|
|
|
From Them That Hath By Kevin Hickson September 2002 The last budget statement marked a turning point in the policy of the current Labour government. As many commentators have pointed out, the Labour Government, especially since 1999, has been quietly redistributive. Much of this has been done by "stealth", redistributing by means of indirect and corporate taxation, and masking increases in welfare expenditure behind tough talk on responsibilities. The budget changed all of this by financing an expansion of public services by means of increases in National Insurance and calling for a national debate on public spending. For those who were still unsure whether New Labour was more neo-liberal than social democratic on public expenditure, the budget should remove any remaining doubts. Brown followed this up with a radical spending review this summer. The government is now committed to substantial increases in public expenditure over the remainder of the current Parliament and into the next. In total this amounts to one of the largest sustained increases in public expenditure of any government since 1945. It should also be pointed out that this is in sharp contrast to the fateful years of 1974-76 when the then Labour government, which was committed in its manifesto to raising public spending, continually reduced expenditure. A lot still to do It would appear then that the case for greater redistribution has been won. In fact, however, there is still much work to be done to ensure that this is the case. This is so for three reasons. The first is that current taxation could and should be more redistributive. The universal increase in National Insurance at the last budget means that higher earners only pay a 1 per cent rate of NI. There is a need to abolish, or at the very least begin to phase out the upper earnings ceiling. The higher rate of income tax, at 40 per cent, is lower than other European rates and is lower than it was during most of the Thatcher years. The second reason for continuing to argue for greater redistribution is that the recent spending increases depend on economic growth. In previous growth forecasts, the Chancellor has given a rate lower than other forecasters. The result has been that when growth exceeded the Chancellor's forecast there has been excess revenue to fund spending increases. This time, the Chancellor's forecast is less prudent, being at the upper end of the range of forecasts. If growth slows then the government will either need to cut expenditure, raise taxes or borrow. Expenditure cuts would be disastrous electorally as the government fails to improve public services and borrowing will break the Chancellor's PSBR targets destroying his reputation for prudence. There may therefore be a need to raise taxes again before the next general election even if there are no further increases in expenditure. The final reason why the case for greater redistribution still has to be won is that there are many on the right of the Labour Party who remain unconvinced about the need to redistribute. These are often people in positions of influence at the heart of the New Labour project. Several arguments have been made against further redistribution, of which an increase in the higher rate of income tax would be the crucial change. These can be summarised as the philosophical, economic and electoral arguments. Often these arguments are not made explicitly, but instead can be detected in the discourse of New Labour. Before going on to examine the fundamental arguments in favour of redistributive taxation, we need to quickly recap on the fiscal history of the recent past. In 1979, a radical Conservative Government under the leadership of Margaret Thatcher was elected with a commitment to reduce the overall tax burden. The Conservatives were not to leave office until 1997. Over the course of eighteen years all rates of income tax were cut, but the largest cuts occurred at the top end. Other taxes were reformed - notably there was a shift towards regressive indirect taxation. The net result of complex changes was that only those earning over £64,000 per year benefited under the Conservatives (1). As will be seen below, the Conservative Government, imbued with a neo-liberal ideology, were to boast of this "achievement" both in terms of political theory and economic policy. However, for democratic socialists committed to social justice it is deemed as unjust. There is therefore a need to address the issue of the higher rate of income tax directly. The philosophical argument To neo-liberals such as Hayek, what matters is the absolute position of the poor, rather than the relative position of the poor to the rich (2). It follows that since we live in a society far wealthier than past societies in which the lot of the poor is now much improved, there is no real poverty in society. More specifically, we can detect three arguments presented by right-wing Conservatives which, when taken together, suggest that there is no need to bring about improvements in living standards by means of deliberate state intervention (fiscal redistribution). Firstly, it was fashionable for Conservative politicians in the 1980s to argue that the poor were poor because of their own failures. In this, they turned the clock back to the Victorian era and rejected the "One Nation" Conservatism of the post- 1945 period. The most famous example of this was Norman Tebbit's call for the unemployed to, "get on their bikes and look for work". However, as even Hayek notes, the market does not always distribute on the basis of merit, effort and