Trickle up: time for tax reform

It’s just over a year until the next General Election, a good time to start discussing how we might reshape our society and our economy, if there’s a change of government. Lately I’ve seen calls for various tax changes, including a return to an extra 1p on income tax to improve public services. While this policy is commendable I think there is a different route to funding improvements to the public sector. In the 1980s Thatcherism involved a radical departure from the post-war political consensus. This included slashing income tax and business taxes such as capital gains. This did indeed shake up the economy, it also had the effect of reversing 90 years of income convergence in the space of 10 years. The UK remains the most economically unequal in the industrial world except for America. I propose a set of redistributive tax changes that will raise more money for the Treasury but also make Britain a more equal, fairer country overall.

UK inequality skyrocketed in the 1980s and hasn’t changed much since, any significant move towards a more equal society must involve a more redistributive tax environment

Bankers surcharge tax
The Conservatives seem to be bending over backwards to avoid collecting tax from Banks and Bankers. Central to Kwasi Kwarteng’s suicidal mini-budget was the unfunded lifting of the Surcharge on Corporation Tax for the banking sector – this light tax environment forsakes billions of £s in tax but also encourages bankers to return to the casino style high risk, short term returns that led to the financial crash in 2009. A fair burden needs to fall on the financial sector, that involves taxing bonuses in full, and levying windfall taxes when appropriate. Another huge mistake, less highlighted, is the Treasury’s determination not to make any money from nationalising the banks. It has knowingly sold off stakes in RBS at a loss, and continues to sell its equity despite the fact that the bank has returned to profit and is paying dividends directly to the treasury, sometimes more than £1 Billion a time. Hopefully a different government will retain its stakes in the banks and simply pocket the dividends – we’ve been waiting long enough for a return on this bail out after all.

Oil & Gas windfall tax
At the time of writing, the price of UK Natural gas is just under 200p a therm. This is way above the long term price range – for the last 25 years it’s oscillated between 20p and 60p a therm. The oil and gas industry continues to pocket huge profits, even to the point where the the boss of Shell, Ben van Beurden admitted that higher taxes on his sector were ‘inevitable’ and that energy giants can’t behave in a way that would ‘damage a significant part of society’. Since then the government has ignored repeated calls to bring in any windfall taxes. It would be a wildly popular policy and is already priced in by the sector itself, Sunak and Hunt, what are you waiting for? Failing to implement a hydrocarbon windfall tax is a huge missed opportunity to improve public finances during an energy crisis.

UK Gas prices – thankfully off their summer peak but still way above the long term average – a Windfall Tax is surely necessary

Legalise and tax Marijuana
Personally I fail to see the point of mere decriminalisation. I’d like to see marijuana fully legalised, sold down the same retail channels as tobacco and alcohol. The grower is legit, the distributor is legit and the retailer is legit. The quality of product is monitored and regulated, and you’d have the same restrictions on sale and usage as on tobacco. This would raise revenue, wipe out a whole class of petty criminals and stop the Police wasting time chasing after kids who just want to get stoned in their bedrooms. Taxing marijuana would partially fill in a massive black hole in finances caused by the decline in cigarette smoking – there are far fewer smokers and they smoke fewer fags per day than in 1980. William Keegan remarked on this in The Observer a few years ago – the decline in excise take amounts to around £40 billion! I fully understand there are mental and physical health consequences to smoking marijuana long term, but they are similar to smoking cigarettes and the anti social behaviour aspect does not compare to alcohol abuse.

Marijuana – a tax reform and a criminal justice reform in one fell swoop

An extra band on Council Tax
The structure of Council Tax hasn’t changed in a long time, in fact a lot of houses are being taxed at their valuations made in the 1990s. Council Tax is a regressive tax where someone can live in a Band H property, worth 20 or more times than a Band A property, but only pay three times as much tax. Property taxes are an effective means of distribution because they are hard to avoid. Former punk now Brexit loving bastard Tony Parsons was once asked what he’d do if he was chancellor for a day, he immediately said, ‘I’d scrap Stamp Duty’. This tells me Stamp Duty and the other property taxes are working really well – because they’re the hardest to avoid. You can debate the exact details, but properties worth more than £500,000 should be taxed more. An extra band on Council Tax is a good starting point.

A Council Tax chart for Southwark Borough from a few years ago – valuations are way out of date and the structure is regressive

Digital services tax
It’s become well established that tech businesses, whether they are hardware, software or internet, have become extremely adept at avoiding tax. Apple, Google, Facebook, Twitter etc seemingly pay next to no tax anywhere in the world and internet retailers undercut High St physical retailers by selling to you from havens too. We live in a world where any content that can be digitised – TV, books, films, music, newspapers – people expect to be free. Free stuff yields no tax either – not great for the creator or the Treasury. There are a number of ways to address this tax desert – some have proposed taxing tech companies’ turnover not profits – a fair idea. Others have suggested a nominal tax on clicks and transactions. Certainly a small tax on clicks would add up, as we click on billions of things a day, and a transaction tax on e-commerce would redress the balance between online and physical retailing.

