Tax and the Left

10 August 2009

Tax is at the core of the Left’s agenda. If there is one quality that defines the Left it should be equality. The market cannot and does not by itself deliver anything approaching equality; government intervention is required to do that and this is the reason for left-wing intervention in the political process.

What does equality mean in terms of tax?

1. Increased equality of post tax incomes;

2. Reduced wealth disparities;

3. Equality of tax paid at a fixed level of income, irrespective of income source;

4. Steadily increasing progressivity of taxation across the income and wealth ranges;

5. Steadily reducing access to tax planning opportunities as income rises.

The 5 Rs of taxation

Tax and democratic government are synonymous: the latter cannot exist without the former. It is however a fundamental error, vigorously promoted by the Right, to think that the sole purpose of tax is to pay for government.

There are in fact five reasons for taxing:

1. Raise revenue;

2. Reprice goods and services in pursuit of social objectives (tobacco, alcohol, carbon emissions etc.);

3. Redistribute income and wealth;

4. Raise representation within the democratic process because tax is the consideration in the social contract between those governed and the government; and to facilitate

5. Reorganisation of the economy through fiscal policy.

These are the 5 Rs of tax. By themselves they are of obvious significance, but to raise tax without considering the issues that items 2 to 5 cover would be a dereliction of duty for any left of centre government.

Redistribution – at the core of the equality debate

Some issues require emphasis even so. The UK tax system has a significant redistributive effect, but there remain glaring anomalies in social justice within the tax environment.

Overall the poorest 10% of households in the UK pay the highest rates of tax: nearly 50% of their income can be paid in taxation of all forms. The top 10% of households in the UK pay the lowest overall rate of tax on their income, despite paying the most tax when measured by absolute amount. Those in middle income pay more than high earners.

The inequity that this situation creates is a source of significant tension within the political arena. This is being widely exploited by the Right although they have given indication of intention of addressing the issue: the outcome of the current structure is one that suits their key funders very well.

Only radical revision of our taxation system can create a system of progressive taxation in the UK where all those bar the top 10% of households pay less tax and the topmost pay more. This is possible, with tax revenues increasing as a result.

This would, however, require boldness of vision and an ability to identify those activities that require taxation subsidy – such as investment in new jobs, technology and the environment – whilst being willing to tax the passive income that they might give rise to for a select few in our society.

That vision has to be part of the Left’s agenda if it is to be accountable on tax and trusted on tax – which is a core part of any electoral agenda. The message has to be that the left’s tax agenda would make 90% better off at cost to the minority who command most income and wealth in our society: that this can be done without harm to the economy as a whole or to the prospects of employment for people in this country and that it is employment and not passive wealth creation that should benefit from future priority within our taxation structure so that the person who works for a living gets the best deal of all from any system we have to offer.

Tax – at the core of the political divide

Little can differentiate the Left from the Right more than attitudes to tax and yet the Left seems to have forgotten just what it has to offer. If the Left is to be renewed then so too does its attitude to tax have to be renewed. If the Left fails on tax it fails to get elected. That is a bold claim: it’s one that history suggests is true.

Richard Murphy, Director of Tax Research LLP. You can read his blog at http://www.taxresearch.org.uk/blog.

Comments
  • treborc
    Tax you mean to fight wars, to waste on silly IT schemes to give some Yankee firm a bigger profit, no bloody way, if you mean do I want the tax used to benefit the people within the UK yes of course, but you cannot keep taxing the poorest to pay for the richest.
  • NickJ
    Without disagreeing to anything in the article the issue the left (or any political entity) will face with tax is the vexed question of incentive. I used to think that "tax the buggers to death" was a good philosophy however it leaves the question of why should anybody try without some personal return. The issue becomes one of how much tax is enough and how much tax is a disincentive? Another issue then appears which is where do taxation levels and new investment coincide? It is not as easy as simply taxing the rich.
  • michael_green
    The American Republicans are happy to spend taxes on the military and the means to kill people, but not on healthcare and the means to save people's lives.

    It shows up the brutality of conservative thinking and that kind of ideology.
  • timworstall
    The first list of one through five could be dealt with by a flat tax with a high threshold. Given that Richard is vehemently opposed to such a thing I guess that means that those five principles aren't in fact all that important. Or not sufficient perhaps.

    "that this can be done without harm to the economy as a whole"

    Well, at some point you're going to get on the wrong side of the Laffer Curve.

    Worth noting that the top 10% of households currently have a post tax income of around £160 billion (they already pay around £60 billion nett). Let us double taxation on the rich.....get another £60 billion say. Whoopee, we've just raised 9% of the total amount needed to run our current State. And does anyone think that if we double the current tax burden we won't see some Laffer effects?

    Seriously? An average tax rate of 55% (note, average of all income, not marginal) isn't going to have some effect upon effort and output?
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