Last week I did an interview with the Evening Standard where I outlined some of my thoughts around new policies that the Labour Party may wish to consider, as part of the debate around how we get back into government.
I have received quite a lot of feedback on the interview, and so I thought it would be useful to clarify a few of the key points:
1. The purpose of an efficient tax system is twofold: a) to incentivise productive economic activity; b) to maximise revenue for the Exchequer, to be invested in public services, and to contribute to balancing the books by paying down the deficit and the national debt.
2. There is a school of thought, based on something called the Laffer Curve (www.laffercenter.com), that indicates that the higher you push the top rate of taxation the less revenue you generate for the exchequer.
3. The point that I was making in my interview with the ES was that we should be questioning the purpose of increasing the top rate of income tax, if it does not actually generate more revenue for the exchequer. We should also be focused on rewarding and incentivising productive economic activity, which brings me to the issue of inheritance tax…
4. One of the announcements in George Osborne’s budget was that the already low rate of inheritance tax should be extended to estates worth more that £1million. This runs counter to the purpose of an efficient tax system, as it rewards the transfer of ‘passive’ assets from one generation to the next.
5. There is therefore a case for: a) freezing the top rate of income tax at 45%, or even reducing it slightly, in order to generate more revenue for the exchequer, whilst rewarding and incentivising productive economic activity; b) taxing the recipient of an inherited estate on the basis of that estate being an element of his / her income. In other words, abolishing inheritance tax and replacing it with a simplified tax, that includes all income and assets.
6. Coupled with these changes to the tax system, I also proposed that the minimum wage should be increased to £10 an hour (£12 in London) with immediate effect, for all workers over the age of 18. Businesses that are unable to pay this rate due to tight margins would pay their employees a proportion of the minimum wage, and those workers would then receive a top up to the requisite £10 or £12 through a Minimum Wage Levy (MWL) on companies that are clearing a certain amount of net operating profit each year. At present this top-up is provided through working families tax credits, which are in effect a tax-payer funded low pay subsidy, to the tune of £30 billion per year. The MWL would be phased in gradually, with a view to ultimately replacing the current system completely, and thus potentially removing £30 billion from the welfare budget. The companies paying into the MWL would benefit through improved supply chain performance, as those smaller companies benefitting from the MWL would have better paid and more productive workers.
7. I also talked about the urgent need for a manufacturing renaissance. Our trade deficit (the difference between what we import and export as a country) currently stands at 5.9% of GDP, which is the highest peacetime deficit that we have had since 1830. The reason for this that we have seen a steep decline in manufacturing over the last 40 years, and our economy is now dangerously over-reliant on financial services. The changes that I outline in points 1 – 6 above would deliver significant savings and / or increased revenue for the Exchequer, and some of this could then be deployed to form a ‘Resilience Fund’ that would be invested in training and apprenticeships for the manufacturing sector, the aim being to create a German-style ‘Mittelstand’, an army of small and medium size niche manufacturers.
8. Training and apprenticeships will help to stimulate a manufacturing renaissance, but investment in labour-saving machinery and technology is equally as important. At present our system of business rates penalises investment of this nature. For example Tata Steel invested £185 million in a new blast furnace, and were promptly clobbered with a £400,000 increase in their business rates. Companies must be incentivised to investing in new machinery and technology to boost their productivity, so a root-and-branch review of how business rates are set should be launched, with a view to driving a major increase in the purchase of productivity-enhancing machinery and technology.
My interview with the Evening Standard is available here: