Shadow Chancellor's 'no' to tax rises, rather wants to protect tax base, at CIOT IFS debate at Labour Conference 2020

24 Sep 2020

Given the weakness of the economy, now is not the time for tax rises and ministers should concentrate on protecting the tax base, Shadow Chancellor Anneliese Dodds emphasised during her appearance at Tuesday’s (22 September) CIOT/IFS debate on Tax after the Pandemic, staged as part of Labour Connected, the online Labour Party Conference.

Dodds began her remarks by emphasising the importance of effective management of the country’s finances. Building on remarks made in her keynote speech the previous day, she said that, while welcoming the Chancellor’s spending to counter the impact of COVID-19: “In my view there is a lot of spend that is not being targeted effectively, and so we need to make sure we have that discussion.”

Turning to tax, Dodds said that history shows that after a period of common sacrifice there is more support for progressive taxation. But she cautioned against any tax rises now in case they dampen any economic recovery: “I’m someone who has advocated a more progressive tax system for a very long time. But I think the critical time period that we are in now is one where, unfortunately, our economy is so weak that some of the hares that have been set running already around potential tax changes, especially if those tax changes came in the near term, so that there could then be cuts and a bit of a bonanza before the next general election, they’re actually leading to stronger concerns about the UK economy compared to others.”

Faced with the current health crisis and its effect on jobs and the economy – and a possible chaotic Brexit too - politicians of all parties should be focused on preserving the tax base, said Dodds. “People are losing their jobs, companies going to the wall, people constraining their spending. That means that [big revenue raisers such as income tax and VAT] are going to be squeezed down.”

The Shadow Chancellor said the party will set out its tax plans after a wide-ranging stakeholder debate. The process will take into account the economic context including changes to the labour market such as the increase in self-employment and the development of new platform technologies, she explained. Platforms acting as, in effect, employers, but not for labour law or tax purposes, are putting pressure on employment taxes as well as affecting people’s work security.

Building on the security theme, Dodds continued: “The Chancellor said that he wants to have a new approach to taxing the self-employed as the quid pro quo for the self-employment income support scheme – of course, a support scheme which itself actually missed out many self-employed people and which is being discontinued soon. But surely in parallel with that must go more security. You must have a balance, you can’t just be saying that there will be additional taxation for the self-employed without buttressing their security as well.”

As Labour has said in the past, Dodds remains concerned about the number of tax reliefs especially because there is a lack of scrutiny as to whether they achieve their objectives. Other countries do this much better, she said, citing India as an example. A very different approach is needed on tax reliefs, she argued.

Debates around reliefs mask areas where there needs to be fundamental reform, said Dodds. An example of an area needing such reform is the business rates regime which is not working for local authorities to deliver the services they need and is also creating disincentive effects. “For years we have seen those disincentive effects being dealt with by just plopping in additional reliefs. We need to have a much more fundamental approach to this and one where we can have more stability for funding local public services as well as more fairness and a level playing field for those businesses based on bricks rather than on clicks.”

The MP reiterated Labour’s long-held concerns about the lack of resourcing of HMRC. “One area where people’s trust in the tax system is reduced is where they believe there is a different system that can be operated for those that have the resources to have individualised discussions with HMRC.”

Helen Miller is the Institute for Fiscal Studies’ (IFS) Deputy Director. She made a number of points that reflect what the IFS has said throughout the COVID-19 crisis. She said that we do not have to raise taxes, but the crisis will probably leave the UK with a larger structural deficit.

She spoke about the background to the crisis which witnessed pressure on the Government to spend more money after a decade of austerity. She suggested that the COVID-19 crisis may reinforce a desire among the public for more public services.

The economist said we could raise more revenue in taxes but should not try to do so yet – rather now is the time to set out a plan for how the UK intends to pay for the economic impact of the pandemic. Miller said the Government could fairly easily raise more money by putting up the rates of the ‘big 3’ (income tax, national insurance and VAT), but a better approach would be to reform taxes, not least because some taxes today discourage various activities and can distort decisions. “It is hard to think of a current tax that could not be better designed”, she said, suggesting we look at self-employment (although she cautioned against ‘knee jerk’ action) and dividends as a priority.

However, Miller warned, just increasing rates of tax on business income would discourage investment, and this was a key reason why it had not already been done. She suggested that discouragements to investment could be removed with some ‘careful changes to the tax base’.

Concluding, Miller listed three measures that would help pay partially for the pandemic: remove all zero and reduced rates of VAT (raising £50 billion she suggested); revalue properties and make council tax at least proportional; and replace business rates with a land tax. Miller suggested that we might even scrap corporation tax and ‘start again’.

CIOT President Glyn Fullelove focused his remarks on the taxation of digital multinationals. He observed that they were perceived to have had ‘a good pandemic’ and many people therefore thought they should bear more of the tax burden going forward.

Fullelove said the current tax system does not recognise a significant part of the business model of modern digital multinational companies (DMNCs), which is that they rely on users around the world who do not actually transact with the platform but do generate advertising and other revenue for the companies. The current system has allowed much of the profits to be shifted to tax havens, at the expense of the USA in particular.

