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Desperately seeking growth through taxation

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Some of the Labour Party’s taxation proposals may sound good in theory, but the amounts raised would be little more than a drop in a very large economic ocean.

12th Oct 2023
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Having heard the Conservative Party set out its stall for pre-election tax planning the previous week, many were eager to discover proposals from Labour, given its substantial lead in recent opinion polls.

Would a party that has been in opposition for 13 years excite us with fresh ideas or merely re-brand policies that will make little difference to voters and, more importantly, accountants?

The first significant contrast between the parties was that where Tory tax ideas came from numerous sources, Labour primarily presents a single voice – Shadow Chancellor Rachel Reeves with party leader Sir Keir Starmer adding weight.

Strangely, both parties offer the same key message – Britain needs growth. Either might also have slipped the word “desperately” into that sentence.

Many have concluded that although Rishi Sunak or Jeremy Hunt talk about achieving growth, they have few concrete proposals to achieve the goal. It is unclear whether Labour has much more to offer but, over time, their concentration on green policies and large capital projects will at least be a little different.

Intriguingly, it appears that Reeves’s bible for these matters is to be Follow the Money, the exhaustive and eye-opening analysis of the current state of the economy from Institute for Fiscal Studies Director, Paul Johnson.

Cats out of the bag

When it comes to tax, some cats had been let out of the bag weeks ahead of what is anticipated to be the party’s final conference before the general election.

Labour has no plans to increase taxes for what are described as “working people”. Neither does it intend to attack the wealthy through raising top rates of any taxes, unifying income tax and capital gains tax rates, or introducing a much-discussed wealth tax.

What does that leave? Some would suggest not very much.

Few of the concrete proposals sound earth-shattering, although some may make a material difference to prospective victims.

Most tax policies prove controversial since they inevitably hit someone in the pocket. However, when Reeves announced her intention to appoint a Covid Corruption Commissioner charged with pursuing at least £2.6bn of “lost” public funds – largely relating to frauds around Covid support schemes from business loans, grants, furlough and Rishi Sunak’s pet project, Eat out to Spread Coronavirus – it is hard to imagine that there could be any serious opposition.

Charging HMRC, the Serious Fraud Office and the National Crime Agency to do their jobs and reel in several million pounds that have been stolen from us all sounds like a good opening gambit.

Mind the gap

Having set up the team and watched them do the business, one hopes that Reeves will then redirect the troops towards narrowing the tax gap by attacking evasion and abusive tax avoidance or bolster HMRC investigative teams to achieve a similar result.

Her other proposals are likely to prove more controversial and some have already angered interested parties. Taxing non-doms sounds like a no-brainer, since even if some up sticks and leave the country, others will feel enough of an attachment to this green and pleasant land and happily pay additional taxes that they can easily afford.

Although the Labour Party has pulled back from its original idea of removing charitable status from public schools, it is still proposing to take away their exemptions/reliefs from VAT and business rates.

According to media reports, only 7% of pupils attend public schools and some of those will be in receipt of scholarships. Therefore, in numerical terms, few voters will be offended by such changes, although those that are could be rich, influential and vocal.

Similarly, Labour has identified what it regards as an anomaly in the taxation of private equity fund managers, in that profits from “carried interest” are taxed as capital rather than income.

Beyond that, there is also rather vague chatter about the need to consider windfall taxes.

The problem for Reeves and her team is that the amounts raised from all of these policies together are little more than a drop in a very large ocean.

Party favours

In a year or so, we will discover whether the next government is to be led by Rishi Sunak or Sir Keir Starmer and, additionally, if the victors will need to rely on favours from other parties to govern.

If Labour is the party in power in 2025 and beyond, unless it can miraculously achieve the significant growth that the Conservatives have flailed around without finding over the previous decade and a half, then additional fundraising will be required. Should that be the case, the party may well be reduced to breaking pledges regarding taxation of the very wealthy and possibly even find a need to introduce or perpetuate a series of stealth taxes.

Interestingly, during a conference event, Reeves was quoted as saying: “We don’t plan a wholesale equalisation of income tax and capital gains.”

The word “wholesale” might speak volumes in the fullness of time.

Replies (3)

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By Mike Warburton
13th Oct 2023 10:09

Politicians have a habit of announcing spending measures to be paid for from tax rises that they think the public will support, or certainly have no objection with. Taxing Non Doms is a favourite. On 1 October 2007 George Osborne announced plans to raise the IHT threshold to £1m at a cost of £3.5m a year, all to be funded by charging Non Doms £25,000 a year. A week later Alistair Darling announced a similar tax on Non Doms but which was planned to raise £500m a year. I was invited to a meeting with the Shadow Treasury team to discuss who was right. My response was that both estimates were likely to be far too optimistic. This was based on HMRC figures for the number registered as Non Doms, although I explained that nobody really knew the answer because some Non Doms had no obligation to file tax returns. Two years later HMRC reported that the change had raised just £226 m.

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By Arcadia
13th Oct 2023 11:44

Changes in tax rules rarely deliver the promised revenues, because people change their behaviour to avoid the tax. Having said that taxing gains as income is a no-brainer to me. We do need to chase down the obvious anomalies and loop holes even just for the sake of equity. There are plenty of others. When we hear that Sunak is only paying 20% tax because he has magicked his income into gains it completely undermines for me any credibility he has for honesty and fair dealing. Quite the opposite in fact. He appears to ordinary people as just as much of a crook as Johnson, but without the bonhomie.

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paddle steamer
By DJKL
16th Oct 2023 16:45

I doubt the school tax policies will hurt that broadly, however there are points to consider:

1. You get tight clusters of fee paying school pupils , I think Edinburgh has circa 25% of all pupils attending private fee paying schools (Not Public Schools) rather than 7% nationally..

2 What are Labour seat targets in Edinburgh? They hold one seat and would like to win back a few from the Nats who are weakened post Camper Vangate. (North & Leith (mine) and East spring to mind though West may not be achievable given the Libs)

Labour need a big swing from Conservatives, shame to maybe drop two seats (must be other similar places in England) on such a scare policy re vat and rates that likely raises very little.

https://www.thenational.scot/news/23709036.private-schools-one-four-edin...

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