so forth. Instead, as social democrats have often pointed out family background, genetic inheritance, market power and other such factors have their influence. In addition to showing that there is no automatic relationship between poverty and desert, there is also no such automatic relationship between wealth and desert. High incomes are just as likely to reflect market power and privilege than they are desert (3). Hayek also argues that present inequalities cannot be described in terms of justice and injustice (4). The outcomes of the market are the result of a large number of decisions. No individual intends to bring about the outcomes of market operations. Justice can only be the result of intent. As the outcomes of market operations are not intended, they are not unjust. The market is in itself amoral. But as the political philosopher Raymond Plant has argued, the notion that the justice and injustice of an act are only related to the intentional aspect is difficult to accept. Certain market actions have predictable results, which occur even though they were not intended. Justice can therefore apply to how we respond to the unintended outcomes of market operations. If it is predictable that the free operation of the market will lead to greater inequalities in income and wealth, and therefore greater relative poverty, we can measure our response in terms of social justice. Redistributive taxation is therefore central to the attainment of social justice and equality (5). The final philosophical argument presented by the neo-liberals is in terms of a defence of negative liberty. Negative liberty is concerned only with the removal of legal constraints on action - freedom from external constraint, rather than freedom to do something. Positive liberty requires a redistribution of resources in order to allow the underprivileged to do things that they would otherwise not be able to do. To the neo-liberal, this will be arbitrary in that someone - i.e. the government - must decide what level of resources is necessary for the realisation of positive liberty. There is a need for a consensus, which is not possible given that each individual has different capacities and wants. Furthermore, it requires an infringement of negative liberty in taking resources away from the wealthy in order to redistribute to the poor. It is, however, possible to defend the redistribution of incomes and wealth in theoretical terms. Given, as we have already established, that high incomes are based at least as much on power, status, luck and so on than they are on desert, we can offset the injustice in this by redistribution. We can assume that since everybody has a claim to be morally equal we should seek to obtain an equal a distribution of incomes as possible. What inequalities remain are to be defended in terms of "rent of ability". That is that society seeks to reward some people with higher incomes as a return for the higher social benefits of their particular work. This is the notion of "democratic equality" advocated by John Rawls and supported by Tony Crosland in his essay "Socialism Now". It has been defended eloquently by Roy Hattersley (6). Moreover, we can overcome the neo-liberal argument in favour of negative liberty by asking what is the purpose of liberty. The only justifiable answer is that liberty is useful in that it allows us to do things. It therefore implies a capacity or an ability to do something. If society allows the underprivileged the theoretical freedom to do certain things, it must also provide the means of realising those things. This means that the incomes of the poorest must be sufficient to achieve basic liberties. Moreover, this does not infringe on the liberties of the wealthy because their incomes are sufficient to achieve basic liberties, unless the level of direct taxation was to be raised so high that almost all of the income of the wealthy was taken away. Finally, it is possible to construct a consensus around what are fundamental liberties. Here the notion of relative poverty can be re-established. If positive liberty is concerned with providing the opportunities for the poorest in society to have a meaningful life and to realise their basic liberties, to be full and active citizens, then income levels have to be seen in relative terms. It is clearly absurd to argue, as the neo-liberals do, that the poor are not really poor because they are substantially wealthier than the poor were in past times. The poor have to have the opportunity to fulfil their own life chances in current society - that is that they have to have the basic liberties available to the non-poor in current society. Such liberties would include shelter, food, health care and clothing in order to have basic subsistence. Moreover, such liberties would include education, good quality housing, recreation facilities, holidays, travel, access to radio, television, the internet etc., in order to acquire information, and other such things that make life meaningful and enjoyable. These things can hardly be regarded as unreasonable demands given that they are necessary to fulfil basic liberties in current society. But many people do not have them. Even the first list of items necessary for subsistence are not universally realised in current British society given the problem of homelessness. There is still much to be done in the second area. Redistributive taxation would not result in a loss in the liberty of the wealthy because they would still be able to realise such basic liberties as outlined above. The economic argument What about the economic