Using a number of pie charts, Fullelove explained how digital services taxes take some revenue away from one country and give it to another – there are always winner and losers, hence why the USA has threatened retaliation against the UK and France because of those European countries’ digital services taxes. He said the OECD solution to the taxation of DMNCs is necessary and is the only achievable solution at the moment but it may not be sufficient to make people believe that these companies are paying enough tax. He suggested that we should look at whether the problem is really monopoly profits rather than digital profits. “If we had ten Facebooks spread around the world would we be talking about this issue as much as we are? My suspicion is we wouldn’t.”

Deborah Mattinson is co-founder of BritainThinks, an international insight and strategy consultancy. She was also pollster to Gordon Brown when he was Chancellor and Prime Minister. Mattinson observed that the public ‘like’ taxation more today than they did just after the financial crisis, but less than they did in 2018, when the anti-austerity backlash first started to be felt. People are willing to pay more tax, she suggested.

She struck a note of caution, however; in her focus groups she finds that while people are willing to pay more their understanding of tax is sometimes poor. People sometimes say they are keen to pay a penny extra on their income tax, but then it emerges they mean a penny a year not a penny on the tax rate. She also finds that people do not get the wider impact of government savings, sometimes thinking saving X here is enough to pay for spending on Y when that is not the case. People thought the savings from not building a Millennium Dome could ‘save the NHS’.

Mattinson said the Labour Party is behind the Conservatives in polling/focus groups when it comes to how it will run the economy. In 1992 Labour had lost the election because the party was associated with poor economic management and an expectation of higher taxes, even for the lower paid. That had been the case again in 2015, 2017 and 2019.

Some 70 per cent of the public expect tax to rise, said Mattinson. However, she went on to say, people who live in the so-called former ‘Red Wall’ constituencies are sceptical about whether they will benefit from larger tax revenues as a result of tax rises. They thought other areas would get increased spending ahead of them.

Questions and answers

Chair Simon Gompertz, until recently personal finance correspondent at the BBC, then posed questions tabled by attendees via Slido.

Asked if Labour will maintain its tax pledges from the two most recent General Election manifestos, Anneliese Dodds said she is determined to have a fairer tax system and provide more security for workers. But Deborah Mattinson advised that people could not understand how the policies in the last Labour manifesto were going to be paid for and that contributed to the party’s poor result in the 2019 General Election. Helen Miller observed that people often define the ‘rich’ as somebody else, a reason why politicians should be more specific about who are the ‘rich’.

A separate question was whether the UK should equalise tax rates, such as those between incomes and dividends. Dodds said she saw a number of anomalies. A lot of reliefs complicate the system. She argued for greater simplicity, saying we should be trying to end up with a situation where radically different tax outcomes as set out by Miller were not possible. She reflected on recent Finance Bill debates where she challenged ‘clear loopholes’ such as those that allow overseas property developers to pay less tax.

Glyn Fullelove said equalising rates between income and dividends was feasible but whether it was desirable is open to question. Dividends are not intended to be a method of payment for the work you do, they are intended to be a return on an investment in capital that you have made into a business. The problem is not the rate of dividend tax but that it is used for the wrong purpose, he said.

Asked if the Government should take account in the tax system of the risks that come with self-employment (as opposed to employment), Miller turned the question on its head by asking whether it is fair for 85 per cent of people who are employees to pay higher taxes than the self-employed? She added that the argument that self-employed people get lower government benefits is less true than it was – pensions have been aligned, for example. Some self-employed people fell through the gaps of the system but some employees also lost out because of furlough rules.

Dodds said that we have needed to see joined up reform on taxation of employment for ‘a long time’. She complained about the lack of calibration between employment taxation and employment law. This causes problems for many people, she noted. But she is keen to avoid a ‘knee jerk’ approach, preferring that politicians and officials look at both systems in order to get a system where it is easier to differentiate who is self-employed and who is employed. If you look at the incomes of self-employed people over time, the increase in people working over recent years has been largely self-employment and that has often been people going into very low paid self-employment, she said. The image of the professional person late in life, going self-employed to get more control over their life, is not the reality for a large number of self-employed. We need to think about the additional security that is needed for those people, said Dodds, identifying a need to deal with continuing issues around pensions, maternity and paternity pay, sick pay as well as ‘everything else that is bubbling up because of this crisis.

The next question was about VAT exemptions and lower rates. The questioner expressed concern that this was increasing a regressive tax. The chair asked Mattinson how that would go down with voters. People tend to instinctively feel VAT is an unfair tax that hits the less well-off more so you’d have to make the case for that ‘very carefully indeed’, she replied. Looking back to the question about who the ‘rich’ are, reflected that in focus groups ahead of the 1997 General Election, participants earning less than £30,000 kept pushing up what they thought the threshold should be for higher rate tax – with the result that people pushed it to £100,000 because they felt that one day they might be earning that themselves. She suggests this was because participants fear they will end up paying more tax when they eventually earn more money.

The final question was from the chair, Simon Gompertz. He asked the panel which one tax they would raise if they had to. Dodds sidestepped the question by saying we must look at tax system as a whole because tinkering is a problem. She re-emphasised that the priority is making sure the tax base does not reduce further. Fullelove said capital gains tax as much from a fairness point of view as from a revenue point of view, given the need to deal with anomalies. Miller and Mattinson also went for CGT.

By Hamant Verma