Jeremy Warner's Outlook: The Tories must wish they'd listened as Gent makes the case for a flat-rate tax system

Kerkorian takes a gamble on GM; Growth surge at Sky defies the sceptics
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The Independent Online

By this time tomorrow I may be eating my words, for elections are never entirely predictable - even at this late stage in the game - yet my money is still on a very sizeable Labour majority with the Tories failing to make significant progress. What explains this continued Tory ill fortune? A large part of it is the economy, stupid, which has made the electorate feel broadly comfortable with Labour notwithstanding any doubts it might have about the Prime Minister's integrity.

I'm not sure Michael Howard could ever have won this election, even if the bias towards Labour in the present electoral system, where sparsely populated inner-city constituencies get a disproportionately large share of the seats, didn't exist. The puzzle is Mr Howard's failure, against the backdrop of a deeply unpopular war, to make greater headway. Everyone has got a view on why this should have been the case.

The fact that Mr Howard was as much pro-war as Mr Blair is only one part of the explanation. To call Mr Blair a liar on the one hand, while on the other declaring that the Tories would have taken the country to war on the overtly illegal grounds of regime change, was too confused a message to be credible.

Yet in my view, the biggest failure was simply that of being insufficiently bold. On virtually all fronts, it was a little bit of this and a little bit of that. Great care was taken not to stray too far from the middle ground. Unfortunately, this is already occupied by Labour. The Tories were never a distinct enough alternative. In no area is this more apparent than tax, where the Tory pledge to tax by £4bn a year less than Labour is a difference of almost laughable insignificance.

Should not the Tories have been more radical on tax? One business leader who has long held this view is Sir Christopher Gent, the former chief executive of Vodafone and now chairman of GlaxoSmithKline. Yet his case is argued to all politicians, not just those of the centre right. Sir Christopher is a believer in flat-rate taxes. My first encounter with the flat-rate-tax debate was years ago through Steve Forbes, the proprietor of the eponymous business magazine. Back then, he was virtually a lone voice, and his views looked more like those of a flat earther than an enlightened visionary.

However, since then quite a few countries have adopted the system, from Russia to the Ukraine and more recently a number of the EU accession nations including Slovakia and Poland. Of course, these were all countries where the tax system had virtually collapsed and almost anything that might raise revenue was preferable to the mayhem that existed. Yet intellectually, flat taxes may have attractions to more developed, stable countries too. By setting a single rate of tax for all beyond a certain income level, flat taxes would take millions of low-paid workers out of the tax system altogether.

Proponents argue that the system would work progressively in other ways too. For instance, in the US, and to some extent Britain, the better-off congregate in low-tax areas where because of the concentration of wealth, the amount of tax raised is higher and tax-funded services are correspondingly better. Property prices rise, making these areas unaffordable for lower paid workers, who become ghettoised in high-tax, poor-service districts.

A single rate of tax prevents this kind of divisive tax competition. Set at an appropriately low level, it also leads to less avoidance and encourages more wealth creation. In theory, the total tax take is higher. Blimey! Even Gordon Brown might go for that one. So why doesn't he, and why did the Tories, with so little to lose, steer clear of proposing a flatter rate tax system? It was in Michael Howard's mind once, for he talked openly about the need to take the lower-paid out of the tax system altogether. Yet it wasn't in the manifesto.

The answer lies in the politics of envy. Never mind the low-paid, the great bulk of the electorate would pay some tax under this system. Few of those in the average-to-middle-income bracket are yet prepared to accept they should pay the same marginal rate as old money chops down the road.

Sir Christopher's view as chairman of Reform, an independent think-tank, is that the dam is breaking. Resistance is already futile. If others are doing it, even if at present it is only Eastern Europe, then eventually Britain must follow suit to keep the wealth creators who ultimately pay for the public services the Government wants to create. It is hard to imagine Labour ever introducing a flat-rate tax system, but you never know. The way things are going, tax reform may soon be the politics of the centre ground too. Labour will have moved in even on this once far-flung corner of right-wing thinking.

Kerkorian takes a gamble on GM

The last time Kirk Kerkorian invested in the US automobile industry, it ended in a nasty car crash. The legendary corporate raider was the biggest shareholder in Chrysler when it was acquired by Daimler Benz in 1998. He bought the Germans' line that it was a merger of equals and not a takeover and accepted the nil-premium terms. When he subsequently discovered he had been sold a lemon, Kerkorian sued. The case was finally thrown out last month and now, to add insult to injury, he is being counter-sued by a DaimlerChrysler shareholder who claims Kerkorian traded the stock with the benefit of inside information.

What then to make of his stake-building in General Motors? It is nothing if not a gamble. GM may be the world's biggest car maker, which makes it too important to fail, but it also has some giant-sized headaches. Its mountain of debt hovers a notch above junk status, its long-term healthcare obligations have reached crippling proportions and it is being taken to the cleaners in its home market by the Japanese. Not the most auspicious of investment cases.

The road map is so uncertain that the GM chairman Rick Wagoner has told Wall Street he cannot provide any earnings guidance for the rest of this year. However, Kirk obviously reckons there is value in the stock and yesterday he punted the best part of $900m on his instincts.

Now aged 87, maybe he is older and wiser than in his Chrysler days. He says the GM shares have been bought purely for investment purposes but the aim must surely be to put the thumb screws on the management.

One of the easiest ways for GM out of its bind would be to enter Chapter 11 bankruptcy protection, which would at least enable it to renegotiate its employee healthcare payments. Unlike administration or receivership over here, Chapter 11 is not terminal for equity holders but Kerkorian would have to take a haircut.

Growth surge at Sky defies the sceptics

However bad the downturn in consumer spending might be for others, it doesn't seem to be affecting BSkyB, or not yet, anyway. The satellite broadcaster had one of its best quarters for subscriber growth in years in the three months to the end of March, adding a net 95,000, or about 40 per cent more than the same quarter a year ago.

In part, that's down to much higher marketing spend. Even so, set against the backdrop of growing competition from Freeview and cable in multi-channel TV, as well as broadband, that's an impressive performance.

Only in two statistics is there cause for concern. The level of churn has crept up from the targeted 10 per cent or lower to more than 11 per cent, and the average rate of revenue per subscriber is slightly down. Yet even on churn, the chief executive, James Murdoch, is confident of returning to trend before too long.

The moment a chief executive starts saying his business is immune to the economic cycle you should start worrying, and to be fair Mr Murdoch is not saying this. Yet in the US, pay-TV has risen in pretty much a straight line for 30 years now, regardless of the ups and downs of the cycle. Mr Murdoch is probably right in thinking that despite the success of Freeview, Sky's growth has a way to go yet.