constraints on redistribution? Broadly, there are three issues here: incentives; the so-called "trickle-down" theory; and globalisation. I deal with each in turn. Neo-liberals argue that high levels of direct taxation act as a disincentive to hard work. Knowing that if a person earns more then they will be taxed more discourages people from working harder in order to earn more money. This is the famous "Laffer curve": high levels of taxation result in a lower total tax yield as people are less prepared to work. The Laffer curve was, for most of the 1980s and 1990s synonymous with the New Right, being far more explicit about financial incentives, self-interested human agency and the implications for fiscal policy than theories such as monetarism. Anthony Giddens, Director of the LSE and Blair's favourite academic, supports the idea in a recent publication (7), showing the degree to which the Third Way, supposedly modernised social democracy, buys into neo-liberal economics. Leaving aside the point made earlier that there is no automatic relationship between desert and income; it is also possible to subject the Laffer curve to empirical criticism. As has been noted, the tax burden on those earning over £64,000 per year fell between 1979-1997. Yet this has had little bearing on real economic performance. It appears that the recipients of tax cuts were not prepared to work any harder. The Laffer curve is based on an assumption that an individual's decisions in relation to work are based on monetary decisions. However, evidence suggests that other considerations are present in decisions of this kind. This is not to say that excessive rates of direct taxation will not act as a disincentive. But the levels of taxation are not yet close to this point and there is scope for tax increases without producing disincentives. The paradigmatic thinker of postwar social democracy, Tony Crosland, argued in The Future of Socialism that at over 80 per cent income tax was close to reaching the point where it would act as a disincentive. If this was so in the 1950s, why is that 40 per cent is now a disincentive? The second economic argument put forward by neo-liberals is the "trickle-down" theory. This states that the poor benefit by allowing higher income earners to earn more and allowing a share of that wealth to trickle-down to the poor. This is a key part of the neo-liberal case since it is the means of justifying the increased inequality that will ensue from allowing the wealthy to retain more and more of their wealth. It also appears to have been accepted by Tony Blair in a Newsnight interview with Jeremy Paxman during the last election. It was this apparent acceptance that led Roy Hattersley to launch an attack on the Labour Government following the election (8). According to the neo-liberals, and possibly Blair, the market is more effective in reducing poverty than is a state-led strategy of redistribution. However, evidence shows that this is not the case. Over the course of the 1980s, the wealthy benefited from tax reforms and the gap between rich and poor increased. If the trickle-down theory is correct, then the absolute position of the poor should have improved. But it didn't happen. Unemployment increased and more people claimed benefits. Benefits were themselves cut and application procedures tightened. Absolute poverty increased and charities were left to fill the gap. In short, there was little evidence to support the trickle-down theory in the 1980s. There is no alternative to a direct strategy of redistribution, other than to allow the poor to become poorer. The third economic argument put forward by neo-liberals and democratic socialist apologists alike is that it is not possible to raise taxes in the context of a global economy. High-income earners will go elsewhere if they are forced to pay higher income taxes. Neo-liberals put forward this argument with some satisfaction, as it appears to justify their philosophical arguments by showing that there is no alternative. Socialist apologists maintain an ideological commitment to redistribution, but argue that it is no longer possible. There is, it must be admitted, an element of truth in this argument. As with the incentive argument, excessive levels of direct taxation would result in the emigration of high earners to lower tax countries. Moreover, the globalisation thesis has much force in any consideration in the redistribution of wealth as distinct from income. In a sense, this has always been a problem, given that the wealthy could hold overseas bank accounts and other assets beyond the reach of British authorities. But globalisation has made this problem much worse in that funds can be moved around in the international banking sector much more rapidly (although corporate wealth can be taxed by the use of a Tobin tax). Thinking here is at a very early stage and any response is likely to be complex. Taxation of income is much easier. Income is taxed at source and is therefore subject to the controls of British authorities. It is unlikely that a more modest increase in higher rates of direct taxation would result in a mass exodus of the higher earners. This is especially true when we consider that Britain is a relatively low tax country (9). Britain has a lower tax burden than the EU and OECD averages. Moreover, although the tax burden is lower in the United States, taxes on incomes are higher than in Britain. There is therefore much scope for higher levels of direct taxation at the top end of the income spectrum without the expected costs put forward by the globalisation