalling and other measures whereby the wealthy either delay or bring forward their income to take advantage of a lower rate of tax. This is a reality of the tax system and may well go a long way to explain why the lower rate of income tax raised an extra £1.3 billion in the first month alone. If this is true, then we won’t know for sure the effect of the lower rate until we see figures for 2014 and 2015 (because tax returns do not need to submitted until the following January after the tax year ends).
The Competitiveness Argument
The competitiveness argument follows naturally from the economic argument. Simply put, higher rates of tax discourage investment in the UK. Since business is now global, people and organisations are no longer restricted by geography. One very important consideration for a business owner looking for somewhere to set up shop will be how much tax he will have to pay. Governments are, therefore, competing globally to offer favourable environments for business. Take France as a recent case study. After Francois Hollande committed to raising income tax to 75 percent, it has been widely reported that many high earning individuals have left the country.
So how should the Conservatives respond to this? When George Osborne announced in the 2012 Budget statement that he was cutting the top rate of income tax, he paired this announcement with a commitment to crack down on aggressive tax avoidance, which he described at the time as “morally repugnant”. This was followed up in the 2013 Budget statement with an announcement of a “package of measures to tackle tax avoidance, tax evasion, fraud and error”. This is an important part of the Tory narrative because it demonstrates that the Party is serious about responsible capitalism and not predatory capitalism (to borrow a Miliband-ism).
Moreover, Conservatives should point to some of the big economic achievements of this government such as lifting more than 2 million low earners out of tax altogether, reforming the welfare system to make work pay more than benefits, and introducing a benefits cap to ensure that claimants won’t receive more than the average family earns. And perhaps the most important part of the jigsaw is that the government’s current economic plan is working. Lower unemployment means more people are in jobs and a growing economy is good for everyone. A change now would put that at risk.
Conservatives must keep calling Labour out over the economic credibility of the policy but this won’t be enough for them to win over would-be voters. It must go hand in hand with an effective response to the issue of fairness.
I’ll end on this: I can’t help but think that Ed Balls’ announcement is, on the whole, a good thing for politics. Don’t get me wrong, I think the policy itself is completely misguided (I’ve written before that this policy shows that Labour is choosing to punish the rich rather than help the poor). But Mr Balls’ announcement has started a discussion. It has laid down a challenge to low-tax conservatives to provide evidence of why we believe that raising taxes on the rich is a bad idea. And likewise it has laid down a challenge to those on the left (Mr Balls included) to explain why they believe raising taxes is the right thing to do. Labour has finally committed itself to a policy and the debate over its merits has begun. And that is a good thing.