Labour tax policy: which levers will they pull and how hard?

29 September 2015

George Bull

When preparing the ground for his speech on Monday, New (or should that be Newest?) Labour Shadow Chancellor John McDonnell emphasised that he would not be making any major statements on tax. And he was right. However, piecing together John McDonnell‘s comments, together with Jeremy Corbyn’s recent speech, it is possible to build up a picture of the broad direction of travel of Labour tax policy.

The underpinning economic aims are to reject austerity, to live within our means as a nation, and to secure dynamic growth within the economy. As austerity is rejected, the tax system assumes particular importance in:

  1. Aiding the reduction of borrowing. 
  2. Securing a measure of redistribution by restoring benefits for low-income groups while imposing higher taxes on wealthy individuals and on companies.

So much is clear. 

The Labour party’s ‘fairer tax policies’ are also clear. They include, and I quote:

  • the aim of country-by-country reporting for multinational corporations;
  • reform of small business taxation to discourage avoidance and tackle tax evasion;
  • enforcing proper regulation of companies in the UK to ensure that they file their accounts and tax returns and pay the taxes that they owe; and
  • lastly, and most importantly, a reversal of the cuts to staff in HMRC and at Companies House, taking on more staff at both, to ensure that HMRC can collect the taxes the country so badly needs.

Emphasis is also laid on reducing the tax gap, estimated by the Treasury at £34bn. However, the Labour party seems to be using a much higher estimate of £120bn. All this sounds clear and straightforward until you compare Labour policies with what is actually happening now:

  • we already have a general anti-abuse rule in the UK, with the prospect of a similar anti-avoidance rule having a much wider scope in Scotland;
  • country-by-country reporting for multinational corporations is part of the OECD project on which more announcements are expected on Monday 5 October. My colleague Rebecca Reading provides a preview of likely developments below;
  • the UK already has a robust system to enforce the filing of accounts and tax computations by companies;
  • more resources would undoubtedly help HMRC, which was reflected in George Osborne’s Budget commitment. 

Moving away from the big picture to small details, John McDonnell also promises to remove a tax allowance for landlords, which is described as encouraging them to keep their properties in good shape. This allowance is said to be worth £13bn and is available whether or not landlords spend money remedying wear and tear. The removal of that allowance is already subject to an HMRC consultation, so, to be honest, there is not much new there either.

Two key observations flow from this:

  1. It’s hardly surprising that such a new leadership team in the Labour Party has not yet been able to formulate its tax policies in any detail. There is no shame in that: Labour have said they wish to consult widely among their members to determine the future shape of their policies. Tax is presumably included in that. At one level, that could be quite a healthy debate if – as has been suggested – the value of specific tax reliefs is assessed and those which are not doing the intended job are repealed. However, the Office of Tax Simplification has spent many years doing just that. 
  2. In reality, the levers of change available to the Labour Party are pretty much the same as those available to the Conservatives and to the Coalition before them. The balance in the tax system – regressive or progressive – is therefore largely determined by the levels of allowances, the amounts of benefits and the rates of tax operated at different points in the system. The real question, therefore, is which levers Labour will pull, and how hard? 

Apart from general expectations that the top rate of income tax will rise from 45 per cent to 50 per cent or perhaps even 60 per cent, and that the rate of corporation tax will increase if Labour has its way, John McDonnell’s statements are completely devoid of numbers. For those we will have to wait and see.