theorists. The electoral argument The final broad argument put forward by those who remain reluctant to advocate increases in the higher rate of direct taxation is that it is electorally unpopular. This is particularly so of those close to New Labour. Given that the Party was out of power for so long, it is seen as an unnecessary risk to advocate increases in income tax. Given the force of the philosophical arguments outlined above in favour of redistribution, it may be regarded as a necessary risk. Moreover, there is sufficient strength in the democratic socialist argument to win over the waverers. But it may also be argued that the extent to which such a pledge is regarded as an electoral risk has been exaggerated. It shows a fundamental caution at the heart of New Labour. This is due largely to the legacy of the 1992 General Election. The proposed shadow budget, which included an increase in the higher rates of direct taxation, was regarded as unpopular. It was decided by the Labour Party leadership after the election of Blair in 1994 that there was a trade-off between electoral popularity and redistribution. Higher taxation is unpopular and should be avoided. There are a number of responses that show that this attitude is incorrect. First is the simple point that Labour had a massive obstacle to overcome given the extent of the Party's electoral defeat in 1987. It had come close in 1992, and would just require one more push at the next election. This attitude appeared to shape Labour Party thinking under the leadership of John Smith. Given the ease with which Labour won the 1997 General Election against a tired and discredited Conservative Government, this attitude could be regarded as correct. But this can only be said with hindsight. Labour's caution in 1997 can be excused. Its caution in 2001 cannot. Secondly, other factors help to explain the General Election defeat in 1992. These include a lack of confidence in Neil Kinnock, the scepticism over Labour's potential management of the economy, election campaign gaffs such as the Sheffield Rally, the reinvigoration of the Tories after the fall of Thatcher and the impact of a largely right-wing press. The tax issue is only one issue among many, and opinion poll evidence suggests that the issue of the management of the economy was most important in shaping voter preferences. Finally, the tax proposals in 1992 were complex and were easy to construe as large tax increases. This of course is what the Conservatives did. The alternative is to pledge an increase in income tax at a specific level of income to a particular level of taxation. This would have the distinct advantage of transparency. The Conservative Party and hostile press would not be able to manipulate such a commitment as they did so successfully in 1992. Here, the Fabian Commission on taxation is relevant. The Report shows that, when presented in this way, there is broad support. In an opinion poll from August 2000, 80 per cent said that the Government should increase spending rather than cut taxes. Even among Conservative voters, there is a significantly higher proportion in favour of higher public expenditure. In a separate poll, of those earning above £70,000, 69 per cent said that income tax was too low or about right (10). In short, there appears to be more support for higher income tax at the top end than may sometimes be believed. The increase in the rate of National Insurance contributions at the last budget provides us with more precise evidence on voter attitudes, given that this was a measurement of what voters thought of a decision already taken rather than a hypothetical situation. The budget was the most popular in Britain since 1977 with all sections of the electorate showing a net approval for the budget, including Conservative voters. The following month Labour scored a popularity rating of 50 per cent, a lead over the Tories of 23 per cent and up 3 per cent on the previous month. Moreover, Brown was the most popular government minister following the budget with a 67 per cent approval rating. Conclusion If the government is to move beyond the recent budget it needs to be more open about redistribution and help to build a new progressive consensus with the electorate. It is best placed to achieve this if it makes a case similar to the one presented here. The immediate option would be to phase out the National Insurance ceiling. The government also needs to raise the higher rate of income tax, and therefore has to put the case for this now in time for the next general election. The rate is open for debate and is ultimately a matter of judgement in which the amount of extra revenue, likely public expenditure requirements and public opinion are all considered. This too ought to be a matter for open and honest debate on the Left. The Fabian Tax Commission has put out a marker at 50 per cent on incomes over £100,000, although this must be seen as a cautious estimate when we consider the level of inequality present in society. If the aim is not only to redistribute in order to improve public services, but also to reduce inequality, then we must aim for more. Notes 1. Fabian Society Commission on Taxation and Citizenship, (2000) Paying
for Progress: A New Politics of Tax for Public Spending, London, Fabian
Society, pp.58-60. Kevin Hickson recently completed his PhD on the 1976 IMF Crisis, and is editing a book (with Raymond Plant) on the political thought of the Labour Party to which he is contributing a chapter on equality. He is a Catalyst Research Associate. Contact: [email protected] |
 |
|
