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.

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Oh dear. Here we go yet again.

Of course there are political advantages in portraying Lib Dem tax cuts as cutting taxes “for the lowest paid” and helping “the poorest”.

But the fact is that the policy is actually to cut taxes “for people on low and middle incomes” – after all, the whole point of the policy is to try to salvage Lib Dem seats in the South of England that are under threat from the Tories – and that means that the vast bulk of the tax cuts (to coin a phrase) will not go to “the poorest”, but to the middle class.

by Anonymous1 on March 23, 2009 at 9:12 pm. Reply #

Yes, the Tories are in some disarray. There is, as Finkelstein says, no money whatsoever. Cameron knows that, and does not want to saddle himself with stupid commitments. Thanks to Clarke’s gaffe, and his greedy right-wingers, he just has.

But who are we to throw the stones? We live in a glasshouse. Our policy of “big permanent tax cuts” looks daily more absurd. I did think the penny had at last dropped with Nick Clegg, because he hasn’t said it for a few days now. But then this article comes along. How about the wisdom of piping down?

by David Allen on March 23, 2009 at 10:48 pm. Reply #

The vast bulk of any income tax cut will always go to the middle class, because the middle class pay the vast bulk of income tax.

Of course, there are political advantages in repeatedly pointing out such banalities.

by Paul Griffiths on March 23, 2009 at 11:19 pm. Reply #

Paul

“The vast bulk of any income tax cut will always go to the middle class, because the middle class pay the vast bulk of income tax.”

Thank you. That’s precisely what I was pointing out.

So, obviously, if you really wanted to target a tax cut at the poorest, you wouldn’t cut the basic rate of income tax.

Conversely, if you decided you were going to cut the basic rate of income tax, because what you really wanted was to shore up your support in marginal constituencies containing large numbers of middle-class voters, then you might a least have the honesty not to dress it up as a tax cut for “the poorest”.

by Anonymous1 on March 24, 2009 at 12:06 am. Reply #

Income tax is NOT paid by the wage earner, but by business. It is passed on in the cost of goods and services to consumers – with highest and most regressive incidence on the poor, especially the expanding unemployed. This includes the 45% rate proposed for higher earners.

Income tax is a deadweight tax on jobs which makes employing workers more expensive for firms and, along with NI, is especially damaging in a downturn. Such taxes are, and always have been, part of the problem not the solution. They have only ever redistributed the wrong way – from poor to rich – helping perpetuate the widening wealth gap.

Replacing employment taxes with levies on privately appropriated public wealth would provide not only a quicker route out of recession, but also a more sustainable framework for wider economic growth and shared prosperity.

Our Party should make switching away from employers NI a priority, since this would have an immediate and direct cost benefit for business, helping to urgently ease overheads and save jobs.

Beyond this, continuing our policy to reduce the burden of income tax is an absolute must. Indeed, we should replace our “longer term aspiration” to remove NMW earners out of income tax with a commitment to do so in year one of a Lib Dem Government.

Taxes need not rise to achieve a rise in revenue. They DO need to be made more efficient, less avoidable by the rich and less costly to administer – particularly for business. We are moving, albeit tentatively, down this more progressive and sustainable road, aiming to “tax wealth, not work”.

Cutting (i.e. switching away from) income tax is part of this vital and vote-winning process. All the current recession shows is that we need to move much further and much, much faster.

by Andrew Duffield on March 24, 2009 at 8:40 am. Reply #

I thought we were a liberal party, so why are we supporting socialist filth like the death tax?

by Libertarian on March 24, 2009 at 10:31 am. Reply #

Libertarian, perhaps because it’s trivially obvious that one’s start in life has an enormous impact on one’s chances in life, and it just ain’t fair that those who happen to be born to the very rich get an easy life.

by sanbikinoraion on March 24, 2009 at 10:50 am. Reply #

Andrew, I agree with you on the need to shift tax from work to wealth, but our party has spent a very long time promoting the opposite with its line on replacing council tax by local income tax. So successful has it been with this that it’s not unusual now to come across people who think that shifting taxes from property to income is a fundamental aspect of liberalism. We have in this way pushed the message “tax on income is fair, tax on wealth is unfair”, which does seem to chime in with public opinion. People do seem in general to think taking a share of money as it comes in is fair because that’s based on “ability to pay” whereas taking it from owned wealth is unfair, since owned wealth is yours for keeps – for an infinite number of generations, given that most people now seem to regard inheritance tax as very unfair. Personally I’m a great believer in inheritance tax, but I find when I argue for it in almost any setting, I’m in a minority of one. If you stand to benefit from an inheritance you’re accused of being a “hypocrite” if you argue for inheritance tax, and if you don’t stand to benefit from an inheritance, you’re accused of being “jealous”, so you can’t win.

Our party has a great history on this, but to its shame it threw that away when it endorsed local income tax and poured scorn on the one remaining property tax. I do not know how we can get away from the muddle-headed thinking which cannot see what you correctly point out about the advantage of taxing wealth not work. The “little old lady in the big house” and the “I’ve earnt it and I have the right to pass it on undiminished to my children” lines will always win the sentimental vote. We might just try the line that it’s unfair to have a taxation system which makes it harder to climb up to the top, but easy to stay there once you’re up, but would that win over sentiment?

by Matthew Huntbach on March 24, 2009 at 11:18 am. Reply #

I’m with Matthew and Andrew. It perpetually staggers me that people would seemingly rather work was taxed than capital. Particularly as statistically speaking very few of them are going to end up sitting on so much capital that IHT is even in point. I think it must be an aspirational thing. People aspire to be rich enough to be outraged by IHT.

