A Pre-Election Look At Labour’s Tax Strategy

A Quick and Informal Look at Labour’s Tax Policies before the Election
By Donald Parbrook on 5th June 2017

Until two weeks ago I was rather disinterested in the election. It seemed that Corbyn would prove entirely unelectable, get kicked out and Labour could return to “centre-left” opposition with somebody like Yvette Cooper charged to lead the rebuilding of her party and her husband, Ed Balls might dance back into political life. Two weeks is a long time ago in this election.

Corbyn has run a great campaign against an invisible PM. Apparently during the Brexit vote she was nicknamed “submarine” as she disappeared at the first sign of trouble. She is now called “yellow submarine” after her mysteriously low profile election.

With the Polls tightening it is perhaps worth looking again at Labour’s proposals on taxation.
Readers will forgive me if I do not spend any time looking at the SNP or Liberal position as neither appears likely to form the next UK Government.

Before thinking about Mr McDonnell’s proposals, I might mention the Conservative position first. Well, it’s pretty unclear. Mindful that Mr Hammond’s frankly disgraceful attempt at a Budget resulted in a breach of their 2015 manifesto then a retraction of a National Insurance Hike for the self-employed, the Conservative manifesto seems to be light on detail and that National Insurance hike is surely certain if re-elected unless he is reshuffled (as he should be in my opinion).

The Conservatives say they are the party of lower taxation but no guarantees like those offered to us in 2015. To be fair, if they continue as before there’ll be more tinkering along with a drop in corporation tax to 17% (announced previously), increases in the personal allowance and higher rate threshold (which the SNP can stop us getting up here) and some more regulation. Making Tax Digital, the flagship policy to force us all to make quarterly returns to the state disclosing business (inc. rental) income, will proceed but maybe a year late thanks to the election and the fact (bluntly) we’re not ready for this big change yet.

The Labour Manifesto is more interesting as it proposes profound changes that will affect the wealthiest in society very significantly if implemented in full, even if commitments that 95% of taxpayers will pay nothing more. So 5% are presumably to be raided heavily to pay for lots of “free stuff”. Or debt increased, forcing a future Government to increase taxes for all. It’s hard to balance the books unless most people pay tax.

Income Tax & National Insurance

A 45% rate will start at £80,000 (currently at £150,000). And at £123,000 the 50% rate will return. Big changes for high earners. For me, the interesting part of this is that for earned income it creates an effective 69.5% (combined tax and NI) rate on income between £100,000 and £123,000 as in this bracket your personal allowance is removed at a rate of 50p for every £1 of income (already the way it works) – this rule quietly turns a 40% tax rate into 60% on that slice of income. With a 45% rate it creates a 67.5% rate plus 2% National Insurance. These are heady rates. Even Nicola Sturgeon might struggle to argue the rich aren’t paying their fair share. National Insurance will be subject to a 2.5% surcharge above £330,000 (5% at £500,000).

Corporation Tax

For larger firms the 17% planned rate will be 26%. Corporation tax receipts have been doing rather well since profitability has returned to the corporate sector despite rates dropping to 19% now. It appears small companies may get the benefit of lower rates (this is how it used to be). Labour is proposing that many of their new spending commitments will be paid for from this change. However, experts argue that, over the long term, it is very uncertain whether higher corporation tax rates will see a higher yield. Conduct may change, inward investment may reduce. If we look at Eire, say (remaining in the EU too!), then keeping the corporation tax rate as low as possible seems wise. This might encourage inward investors to retain a post Brexit UK base- employing people and paying business rates as well as some corporation tax.

The lesson from Eire could be that a stable English speaking economy in Europe offering low tax rates to corporates can attract real businesses (not just brass plates). Higher corporation tax may also reduce dividends, on which income tax is paid (higher rates) and impact investment funds (such as pensions). If the increase adds £10bn to corporation tax receipts I’d be quite impressed. They are currently just above £50bn I understand. It is not for me to say what rate is right, but consider that France’s new Government wants to cut their rate.

VAT

Mr McDonnell has pledged to try to reduce this from 20% to 17%. As receipts from this tax are understood to be circa £85bn this cut could take £10bn back out of the treasury coffers – which does rather leave me feeling that the corporation tax increase could be wiped out in an instant if he proceeds with this, leaving no money for any of the spending plans.

