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
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The Independent Online

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.