The most interesting conversation in Westminster right now is what a new Labour leader could do to restore the party’s fortunes. One idea that could be particularly politically potent is a bold move on tax.
Since Labour came to power, the number of people paying the top rate of tax has pretty much doubled. Brown has kept Labour’s 1997 manifesto promise not to raise the top rate of income tax but he has done so at the cost of making more and more people pay tax at the top rate; a typical Brown dodge. This fiscal drag has had the same effect as an actual tax rise and resulted in people who are not earning huge amounts of money—police inspectors, for example, who earn in the mid 40 thousands—paying the top rate.
A new Labour leader could make a play for the middle class and break with Brown’s numerical manipulation by announcing that no one who earns less than £50,000 a year would pay tax at 40 percent. This would involve moving the amount at which people enter the higher tax band from £34,600 to £44,000. (The £50,000 sum is reached by adding in the personal allowance which will be a touch over £6,000 this tax year.)
This move would take 580,000 people out of the top rate of tax; it would be a significant middle class tax cut hitting precisely the kind of demographic that decides elections. It would also position Labour as an aspirational party.
On a static calculation, this policy would cost £2.5 billion. The move has to be notionally revenue—seeing as, realistically, Labour won’t cut public spending; is ideologically sceptical of the dynamic benefits of tax cuts; and is wary of being accused of offering a tax bribe. It could be paid for by introducing a new 45p top rate of tax for those earning more than £175,000 a year. (Again this is a static not a dynamic calculation, you would probably earn very little revenue from such a move).
If Labour did this the Tories would be in a right pickle. They would want to agree with taking people out of the 40 percent band but they wouldn’t want to support raising tax on the very rich. They couldn’t just do the former but not the latter as they have talked themselves into a rhetorical corner by denouncing unfunded tax cuts in such harsh terms. Opposing what is effectively middle class tax cut to prevent taxes being raised on hedge fund managers, investment bankers and the like would be politically crazy. The Tories proved how politically successful redistribution from the super-rich to the middle class can be last year when they promised to raise the inheritance tax threshold to a million pounds and pay for it by introducing a levy on non-doms.
My point is not that the Tories should be seeking a new top rate of tax for the ‘super-rich’ but that they need to offer a middle class tax cut or risk handing a new Labour leader an early and potentially hugely important political triumph. If the Lib Dems can promise to cut public spending by £20 billion, the Tories should be able to find the £2.5 billion necessary to lift 580,000 people who should never have been it in the first place out of the top rate of tax.
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