Wednesday, 22 April 2009

Is the tax rise good politics?

There is no doubt that the big story out of the budget politically will not be the huge levels of borrowing or even the Chancellor's optimistic growth forecasts for the coming years. It won't be increased duty on spirits or petrol: that is a given in budgets. Nor will it be the very welcome boosts for pensioners and savers, or the extra child tax credit, let alone the money for colleges I mentioned in the previous posting. All of these things are valuable, and Alastair Darling presented them well.

The story will be around the increased tax on high earners, some of which was announced in the pre-budget report, which means that those over £150k a year lose higher income pension tax relief and pay 50% on earnings above that level from April 2010, and those above £100k have their taxes increased as a result of the removal of their tax-free allowances.

There are three questions to be asked about the strategy. The first is whether it will raise much money. It can reasonably be argued that the extra millions or even billions it does raise each year is financing useful measures such as the extra training for the unemployed or college places. But the same extra revenue could be raised in many other ways without touching basic rate tax.

The second is whether it is fairer. And on that score, it is hard to argue against the changes, as it is being targeted at the top 2% of income earners. The system is certainly more progressive.

But is it good politics - the third and trickiest question? On the one hand, it puts the Tories on the spot, and they have been careful not to announce any repudiation of the measure even though they know they could do so at relatively little financial cost. Doing so would paint them as on the side of the rich, a group that includes traders and bankers whose unpopularity knows no bounds. Moreover, it would hardly fit with their cost-cutting lectures on public services. So, as a 'dividing line' it is probably good politics. And the Tories would be wiser taking Danny Finkelstein's prescient advice on this score than Iain's instant reaction.

However, whether it is good politics for Labour in the long term is another matter. It may well be popular with some of the party's base support and Guardian columnists. But an important part of New Labour's promise and success has been that it would not raise taxation, and until November, the party kept to its promise (albeit with a 1% rise in national insurance). The politics of doing so was not particularly about attracting the very rich to vote Labour: their proportions were always going to be very small and their support smaller. It was more about making Labour attractive to the aspirational middle, business-owning and professional classes, particularly in London and the South East. And while most would never earn more than £100k in 1997 - the level that some wanted at the time - or £150k now, they might aspire to do so.

At a time of recession, it is easier - as Obama has done in America - to justify raising taxes on a better off minority. It is hard for anyone to argue with higher taxes on the highest earners at present and to sound unselfish in doing so. So it may prove initially popular. But the willingness to increase the top rate of tax could make it harder in the future for Labour to build the sort of coalition that kept it in power for three terms. And that may mean that any short term political gain has longer lasting political pain.

This posting has been picked up by Iain Dale and the Observer.

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