The Labour case for Brexit

You would be hard pressed to deduce this from the current political mood music but, like the Conservatives, the Labour Party has always had a pretty ambivalent attitude to the EU. That much is at least self evident if one looks back at the history of the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is that there is not the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that there should be because the potential threats posed to our democracy and to the viability and effectiveness of any future Labour government by the EU (at least in its current form and with its current direction of travel) are now much greater than they have ever been.

These threats I believe are two-fold. The first is economic, the second democratic. The economic threat comes from the increasingly unviable state of national finances and taxation frameworks and the negative impact on both of these posed by the single market. For a government to function effectively it needs to be able to borrow what it needs when it needs, and it needs to be able to tax who and what it needs in a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the heart of the new EU is the single market. The single market is everything. The single market is sacrosanct. Nothing will be allowed to interfere with the single market. That means all government policies will be tested against this question: do they distort the single market? If so then they will be deemed to be illegal. We have already seen the start of this trend with the decision of the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the spotlight, then VAT. After that it will be corporation tax on companies, and possibly even income tax. But you don't need the single market or the ECJ to bring about harmonisation of tax rates: that will happen automatically if we continue to allow the freedom of movement of people.

The freedom of movement of people or workers is one of the four pillars of the single market, the other three being the freedom of movement of capital, goods and services. Implicit in these is a fifth freedom, the freedom of movement of jobs. Most criticism of the first of these, the freedom of movement of people, has concentrated on its effect of immigration. However, there is a secondary impact. If you allow people to move country then you effectively allow them to choose which taxation regime they wish to work under. In other words they are able to exercise consumer choice to choose their tax rate by selecting a country of residence with as low a tax rate as possible.

We have already seen the effect of this when President Hollande raised the top rate of income tax in France to 75%. Many of the wealthy moved to London or across the border into Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France for their work if they needed to. Of course if your income tax was dictated by your nationality and not your country of residence (as is the case for US citizens) such movements would not be financially beneficial, but of course EU rules and the single market prevent this.

The impact of all this will be two-fold. Firstly it will undermine democracy because it will effectively allow some voters to circumvent the democratic outcome of national elections. If you don't like the result then you can just move somewhere else. If your fellow countrymen vote for a socialist government with better public services and higher taxes on the wealthy, then the wealthy can just move to a country with lower taxes. The rich get to have their cake and eat it.

The second impact is a direct consequence of the first. If the voters can move from country to country in search of the best tax deal, then countries will be forced to compete for income. This competition will force them to outbid each other in terms of tax cuts. The net result will be an inevitable race to the bottom in terms of tax rates. As a consequence the tax gap that governments currently suffer from will widen, revenues will fall, spending will decline, and services will worsen, whether these are in social security, healthcare or education.

The one great virtue of the EU in the eyes of Labour voters and trades unionists has always been the Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that the EU should be for the benefit of workers, and not the owners of capital, by setting common standards for working rights and conditions that multinational corporations in particular operating in the EU would have to abide by. The rationale was that individual member states were too small and powerless to implement these standards unilaterally because multinationals could effectively force nations to compete against each other for the jobs those multinationals could provide. The irony now is that it is competition within the single market that is the great threat, not to wages but to government finances. Once you allow freedom of movement of labour then you undermine the fiscal sovereignty of individual states. Eventually they become financially non-viable with only the EU itself being able to levy income tax across the EU and across national borders. The result will be a push towards introducing a federal income tax and a federal budget with more loss of sovereignty and democracy at national level.

The result of all this is that it will become virtually impossible to elect a left wing government because a left wing government by definition is one that will always want to intervene in the market, either to prevent economic crisis or to stabilise an economy that is already in crisis, or to reduce the impact of inequality. All these interventions will necessarily result in a distortion of the market, and even though the market is imperfect and may be in crisis, this will be deemed to be against the rules of the single market. So while you may still be able to vote for a left wing government, that government will not be allowed to implement anything that resembles a socialist platform. It will be like voting for a Labour local council but finding that they still have to implement the same austerity-driven cuts as would have happened under a Tory administration. And of course the Greeks have already discovered this. They elected Syriza (twice) and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into perspective imagine some of the policies that a future Labour government might wish to implement to raise extra taxes and tackle wealth inequality: the mansion tax; a citizen's income, support of key industries (e.g. steel) in times of external shocks; taxes and controls on intellectual property. All of these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the freedom of movement of people would make it unworkable whereas if eligibility were based on nationality then immigration would have little or no negative impact. But under EU rules countries are not allowed to "discriminate" on grounds of nationality.

The worrying thing is that the current Labour hierarchy seem oblivious to most of these potential pitfalls of EU membership. Moreover, by hitching his wagon (and by association most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a massive tactical miscalculation. If the electorate votes to leave them he will have made Labour unelectable for a generation as no-one will trust the party in government to keep the UK out of the EU. After all who is going to vote for a pro-EU party and prime minister if the country is negotiating to leave the EU? At least if a significant number of senior Labour figures (other than the commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign then there would be sufficient alternative leadership candidates, or cabinet members who could be entrusted to lead future negotiations. And even if the public votes to stay in the EU the Labour party will likely lose significant votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.

Why the 50p tax rate is bad politics and bad economics

The issue of tax has long been a thorny issue for the Labour Party, due in large part to the suspicion that it was the one single issue that cost it both the 1987 and 1992 elections. Hence Tony Blair's pledge before 1997 not to raise income tax in the first term of a Labour government. However, last year Alistair Darling did indeed announce an intention to raise income tax for those earning over £150k by introducing a new 50% tax band for those high earners. The intention of the tax seemed clear: to increase wealth redistribution and to make Britain a fairer and more equal society. There is just one problem with this proposal. Any objective analysis of it suggests that it will probably fail miserably to achieve any of its aims. In short, it is a rubbish policy.