Capital Gains Tax

Media suggestions are that Labour may increase the rates. It would seem odd to raise income tax rates but not adjust capital gains tax rates or align them with income tax? In terms of importance to the fisc, CGT is a smallish matter. The big “beasts” for Treasury income are VAT, Income Tax, National Insurance and Corporation Tax. I think this is one to watch for if Corbyn wins- the post election Budget may just see the generous 20% rate (10% for business disposals) attacked.

Inheritance Tax

Labour have said they will reduce the thresholds including the newly introduced additional allowance for inheritance of a main residential property. A reduction in limits will be very unwelcome for many, especially in the south east of England due to house prices. The nil rate band has been left behind inflation for many years and although the new house exemption helps, the number of estates paying tax is rising steadily. Does McDonnell believe inherited wealth should be allowed?

Tax Avoidance

So much has been done in this area and I don’t always think the media gives any credit or acknowledgement for the changes. However, Labour promise to end shell and umbrella companies and to make anybody with £1m+ income publish their tax return. They want to hit this hard – but all politicians say that, and in my own opinion the “post Gordon Brown” period has seen more new legislation in this area than anybody could have imagined. We must be nearly there in terms of how far we can go whilst retaining the rights of citizens to a private life.

Brexit

I mention this as Labour give a commitment to retain the Single Market and Customs Union. They say “no deal” is not an option. My conclusion on this is that (looking at the EU position) we can only achieve this by allowing a free movement of people. It strikes me that EFTA (like Norway) is in prospect. What is remarkable is that this isn’t being talked about more. The Tory position is at least understandable. We promise nothing, we go in willing to walk away and see what can be agreed. The Liberal stance is ridiculous. Their second vote stance is basically saying to Juncker, “if you offer us a rotten deal we’ll take it to the people in a second vote…and recommend we stay in the EU rather than leave”. I imagine Juncker’s reaction will be to ensure we get that very rotten deal in order to ensure we vote again more favourably! Still it’s not likely the Liberals will be calling any shots on this one.

Landlords

No doubt still recovering from the shock of the increases in Stamp Duty (LBTT in Scotland) including the 3% supplement for non-main residence purchases, landlords face the removal of higher rate tax relief for interest which for some has the effect of pushing real tax rates on economic profit way above 50%. Landlords also have the prospect of quarterly tax returns to HMRC through “Making Tax Digital”. If Labour win, their lives may be further troubled by Labour’s commitments to ensure tenants can have 3 years leases with inflation only increases in rent, to give tenants consumer rights and more regulation on property condition.

“Garden Tax” – a myth?

There is a reference in the Labour Manifesto to Council tax replacement. Of course, Scotland and England may diverge here. However, being careful not to quote biased reports one must be aware that there is a Labour Land Campaign which the current leadership supports. Their proposals are that there is an annual tax on land value. Some Conservative media outlets have reported that 3% is the likely rate (because this is apparently used in examples somewhere). Labour are saying they will review the matter and nothing is agreed etc.. However, we all know local taxation is a difficult area. If England were to move to introduce a tax of this type it must surely be likely that Scotland would too. It is surely likely that those living in detached houses in wealthy areas (and businesses too may be included) will pay a lot more if this was to ever reach statute.

Summary

It might be easy to say the country will “go to the dogs” if we elect a Communist/Marxist Chancellor. I must say some of the old media (youtube) videos of McDonnell saying he wants to destroy the whole system and speaking in support of the fallen IRA’s fallen are unappealing to me in the extreme in a way that no mainstream political party has been before.

I wonder if once in a generation we need to actually “try socialism”. Polls suggest young people are hugely in favour of Labour (or the SNP up here).

Certainly, we’re a long way from Labour’s Peter Mandleson’s famous quote (in relation to footballer’s wages in 1998). He said he was “ intensely relaxed about people getting filthy rich as long as they pay their taxes” (my words). Apparently he regrets that now!

I find it all rather strange and I imagine others do too. We have become used to choices between a “soft” left and “soft” right since “Major vs Kinnock”. This week most Scots will have to choose between Conservative, Labour and SNP (a few will live in a Liberal target I know). The profoundly different visions for Scotland and Britain on offer are quite startling with “more of the same”, “UK wide Socialism” or “Indy2” all on the menu. Lucky us I suppose.

I feel as if I’ve returned to a favourite restaurant and the simple choices between Beef, Cod and Vegetarian Pasta, all of which may taste fine, has been replaced by Snail Soup, Jellied Eels or Sweet Haggis and Neeps Ice Cream. I don’t want any of them – but I need to work out which one is least likely to give me a funny tummy!

Regards
Donald

The views above are personal views of Donald Parbrook, and are not those of colleagues and the firm.

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