Tories’ double whammy tax bombshell

by Stephen Tall on March 23, 2009

I leave the country for just three days, and come back to find that, in my absence, the Tories have fallen to bits over tax. I must try this going away lark again, some time. (What do you mean, post hoc ergo propter hoc?)

Of course, it’s possible to claim it’s all a storm in a teacup: that (i) George Osborne’s announcement that the Tories will go into the next election promising to raise the top rate of tax, and (ii) Ken Clarke’s declaration that their inheritance tax cut for the rich was an “aspiration”, are merely a case of (i) re-stating existing Tory policy, and (ii) a minor gaffe from which we should all just move on.

Yes, it’s possible to claim all that. But to do so is to ignore two far wider, bigger points.

1. There is fundamental disagreement in Tory ranks about tax.

On the one hand, you have David Cameron and George Osborne, both utterly paranoid of being labelled by Labour as in hock to the rich, and neither with any real ideological bedrock beyond wanting to win power; for them tax cuts are a case of when we can afford it. This view is stridently represented by The Times’s Daniel Finkelstein:

Let me begin my argument with the central inescapable fact in British politics. There IS NO MONEY. … There can be no question of anyone promising upfront overall tax cuts.

On the other hand, though, you have the pure Thatcherite Tories, who view Cameroon attempts to deflect Labour attacks as cowardice, and remain devoted to the principle of tax cuts as soon and as deep as possible. Their argument is staunchly represented by the Telegraph’s Iain Martin:

… clear principles [are] more likely to illuminate the path to prosperity than endless pragmatic positioning. After all, if the Conservative Party does not believe that lower taxes stimulate demand, extend freedom, reward enterprise and create prosperity, then what is it for?

Of course, there are Tories surveying the wreckage of the past few days’ media coverage who would prefer to pretend that this schism in the ranks does not exist. But it does, and it’s not a schism that is going to disappear miraculously between now and polling day.

The best that the Cameroon Tory leadership can hope for, it seems, is that the Thatcherite Tories will pipe down until victory is theirs. This is one of the key differences between the position Mr Cameron finds himself in, and that of Tony Blair in the mid-1990s: Mr Blair’s internal opposition, on the left of the party, were a defeated minority in retreat; Mr Cameron’s internal opposition, on the right of the party, are in a resurgent majority. How on earth the Tories expect to govern like that is as yet unresolved.

2. The Tories have got their policies wrong.

This is the bigger issue, far more important than the Tories’ own profound internal divisions. The upshot of the weekend’s confusions and contortions is that the Tories are sticking by their one tax pledge: to cut inheritance tax for the richest, while appearing to rule out any other tax cuts. It’s almost unbelievable that at a time of economic crisis – unparalleled since the 1970s, perhaps since the 1930s – the likely Government-to-be is sticking doggedly to a tax policy put forward 18 months ago to stop Gordon Brown calling an election, which will benefit only the wealthiest in society a long way in the future.

Of course it wasn’t meant to be like this. As the Evening Standard’s Paul Waugh notes today, the Cameroons had been hoping to defer the inheritance tax pledge:

… the Tories have been quietly preparing the ground for this shift. It was a year ago – even before the full scale of the current downturn was apparent – that Cam himself made plain that tax cuts would come in towards the end of the Tories’ first term in office, “when it is prudent and practical to do so”.

But then Ken Clarke blew the gaffe, and the Tory leadership faced with the baying clamour of the right-wing press, chose to back themselves into a corner.

The Tories could, mind you, still rescue their reputation as the tax-cutting party, while at the same time responding to the changed economic circumstances, by pledging to cut taxes now for the lowest paid. In short, they could adopt the Lib Dems’ policy:

The Liberal Democrats will cut taxes for people on low and middle incomes, raising them for the richest so the tax cuts are affordable. We will fund this by ending upper rate tax relief on pensions, clamping down on tax avoidance, harmonising income and capital gains taxes, increasing green taxation and trimming overall central public spending. These proposals would not increase the government fiscal deficit; that means they are affordable now. This tax cut is now urgent to get money to people who are struggling the most, helping them to pay for essentials and keep spending money in the high street.

Is that going to happen? Might the Tories choose to ditch an inheritance tax pledge that benefits the rich and does nothing for the economy, and replace it with an income tax cut pledge that helps the poorest and helps get the economy moving? Doesn’t seem likely, does it – perhaps it’s time for me to go away for a few days again.