A luxury lifestyle tax
A few days ago the Equality Trust released the following statement, ‘The wealth of the UK’s billionaires has skyrocketed by over 1000% between 1990 and 2022, ballooning by around £600Bn. The number of billionaires exploded from 15 in 1990 to 177 this year.’ The rise in the numbers and the value of assets held by billionaires has happened in part due to a tax system that they have played very well. This has enabled the super-rich to become wealthier at a faster rate than the rest of society. This is bad for society and for the economy (see my blog about the Keynesian take on trickle down below). In order to redistribute money from the super-rich to the rest of society you need to target their lifestyle choices. There are various options, this week the Campaign for Better Transport called for a specific tax on the use of private jets (not so unreasonable as aviation enjoys a huge tax break – kerosene jet fuel is not taxed, while road fuels are). I guess other big boys toys such as yachts could be taxed more too.

Charity calls for private jet super tax on super rich

We can allow the rise of the international jet set Billionaire class and continue to see millions of low paid see no improvements to their standards of living, or we can do something about it

Where to cut? Start with sales tax
Apart from raising tax you can redistribute by cutting regressive taxes. VAT is the most regressive tax with the consumer paying the same rate whether they are rich or poor, a giant business or a micro business. Earlier this year the Lib Dems called for a temporary cut in VAT from 20% back to 17.5% – a rate it had been for decades before it was raised at the end of the global financial crisis. From memory raising VAT to 20% was supposed to be a temporary measure but it stuck. If possible I’d like to see the cut back to 17.5% be made permanent, I believe this is possible with all of the above, plus rises in Corporation Tax (as per Joe Biden’s global 21% minimum proposal), and hiring more tax inspectors to collect more Income Tax from really high net worth individuals – closing the tax gap.

Your tax reform agenda
Not everyone will agree with the above, and I know I’ve missed some major tax reform policies out, such as replacing Business Rates with a Local Land Value Tax. That’s fine – I hope, at least it will get you thinking and spark some debate as to the kind of tax landscape we should have, and how that feeds into the kind of economy and society we want. With a likely change of Government in 2024, it’s a good time to start talking.

My blog on the fallacy of trickle down economics can be found here:

The return of economics

Brexit: Lessons from the past, reflections on the present

Something missing from the Brexit discourse in the past few years is much contemplation on the fact that it’s a disruptive and unknowable change. There is no compass, there is no map, there are no precedents in terms of success, it’s a huge leap in the dark. That makes it difficult. Hopeful Brexiteers thought Britain might become more like Norway or Switzerland, but Norway is a small population country sitting on vast hydrocarbon reserves, and Switzerland is the premier destination for every crook, despot and arm dealer’s money. We can’t make the same choices those countries have made.
If you’re looking at disruptive changes in the context of trading blocs they’re not positive – the Communist trading bloc Comecon dissolved when the Soviet Union and Warsaw Pact imploded and all the countries went into reverse for five years or more afterwards. In Latin America Venezuela was kicked out of Mercosur and has continued on a road to economic failure ever since.
I can’t make great claims for the outside options I did at university but going to the LSE I felt a bit guilty at doing a Politics degree in an Economics hothouse and resolved to become more economically literate, so I did an Economic History course every year. The three main takeaways from Economic History that relate to Brexit are as follows: 1) Whenever economies go from free trade to less free trade it’s always bad – look at the 1930s, 2) Net migration is a good thing for an economy especially if it’s young people, one professor described a 18-year-old economic migrant as a ‘free gift’, 3) Multinationals moved to the UK in anticipation of joining the EEC and they brought working practices that put local suppliers to shame. UK industry either became more competitive or died.
Touching on point 1, in the mid-30s tariff barriers and quotas were introduced across Europe, a few years after the notorious Smoot-Hawley act was enacted in America. These restrictions inhibited a fragile recovery in the wake of the Wall St crash. At that time tariffs and quotas were incredibly important as physical goods dominated international trade. Unsurprisingly cross-border trade took a hit and smuggling resumed, with frozen animal carcasses being hauled across Alpine passes at night. In the 21st century our economy is radically different, I remember head of the TUC Norman Willis giving a speech at my school in 1990, he said the number of people employed moving goods had overtaken the number of people making goods for the first time that year. Fast forward to 2022 we have an economy dominated by digital services, and the distribution of food, clothes and electronics produced in low-cost countries a long long way away. In the last 40 years we’ve evolved to a service sector economy where finance, insurance, entertainment, advertising and design are our world class industries.
The tariffs and customs checks on physical goods are of course an impediment to trade – disastrous for just-in-time supply chains that the major car makers got used to, and terrible for the frictionless movement of fresh produce, such as Scottish shellfish. Non tariff-barriers are so much more important in the 1930’s however, the sectors I report on as a business journalist – architecture, interior design, construction are very international and UK firms have an excellent reputation. In the lead up to Brexit UK Architecture practices increasingly worked across Europe, the Middle East, China and India. Not in the USA. Why not? You have to be fully ticketed up with an AIA qualification, this takes years, a tiresome, wearisome burden on anyone who’s already spent seven years getting degree in the UK. Also the architecture sector is a cautionary tale for anyone thinking a switch to working outside the EU with its watertight procurement and contract law is easy. One architect interviewed by Building Design for a Middle Eastern supplement said, “I spent five years figuring out how to win work over there, and then 20 years figuring out how to get paid in full.”