This 50% tax targets a miniscule proportion of the population, it is too easy to avoid, and so it will raise virtually no extra money. In fact by encouraging tax avoidance, it may even reduce the overall tax receipts by also decreasing the number of 40% tax payers in the economy. In addition, the level and threshold at which it is set are so arbitrary that the signals it sends out are entirely negative. To put it simply, if the Government can tax at 50% today, then why not 66% or 90% tomorrow? With no logical reason to doubt that the tax rate could go even higher in the near future such a policy completely destroys any confidence in Labour's future tax plans. Instead it raises the spectre of the bad old days of the 1970's and Dennis Healey's pledge to "tax the rich until their pips squeak." It therefore destroys confidence in the Government without even having the positive compensating effect of raising significant amounts of extra money. So, instead of a win-win scenario, we have a lose-lose one. Brilliant!

If the Government was going to raise the tax rate for high earners, it should at least have done so based on some underlying guiding principle. That principle should be one of equality or fairness. The questions then become, how can we justify such a higher rate of income tax for higher earners, and what should it be?

Historically, government expenditure has tended to hover around 40% of GDP, at least in recent decades. In the light of this one could reasonably argue that anyone who is paying less than 40% of their income in tax is clearly not paying their fair share. At first sight that might appear to encompass the majority of the population who only pay income tax at 20%. However, that argument doesn't account for the additional 11% they pay in National Insurance (soon to increase further), Council Tax (which averages out at another 4%) and the VAT and other consumption taxes that they pay on most other basic costs including transport, food and clothing. So in practice a person on an average income (which is currently about £25k) pays significantly more than 40% of their total income in tax, almost all of which is unavoidable.

As the average Briton is clearly being taxed at a rate that is greater than the overall taxation ratio of 40%, it is therefore only fair that those on higher incomes should also be expected to be taxed at an overall tax rate that is commensurate with the ratio of Government expenditure to GDP as well. However, any additional income that the richest 10% of the population earn in excess of the average household income (currently about £45k) is predominantly disposable income. It is income that is above and beyond that which is required to cover most daily living expenses. Therefore, it seems only reasonable that this should be taxed at the same overall ratio as the national average. That seems to me to be the justifiable rationale behind imposing a higher tax rate for the top earners in society, and perhaps why it has been set at 40% for most of the last few decades. However, there is now a problem. The current recession means that the ratio of Government expenditure to GDP is increasing above 40%, while tax receipts are declining. With public sector net borrowing (PSNB) predicted to exceed £175bn this year, and the bond markets getting increasingly nervous about the scale of our national debt, politicians need to come up with credible policies to tackle this problem. However both the solutions advanced so far have a dark side.

On the one hand is the spectre of tax rises, as exemplified by the recent announcement by Alistair Darling to raise National Insurance contributions, for both individuals and employers. This, though is a tax on both jobs and consumption, both of which could slow any economic recovery. On the other hand the Tories are baying for spending cuts. Yet this also risks prolonging the recession by increasing government spending on benefits even more while reducing government procurement and economic consumption. What is needed is a 'third way' that reduces the deficit without taxing jobs and reducing revenues from consumption. That way is to tax surplus wealth, and one such source is the disposable income of higher earners. I would therefore argue that rather than introducing a new 50% tax rate that benefits no-one, the Government should have raised the existing 40% rate.

My reasoning is this. Given that the ratio of Government expenditure to GDP has now increased to nearly 44% for this financial year (2009-10), and is expected to remain at such a level for the foreseeable future, and tax receipts have plummeted to only 33% of GDP due to the recession, gradually raising the upper tax rate from 40% to 44% would have represented a far better policy than the introduction of a new 50% rate. Not only would it have been fairer, it would have been based on a clear and transparent principle that would have reassured the public that such rates were not arbitrary and vindictive. It would have also raised ten times as much in tax as the 50p rate (£10bn versus £1bn). As such it would have made a significant impact on our underlying budget deficit (currently estimated at about £50bn), while having little or no adverse effect on either levels of employment or consumption (due to it being targeted at the disposable income of the affluent that would normally be invested in assets and savings). It would also be far less prone to the problems of tax avoidance as it is highly unlikely to cause a mass exodus of higher rate tax-payers from the country.

So the essence of this tax policy is this. Rather than having a fixed 40% tax band, or introducing a new 50% band, the current 40% band should 'float' with its level set by the current ratio of government spending to GDP. Under the current financial circumstances we find ourselves in that would mean gradually increasing the rate from 40% to about 44%.

There would of course still be great howls of protest from those with salaries in the top decile of the earnings league who would be the most affected by the raising of this tax level. However, these are to a large extent the very people who enjoyed the largest percentage growth in their earnings during the boom years, earnings that we now know (or at least suspect) were, in a large measure, based on fictitious or inflated profits, particularly in the financial sector. In which case, these were, in large part, salary rises that were unearned.

These are also the people who, more than any other sector of society, invested those earnings in the property bubble that caused the boom and the resulting crash in the first place. So, given that many of them were the largest beneficiaries of the credit boom, and partially responsible for it, isn't it fair that they should also be the ones who should contribute most towards restoring the economic stability of the country? Given that they are also the only ones with the spare cash to do so shows that they also have the means to do so. And if they don't like this policy? Well, they can always vote for a party that will promise to slash public spending in order to keep it below 40% of GDP. But then don't most of them do that already?