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Tax Reform: Rolling back the Thatcherite legacy

“In the USA, Barack Obama wants to ‘spread the wealth around’. We need to do the same in Britain, starting with tax reform.”

2. How does it fit with Compass’ core beliefs of equality, solidarity, democracy, freedom, sustainability and well being?

Largely because of Thatcherite deregulation and tax breaks for the rich, the poorer half of Britons pay a higher proportion of their gross income in tax than the very rich. Not only is Britain one of the least equal societies in Europe, but there is ample research showing that high inequality is associated with poorer social outcomes such as more mental illness, more drug abuse and lower educational achievement. Inequality erodes social solidarity and well being and, ultimately, undermines freedom and democracy. New Labour has reduced absolute poverty, but it has not reduced inequality. The problem needs tackling urgently.

3. How does it build the institutions of social democracy, like social groups and collective and cooperative forms of ownership and control?

Social solidarity and democracy cannot thrive where the super-rich live in a world apart, monopolising financial resources and political power to advance their narrow interests. In the past months, government has spent billions rescuing of the banking sector. It now needs to regulate the economy starting with the finance and energy sectors. Regulation includes capping outrageous City salaries and bonuses as well as siphoning off the huge profits of big oil and gas. At a time when public resources are desperately needed for education, health, pensions and environmental sustainability, Britain can no longer afford the profligate consumption of the super-rich.

4. How much will it cost or raise and where will any cost come from?

Merely by a 50% marginal rate for those earning above £100k would bring in an extra £8bn, while closing tax havens and ending personal and corporate tax avoidance would raise an estimated £30bn. These two measures alone would raise total tax revenue by nearly a quarter, bringing the share of tax in national income into line with that of other major European countries, although still far short of the Nordic countries. And of course there are many other reforms which should be undertaken, ranging from reforming council tax and NI contributions, bringing in environmental taxes, aligning capital gains tax with income tax and closing tax loopholes particularly in the corporate sector.

5. Which groups in the electorate are likely to support or oppose this measure? Is there any polling evidence you have on this?

Until quite recently, social survey data suggested that while a majority in Britain wanted better social services, they were unwilling to pay for it through higher taxes; there existed what was called a ‘tax disconnect’. Equally, although a large majority in Britain believe that the gap between rich and poor is too large, they have opposed ‘redistribution’. (Taylor-Gooby in Fabian Society, 2008). Today, however, attitudes are changing, mainly as a result of the financial crisis and the current recession. There is much anger about the fact that bankers have accepted huge public handouts while still paying themselves large bonuses, just as there is resentment about rising energy bills at a time of when oil companies are making record profits. In the same way as politicians are returning to Keynesian principles in response to the recession, so public attitudes will become more favourable to ‘making the very rich pay’ for what is perceived as a crisis brought on by the reckless practices of City financiers.

6. Is there a place or country where it’s worked? Please provide some information.

Britain’s Gini coefficient went up by 10 points under Thatcher and Major, and has remained virtually unchanged since 1997. In the EU only Greece and Portugal are more unequal. Nominal tax rates on personal and corporate earnings are lower that in most EU countries, as is the share of tax in GDP. Most Nordic countries have top personal tax rates greater than 50%, and in Germany and France they are higher than 40%. Significantly, other European countries raise a far higher percentage of tax at local or regional level. Britain’s domiciliary tax rules are the most lax in Europe.

7. What are the three main arguments in favour/against it?

The main arguments favouring tax reform and closing loopholes are (1) reversing Thatcherism by achieving greater equity; (2) generating extra financial resources required to upgrade our social and infrastructural provision and regenerate our manufacturing base; and (3) building a stronger fiscal system needed as a basis for counter-cyclical macroeconomic policy. The arguments against are (1) there is an alleged trade-off between efficiency and equity; (2) raising tax is politically unpopular; and (3)higher taxes increase the incentive for tax evasion.

This entry was posted on Tuesday, November 11th, 2008 at 12:33 pm and is filed under Equality. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.