A taxing dilemma: How to squeeze the rich without panicking the rest of the nation…

TO hike tax or not to hike tax, that is the question. And – taking further liberties with The Bard’s Hamlet soliloquy – whether to do so is nobler in the mind, even if it means suffering the slings and arrows of an outraged electorate?

Clearly, in Britain, the Opposition’s big Eds – Miliband and Balls – believe picking the pockets of those with more spending oomph than what’s good for them is a risk worth taking. Besides, the whiffy rich are probably all Conservative voters (not the case, incidentally, as some of Labour’s mega-donors are billionaires).

Importantly, the rationale is the plebs will love it, just as Madame Defarge famously knitted and cackled, as French aristos arrived at the guillotine in Dickens’ Tales of Two Cities, only to exit several inches shorter (hey, whatever else, nobody can deny this column isn’t a minor tour de force in classical literature).

So Shadow Chancellor (Finance Minister) Balls says the top rate of income tax will rise from 45 to 50% for those grossing £150,000-plus come a  government of The People’s Party.

It was meant to have been his boss’s grand proclamation at next autumn’s party conference, as the wind-up to the 2015 General Election steamed nearer boiling point. But improving GDP, lower inflation and higher employment stats dulled the resonance of Miliband’s recent call to arms that the ‘squeezed middle’ and lower paid aren’t benefitting from the UK’s trajectory out of the economic gutter.

So, the tax card has been played now and it’s a clever ploy from the Red Eds. Never mind previous assertions of a ‘one-nation Britain’ – a quote Miliband shamelessly purloined from Benjamin Disraeli, a 19th Tory leader – this is pure divide-and-rule strategy.

The bet is it could woo back into the Labour fold those who deserted to the Liberal Democrats in protest at Tony Blair’s Iraq adventure, only to find they’d backed a bunch of political harlots. And even some lukewarm Tories, hammered by the ruling Coalition removing Child Benefit for families where a parent earns over £50,000, could register their disgruntlement by biting the hand that robbed them.

TAXING TIMES: High earners, grossing more than £150,000 a year, will be hit by Labour's ploy

TAXING TIMES: Earners grossing more than £150,000 a year  will be hit by Labour’s 5% tax-rise ploy that’s more politics than economics

Yet Gordon Brown’s lustre was hardly burnished when he inflicted the 50% rate on high earners, before transmuting from Iron Chancellor to jelly-wobbling Prime Minister, then disappearing into the Sahara of political obscurity, post the 2010 election fiasco.

The problem is – as the august Institute of Fiscal Studies pointed out – the five-percent hike isn’t likely to grab that much cash. And, with a bodyguard of lawyers and creative accountants to protect their assets, the really seriously affluent won’t bat an eyelid, because their lucre is parked in trusts or offshore tax shelters.

So, there’s no disguising what this gambit is all about – politics, not economics

Yes, there’s an incontrovertible moral case for the well-shod to shoulder their fair share of the nation’s burden. But most already do, with the top 1% of earners annually coughing up nearly £50-billion to the Treasury, which accounts for over 20% of the overall take.

Tax, though, is rather like taking a friend to the dentist to have his root canal filled, minus anaesthetic; it’s an unpleasant experience, but mitigated if someone else’s suffering is all the more painful.

Yet none of us escape its clutches, either directly via income tax or pernicious ‘sales’ duties, like those levied across the European Union under different acronyms – in Spain it’s IVA, in France TVA, in Scandinavia the cuddly-sounding but detested Moms and Britain has Value Added Tax/VAT, though where the ‘value added’ is remains shrouded in mystery.

To me, income tax always seemed the fairest imposition, because it’s based on earnings and graduated. In contrast, whatever their quirky handles, catch-all ‘sales’ taxes aren’t, since they don’t discriminate between rich and poor, and impact harder on the have-nots than the haves.

However, the key to making tax work is setting a rate that’s equitable. Because, illogical though it may seem, the higher it is, the less the state’s overall gain.

EDS YOU WIN? Miliband and Balls have played the tax-hike card, but whether it brings them victory in the 2015 election is another matter

EDS YOU WIN? Miliband and Balls have played the tax-hike card in a bid for victory in the 2015 UK General Election

For instance, in the 1920s, under President Calvin Coolidge,  the top rate of US income tax was cut from 73 to 25% – yet the amount of cash flowing to the Treasury went up, the economy boomed, GDP soared by an average of 4.7% and unemployment fell to just 3.2%.

And a pet anecdote of mine further underscores this apparent contradiction: On assignment in Sicily some years back, I was imbibing a few flaming Sambucas with a clutch of local scribes and we got around to discussing which of our nations squeezed us most.

I thought it was Britain, until one of the Italians piped up, insisting, ‘No, is-a Italia. ‘Ere is 80% – dat’s-a why nobody pay-a tax!’

When he’s not playing musical beds, President Francois Hollande is discovering a similar scenario erupting in France, after raising top-level taxation to a swingeing 75%, only to find the country’s coffers fell 2.7-billion euros short of expectations.

‘Ill-thought-out taxes, from sales tax to heavier social fees, push people toward the informal economy,’ explained economist Samuel-Frederic Serviere.

So, not only are fewer French paying – some fled the country, actor Gerard Depardieu even decamping to Russia – the ‘black’ economy is booming, last year up by 10.2%.

Ditto Spain, where taxation impacting on the self-employed is so punitive there’s no incentive for wannabe entrepreneurs to open small businesses. Instead, as in France, the illegal sector expands, in Spain’s case to 19%.

So the question remains of how best tax can be used to pump-prime a declining economy and foster enterprise – which creates more jobs, thus more tax-payers, and reduces benefit dependency – even if the post-tax, take-home pay of some CEOs is panned as obscene by hard-pressed workers.

By playing the tax card, Labour is pandering to that naked popularism and we’ll see if it charms the voters in the General Election of May next year.

The People’s Party track record, however, isn’t inspiring, especially with Balls still remembered as Brown’s chief bully boy, who helped tax and spend Britain into the sick bed of Europe.

Another downside for the Red Eds is the general public’s edginess at any mention of tax hikes, even if Britain’s rich are due to be first in line for the squeeze.

Who, perhaps they might wonder, is next in the queue to get clobbered, especially from a party where raising taxes is ingrained in its DNA?

 

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