Both UK – EU imports and exports have fallen sharply since the start of the pandemic and have failed to recover

The UK’s trade with the EU, both in terms of imports and exports is dropping off. That trade relationship was goods such glucose travelling from Mars’ factory in Paris to Slough to make Bounty, Galaxy and Ripple bars. Multinational firms were happy to move raw materials across borders, lengthy and complex supply chain arrangements weren’t a problem at the time. Immediately before Brexit it was also a profusion of professional services such as management consultancy, accountancy and IT project contracting. This ranged from large household names to micro-businesses and sole traders even. Brexit has destroyed that trade, EU firms have no reason to favour a UK business that could only be physically present in their country for 90 days out of six months. Only rejoining the Single Market with freedom of movement of money, people, goods and services can bring that trade back. Aligned to mutual recognition of professional qualifications, though this would mean we’d have to adhere to the EU’s Bologna Declaration on the harmonisation of university courses again.
As 2022 draws to a close, what conclusions can we draw economically and politically about Brexit? In the six years since the EU referendum UK GDP growth has been low, and lower than our peers, investment has flatlined, the £ dropped against major currencies as soon as the referendum was announced in late 2015 and stayed lower ever since. While it is true that the £ had been lower against the US$ and the € before, those lows weren’t part of a multi-year slump. The £ has been low against those two currencies for seven years now with no immediate prospect of a major recovery. It seems as if the £ has been marked down permanently, after seven years I think the tone has been set.
Yes the Covid pandemic and the Ukraine – Russia war have affected global and regional economies too but the UK now looks to have resumed its role as the sick man of Europe. This isn’t the mythical fall off the cliff that leavers keep invoking, it is to borrow a phrase from Terry Venables describing the Swiss football team, Sustained Mediocrity. That’s what we’ve got to look forward to if our relationship with Europe remains the same – always 0.5% to 1% lower growth than the best performing European countries. This mediocrity will foster two instincts the leavers never bargained for, a sense that the grass is greener across the channel (exactly how we felt in the 1960s), and sense of nostalgia for our EU times – remembering being able to bring back as much booze as we liked and doing a season at a ski or beach resort.

Business investment is now Billions of £s below where it would’ve been if we’d have stayed in the EU

We’re now in a phase where people are reflecting on the real world outcomes of Brexit and these are on a scale between underwhelming to crushing disappointment. No surprise that opinion polls show a growing majority say Brexit was a mistake, and after a long-term reluctance to countenance an immediate reverse, more and more would vote rejoin if given the opportunity. This is all good news, if highly theoretical as nothing can change without removing the Conservatives from office. There is a Rejoin EU campaign and it’s only just got going. For my part, I think this campaign has to be different and better than the Remain campaign to succeed. In the long run there will be new organisations and new people involved in Rejoin who were not prominent during the 2016 – 2019 period. Marches in London are fine as far as it goes but more activity is needed in Glasgow, Edinburgh, Cardiff, Leeds, Sheffield, Newcastle, Manchester, Leeds and Birmingham for the movement not to be written off as a middle-class home counties hobby horse.
On a brief party political note – I’m a Lib Dem. The Liberal Democrats are the original and best pro-European party, we have supported the European project since 1960, have never wavered in our support and our policy is Rejoin. We adopted this at the earliest available opportunity post-Brexit, our conference in September 2020. We’ve passed conference motions fleshing our our desire for closer ties with the EU at every Spring and Autumn conference since then, touching on economic, cultural and security links. That’s 62 years of unbroken commitment. I know full well that in order to Rejoin to succeed there has to be a broad-based movement, it will take Labour, it will take Greens, it will take Nats and even some pro-Euro Conservatives, but I fully expect Lib Dems members and voters to be at the forefront of the movement as it gathers momentum in the next few years.

Yes for Europe in 1975, will we see anyone as glamorous involved in a future Rejoin poster campaign?