Last Friday’s Telegraph published a couple of brief pieces drawing on a wide ranging interview with Eric Pickles. The Communities Secretary had a few characteristically pithy observations to make in relation to the ongoing debate over the future of the 50p tax rate and the alternative mooted by the Liberal Democrats of moving to a tax on high value properties.
The Telegraph reports that Mr Pickles:
… is determined to face down Liberal Democrat sensitivities and reduce tax for the middle classes. New taxes on more expensive properties are definitely not on the agenda.
“We as a government have got to understand that middle-class families put a lot into this country and don’t take a lot out,” he says. “It would be a very big mistake to start imposing taxation on the back of changes in property values.”
Mr Pickles also goes further than some of his colleagues by insisting that the 50p higher rate of income tax should be scrapped for ideological reasons.
The Treasury is conducting a study to establish whether the new top rate actually raises much money, but the Liberal Democrats have said it is “cloud cuckoo land” to consider scrapping the tax at the moment. Mr Pickles expresses the views of many Conservatives when he says: “We always said it [the 50p rate] was temporary.
“We’ll get an assessment at the end of this financial year as to how much money we’ve got [from the tax]. But you know I’m a Conservative, I like the idea of lowering taxation.
“I believe you get more tax revenue by lowering taxation because people work harder. I like people to keep more in their pockets for their family.”
Elsewhere in the Telegraph he is reported as saying that:
“… a mansion tax on high-value homes could hit many ordinary middle-class families because of high property prices in some areas.”
“People will suddenly find themselves in a mansion and they hadn’t realised it was a mansion,” he says. “If it is only going to be mansions, the kind of thing you and I would regard as a mansion, it ain’t going to raise very much.”
It is important to put these comments in perspective.
The 50p tax rate only applies to individuals earning £150,000 a year. That is 1% of the population. For comparison, 65% of the population had an income of less than the mean of £26,800 in 2009/10 and 90% had an income below £78,000.
The idea of a Mansion Tax was proposed by the Liberal Democrats in the 2010 election as applying to properties valued at over £2million. It has subsequently been suggested that if this approach were being seen as an alternative to the 50p tax rate then it would more likely to apply to properties over £1million. That still means that it would apply to less than 1% of the owner occupied housing stock in the UK (fewer than 150,000 properties out of 18.5 million).
Mr Pickles might like to frame the argument in terms of “ordinary middle class families” – including those who rather haplessly get caught by the system – but that is entirely misleading. We are not talking about families that are anything like ordinary. They aren’t in “the middle”. And class probably has nothing to do with it. We are talking here about a tiny minority – the very richest people in society. Clearly, the minority affected by a property tax and the minority affected by the 50p income tax are not going to be the same. There are asset rich/income poor retired households, for example. But they are a tiny minority none the less.
George W Bush very successful deployed the language of aspiration and incentives, and of reducing the burden on those who create wealth, to justify huge tax cuts for the rich. Sectional interest masquerading as the public interest. He managed to secure popular support among ordinary voters for measures that have ultimately had a negative impact upon the quality of life of the bulk of the population. Mr Bush presided over a massive concentration of wealth at the top of the income distribution, making the contemporary US one of the most unequal societies in history.
It strikes me that Mr Pickles’ comments are straight out of the George W Bush playbook. Many of those to whom the 50p tax rate applies are part of the metropolitan elite: the media, the legal establishment, business and – most egregiously – the City which, lest we forget, provides the Conservative party with more than half its funding. Their financial circumstances bear absolutely no relation to the situation that 98% of the population find themselves in. And a frank assessment of the situation suggests that few will ever cross the threshold into this elite group. Aspiration is no doubt a virtue, but it would be better if it were not rooted in fantasy.
There is an important debate to be had about tax at the level of both principle and practice. For example, property taxes are being favoured because they are harder to avoid or evade than income taxes, but are we sure that is the case (a point raised by Bagehot in the Economist the other day)? There are implicit arguments about the tax elasticity of labour supply – less tax leads to more work – and the location of the British tax system on the negative portion of the Laffer Curve – so lower tax rates increase tax revenues – that need to be interrogated very closely. There are important links yet to be made between the debate about taxation and the parallel debate about how we can reduce the dysfunctional volatility in the housing market.
In a period of severe fiscal constraint when the Government has made the reduction of the deficit its number one priority, giving more money to the already extremely advantaged – who will presumably just save it – is probably the least useful way of trying to stimulate the economy. Reducing taxes on lower income households would be a better way of stimulating the economy in the short term. Personally I think that if there is any scope for reducing taxes – a premise about which I am sceptical – then there should be some joined up thinking with the growth strategy so it should go into tax breaks for investing in new technology or innovative business start-ups.
But the Pickles approach is to obscure all these important questions with a smokescreen. He seeks to create a sense of identification between the interests of the mass of the population and the super-rich. This is questionable and needs to be questioned.