All bets are off

30 June 2007

Fraser Nelson says that the new Prime Minister has positioned himself in territory that the Tories have left vacant, and is ready to fight a cultural battle to defend the ‘British way of life’ and win over the C1 voters who decide elections

This takes us straight to the heart of the Brown paradox. It is precisely his addiction to tax revenues that has led him to the conclusion that he cannot raise the top rate of tax: higher tax rates, he has finally grasped, mean smaller revenues. This is very different indeed to what he believed before 1997, when he was keen on a new top rate of 50 per cent. But ten years in the Treasury has turned him into that rare thing: a redistributionist Prime Minister who understands and relishes the dynamics of the Laffer curve. This is crucial to understanding his thinking now.

The same instinct has led him to protect the City of London from regulation and tax — or at least not to undermine it actively as all previous Labour chancellors have tended to do. More money is now managed in St James’s, the hedge-fund district, than the whole of Frankfurt. Canary Wharf has become a capitalist Babel, with Chinese, Indians, French and Americans working together in a globalised mix that even Wall Street cannot rival. All this is a deliberate strategy by Mr Brown to keep regulation light and help London take on the world. His trick has been to turn a blind eye to those issued with non-domicile tax status — a perk which has no equivalent in America or Europe. London is packed with such non-doms (many holding British passports) who pay about 25 per cent tax rather than 40 per cent. It is Mr Brown’s discreet tax bait, to lure the world’s financial elite to London. Everyone is at it. Even his own chief fundraiser, Sir Ronald Cohen, is understood to have non-dom status.

This is hardly the policy of a traditional socialist. In effect, Mr Brown has applied low-tax Friedmanite economics to a tiny section of British society — City financiers — and reaped the benefits as talented foreigners flood to London. In one of many role reversals in the political landscape today, it is the Conservatives who now want to close the loopholes that benefit those in the private equity world. ‘If it looks like income, then it would be peculiar not to tax it like income,’ says George Osborne, the shadow chancellor. Similar moves are afoot in America. But not in Brown’s Britain.