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Guest post: Why the right is losing the argument on tax – and why it matters to all of us

Two weeks ago, Labour pledged to tax as income the performance fees (known as the ‘carried interest’) paid to certain investment managers. This rather than the much lower capital gains tax rate enjoyed hitherto. The pledge followed Labour’s promise, earlier in the week, to remove the centuries old non-dom tax break and, last month, to restrict pension tax relief for high earners.

Taken individually, there is a compelling case for each of these measures. And they cohere as individual parts of a bigger programme to bring more earnings above £150,000 into the top rate of tax. Looked at as a matter of good design, we should applaud them. The removal of piecemeal tax reliefs and complexity is the intellectually unassailable argument of flat taxers. They should love this programme too.

They don’t though.

In 2012, Allister Heath, the Telegraph’s Deputy Editor, chaired a report calling for a flat tax of 30%. But on Thursday he led the charge against the non-dom changes in a heroic leader piece entitled ‘Labour’s Socialist Headbangers Will Clobber Us All‘. It was a ‘near certainty’, he said ‘that a significant minority of non-doms, including the richest… would up-sticks.’

He did, though, concede that the eligibility conditions for non-dom status were ‘bizarre.’ When I asked him why he had not called for their reform earlier he claimed he had. But he dropped the point when I pointed out his report had explicitly recommended no change. I had an almost identical conversation with another avowed flat-taxer, Stephen Herring, Director of Tax at the IOD.

The problem they face is this. If you won’t advocate sensible reform against your own interests you can’t expect to be listened to when you advocate sensible reform for them.

Now, none of this would much matter but for the fact that the right is already losing this argument. And not – entirely at least – in a good way.

There is a rate of tax that is too high. Although we sustained marginal rates of income tax as high as 99.5% in the post-war years through to the late 1970s the world, our place in it, and the tax rates of our competitors, were all very different then. Today we are – like it or (more likely) not – highly dependent on the highest earning 1% who pay around 27% of all our income tax receipts. And the evidence clearly shows there to be a point where increasing the rate of tax brings about only small increases in receipts – and beyond which increasing it further can lead to reductions. It is this relationship that the Laffer curve describes. Even around the 50% mark policy makers begin to ‘stroll,’ as Robert Chote, Chairman of the Office for Budget Responsibility, memorably described it ‘across the summit of the Laffer curve.’

What is true for individuals is also true for business. Despite the Coalition’s promise to rebalance the economy, we remain heavily reliant on financial services. Yet, for understandable political reasons, banks have been hit time and again. And there are serious murmurings of discontent, even amongst the most socially responsible of bankers.

It is this debate that ought to be centre stage; it is this debate that matters. There is meaningful difference between the parties: Labour is promising to restore the top or ‘additional’ rate of tax to 50%. The Conservatives have refused to confirm they will not cut it to 40%. What the extra yield might be today – because things have moved on from when Treasury last did the exercise – from a higher rate of tax is a point I mean to cover in a later blog post. But what I do know is that, if the right persists in inconsistent and alarmist ‘Chicken Licken’ry, it will further remove itself from a position of influence.

That would be a bad thing. We need an intellectual compelling counter-argument to the view, slowly taking hold and fostered by ongoing increases in the personal allowance, that taxes are things other people can be relied upon to pay.

There are those on the right who see taxes as a confiscation of personal wealth under compulsion of law by a spendthrift state. The left’s equivalent would soak high earners until the pips squeak for the sin of financial success. They deserve each other, these ideologues.

But for the rest of us, the only question we should be asking is, how much tax is too much?

Jolyon Maugham QC is a barrister practising from Devereux Chambers and has advised the Labour Party on its reform to the non-dom rules. He blogs at Waiting for Godot – Musings on Tax and can be found tweeting here.