Dominic Lawson: Higher taxes will drive not just people but businesses abroad

I was in the Commons when my father removed the old higher rates, to Labour’s fury

Share
Related Topics

I know it’s got to the point that when Gordon Brown says something, it is generally assumed that the opposite is true. Observe, for example, his remarks a few days ago at an event for The Prince’s Trust: Mr Brown volunteered that his proposal to introduce a top tax rate of 50p in the pound “is not taxation for its own sake, it is tax for a purpose”.

Yet for the moment, dismiss from your minds the unworthy thought that this proves Gordon Brown really does like the idea of imposing greater taxes on the well-off as an end in itself. Instead, consider that the proposal did indeed have a purpose: it succeeded in its objective of seizing the Budget headlines, when otherwise the media would have concentrated entirely on the shocking public debt figures which Chancellor Darling was obliged to reveal.

It had a second – also entirely political – purpose. The Labour benches were uneasy with Mr Darling’s revelation that public expenditure (after taking into account the increased cost of debt repayment) would need to be cut. Just about their only cheer came when the Chancellor dropped his little tax bombshell that those earning over £150,000 a year would pay a significantly higher rate of tax: indeed, with the removal of a number of allowances, it seems that many will find that their marginal rate of tax will rise to 60 per cent once their earnings reach £100,000.

There is historical payback in this.

In March 1988 I was in the House of Commons, in the seats reserved for family, when my father removed the old higher rates of tax and established a new top rate of 40 per cent. The Labour benches erupted in fury, so much so that the sitting had to be suspended: I recall Gordon Brown being among the most animated in rage.

The claim made by the then Chancellor that this measure would stimulate the forces of entrepreneurship in the economy, and might not lead to any loss in tax revenues from the highest earners, turned out to be justified; but it was clear to me intuitively at the time that the Labour benches were not yelling with fury because they feared that these tax cuts would lead to worse times for the least welloff.

They were simply appalled by the idea that the better-off should be allowed to keep more than half of their income out of the hands of the taxman – regardless of how well or wisely that money was subsequently spent by the state: indeed, they would rather the money be dropped, unspent, into a bottomless pit, than retained to such an extent by the people who had earned it in the first place. That view still has wide currency, and not just among the Labour MPs who never called themselves Blairites.

What is strange, however, is that for all those people who believe that a high level of personal income tax is a social good in itself, there seem to be none who personally volunteer to pay more. I know of no individual, however committed to equality of post-tax income, who sends an extra annual cheque to the Inland Revenue, over and above the amount he or she believes is owed by law.

To the extent that this is based on an unspoken understanding of the grotesque inefficiencies involved as the money is tortuously funnelled from those who earn it to those who need it, Alistair Darling’s claim that the Government would be able to save “£9bn a year of additional efficiency savings” comes as mere confirmation.

As Vince Cable observed, if the Government is right that it could save £9bn a year in “additional efficiencies” without sacrificing a single programme or public sector project, why was such large-scale inefficiency regarded as acceptable until now?

That £9bn is still a small fraction of the running public sector debt of £175bn; the benefits of the increased tax on higher earners are yet smaller, even on the Government’s claims. It says that the new 50p rate, combined with the removal of some higher-rate allowances, will raise an extra £7bn a year. This is starkly denied by the non-partisan Institute for Fiscal Studies. Following detailed research over a number of years, the IFS has concluded that the Government would maximise the

revenue it collects from those earning over £100,000 a year by imposing a marginal rate of 55.6 per cent. The current marginal rate for those high earners is already 53 per cent; yet the IFS’s optimal figure will be left well behind in Brown’s wake as a result of the Budget.

Such calculations are based not just on the fact that people with exportable skills might leave the country if they believe their net earnings would be higher elsewherealthough it is a worry, given that the top 1 per cent of earners pay 22 per cent of total income tax. The likelihood of such an exodus can be exaggerated, especially at a time when job opportunities are declining globally; the greater problem is the extent to which international businesses decide to base themselves elsewhere.

The key to this is the financial services sector. Although those businesses account for less than 10 per cent of British GDP, they generate 25 per cent of Corporation Tax revenues. It is true that the Exchequer will probably end up losing about £50bn as a result of the bank bailouts; but that is

dwarfed by what the City has paid into state coffers over the course of the last decade. You might not approve of such things as financial derivatives, but the fact is that by 2007 almost half of them were traded in London (to the fury of New York, Paris and Frankfurt) which means that the profits were booked and taxed in the UK.

Such businesses are highly mobile: unlike great manufacturing plants, it is no great effort to relocate a trading floor from one country to another, especially if the staff are recruited internationally. This, indeed, is why Gordon Brown had slobbered over the City while Chancellor: he knew that they were funding the dramatic increases in public expenditure which were the key to his political strategy.

Characters as diverse as the Archbishop of Canterbury and Lord Mandelson have argued recently that it would be better if we “made” more things. Yet if the objective is to finance a generous welfare state, then you can’t really believe that we should sponsor car manufacturing, which produces negligible amounts of profits and therefore taxes, and discourage more lucrative industries; added to which, the unfashionable truth is that the countries which are suffering most in the current recession are those most dependent on the export of manufactured goods, such as Japan and Germany.

Some newspapers have argued that the budget showed Gordon Brown engaged in class war. That is a preposterously old-fashioned way of looking at it. The City, for example, has long since ceased to be a sinecure for the sons of the aristocracy: it is furiously, even obsessively, meritocratic.

In fact the only family to gain substantially in the budget was the Royal one: buried in the small print was an amendment permitting the Prince of Wales to deduct his sons’ official expenses from his own tax bill.

Which brings us back to those remarks by Brown at The Prince’s Trust: he concluded by revealing the “purpose” of the increase in the tax on high-earners: it was “Britain taking bold action for recovery”.

Now that is definitely the exact opposite of the truth.

d.lawson@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Online Media Sales Trainee

£15000 - £30000 per annum: Recruitment Genius: Now our rapidly expanding and A...

Recruitment Genius: Public House Manager / Management Couples

£15000 - £20000 per annum: Recruitment Genius: Are you passionate about great ...

Recruitment Genius: Production Planner

£20000 - £30000 per annum: Recruitment Genius: This fast growing reinforcing s...

Recruitment Genius: General Factory Operatives

£18000 - £35000 per annum: Recruitment Genius: This fast growing reinforcing s...

Day In a Page

Read Next
 

If I were Prime Minister: Every privatised corner of the NHS would be taken back into public ownership

Philip Pullman
 

Errors & Omissions: Magna Carta, sexing bishops and ministerial aides

John Rentoul
As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links