I also don’t understand why the equally emotive “taxing the dead” argument works. For a start it’s not technically true, it’s the estate that is taxed before the living can receive it. But even if it were true – surely the best time to be taxed is when you’re dead?

by Alix Mortimer on March 24, 2009 at 11:38 am. Reply #

Actually, tt still stuns me how the entire media ever swallowed this as a “central plank” of Tory tax policy in the first place. Even in the current “flip-flop” treatment that’s still the underlying assumption. I mean, if that’s your core policy how pathetic are your auxiliary policies going to be?

by Alix Mortimer on March 24, 2009 at 11:40 am. Reply #

David Allen,
within the context of a ‘tax-switch’ policy “big permanent tax cuts” as advocated by Clegg are entirely consistent as well as feasible and desirable.

Yet here you are criticising Clegg and Cable’s foresight because you are only listening to half the story!

The LibDem ‘tax switch’ policy is principled and entirely pragmatic.

As the incoherent dogmatic Conservatives show themselves to be in such a mess we should be promoting our policy even more strongly.

by Oranjepan on March 24, 2009 at 12:15 pm. Reply #

David,
I should also point out that the actual line is “big, permanent and fair tax cuts”.

Don’t forget that bit about fairness.

by Oranjepan on March 24, 2009 at 12:22 pm. Reply #

“I think it must be an aspirational thing. People aspire to be rich enough to be outraged by IHT.”

They are suffering from Joe the Plumber syndrome, which is all too common!

It’s funny, he was cited as a typical Repug because according to the story he was a hard-working success story about to be taxed to death. Well, this turned out to be a total lie.

But he does reflect the true face of the Repug party in that he’s both a fraud, & deluded. This is also what half the supporters (or should that be ex-supporters) of this policy say.

There are many such people amongst us who, in the days of rising prices, “aspired” to unearned wealth in such way. It is one of the reasons why I will soon be cursing the new government’s name that it panders to them without realising that those days are dead.

http://tinyurl.com/cc9lt3 (not safe for work).

There are mixed feelings on ConHome. The usual types like Newmania won’t budge & come out with some toss they haven’t thought about. Others, whom I believe to be the true face of Tory voters, are seeing sense.

by asquith on March 24, 2009 at 12:22 pm. Reply #

“I think it must be an aspirational thing. People aspire to be rich enough to be outraged by IHT.”

They are suffering from Joe the Plumber syndrome, which is all too common!

It’s funny, he was cited as a typical Repug because according to the story he was a hard-working success story about to be taxed to death. Well, this turned out to be a total lie.

But he does reflect the true face of the Repug party in that he’s both a fraud, & deluded. This is also what half the supporters (or should that be ex-supporters) of this policy say.

There are many such people amongst us who, in the days of rising prices, “aspired” to unearned wealth in such way. It is one of the reasons why I will soon be cursing the new government’s name that it panders to them without realising that those days are dead.

http://tinyurl.com/cc9lt3 (not safe for work).

There are mixed feelings on ConHome. The usual types won’t budge & come out with some toss they haven’t thought about. Others, whom I believe to be the true face of Tory voters, are seeing sense.

by asquith on March 24, 2009 at 12:22 pm. Reply #

I’m amazed that the Cameroon Tory party has such similar divisions to the UK one. 😉

by James on March 24, 2009 at 12:34 pm. Reply #

The underlying justification of Inheritance Tax could be that all should be made equal.

If that is truly the reasoning, then the next step could be income limits.

That is fine if you are a communist and want equality but surely people want to aspire to have something better.

If you are a parent, you want a better school and you will take a better salary to achieve it.

Maybe one day we will reach the point where all schools are good but, until then, surely fairness to those who want a better school has a place.

Robbing Peter to pay Paul may seem attractive in the short term.

by Voter on March 24, 2009 at 2:26 pm. Reply #

Just been reading this post, and it seems to me that the Tories just haven’t got a clue.

At the rate they’re going, they’ll just be waiting to copy our policies for their manifesto at the next election.

We’ve got room to cut income tax further, or raise the starting threshold, and still balance the books AND stimulate the economy in the RIGHT WAY.

There could be some interesting debate at Autumn Conference around this as it’ll be our last one before the election 🙂

by Neale Upstone on March 24, 2009 at 8:57 pm. Reply #

Voter,

The underlying argument for inheritance tax is that it’s fair. Why should a transfer of money one way be taxed at a much higher rate than a transfer is another? Why is it that when I earn my salary by hard work I pay a big chunk of tax on it, but if someone gets the same amount of money just by having the right parents they pay no tax at all on it?

Please don’t try the “double taxation” argument, as that’s economic illiteracy. I pay a gardener, and I pay him out of my taxed income. He has to pay income tax on what I pay him, he can’t say “oh, tax has already been paid on that, so I shouldn’t have to pay income tax on it”. Five pound notes do not come stamped “tax already paid on this one”.

by Matthew Huntbach on March 25, 2009 at 12:10 am. Reply #

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