National politics

Don’t believe Labour’s tax con

Labour spokespeople are consistently talking about the way they will close the deficit over the next Parliament. They talk about three routes:

  • Sensible cuts
  • Making the rich pay more, and
  • Making work pay.

Peter Brookes cartoon

The sensible cuts line was best debunked by this cartoon by Peter Brookes in the Times. Apparently when the Tories cut it always harrowing and unfair. The Labour axe is so much more fragrant and “sensible”. The reality is that Labour will probably not cut as much as the Tories will as they ultimately don’t see the need even if they could get cuts past their union backers. The biggest “cut” they will make is by ramping up council tax to pass the burden of paying for local services from central government to Council Tax payers. So not a cut really but a tax rise for council tax payers. More on this another time.

Making the rich pay more is Labour’s get out of jail free card. The Mansion Tax, non-doms (today’s easy target that will more likely reduce the tax take), 50% rate, bankers’ bonuses, etc. They all sound grand. They all sound like someone else is going to pay and that regular people can really have free loveliness at no cost to them. In reality all of these changes are likely to disincentivise risk takers and wealth producers and make us all poorer. Good politics but bad economics. Ultimately all of these measures are likely to have only a negligible effect on the overall tax take.

The making work pay line is Labour’s latest magical money tree. They know that they cannot admit that taxes will rise and that they have to try to capture some financial credibility. The idea simply is that by mandating higher pay this will flow through to a higher tax take. It is a nice idea. Companies pay higher wages and we will all live happily ever after. The trouble is we already have too low a productivity in this country and Labour are going to ramp the cost of labour. What effect will this have? Businesses will start to shed labour. Unemployment will rise. Sure some workers will be better off. The state will have to pick up the tab for the unemployed. Maybe the tax take will rise, but so will the benefits bill. There is no such thing as a free lunch.

Ultimately the UK tax base rests on the VAT, NI and income tax that ordinary people pay. If Labour fails to cut and keeps spending and borrowing then ordinary people will pick up the tab. The non-dom thing, and all the rest of it, is just a distraction from the main event. Who do you trust? Do you trust the people making up stories or the ones telling it straight?

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