General Election - What Should Labour Say on Tax

As Marx says,

“No modification of the form of taxation can produce any important change in the relations of labour and capital.”

(Instructions For Delegates to the Provisional Council Of The First International)

In other words, we should not delude workers with thoughts that the inequality that exists under capitalism, can somehow be changed by policies of income redistribution via taxes and benefits. Workers can only obtain a fair share, when they themselves own the means of production. In the meantime, tax policy should be geared to what brings about the most rapid development of capital, and the productive forces, because those conditions are the ones which best benefit labour in the short term, by increasing the demand for labour-power, and so facilitating higher wages, and fuller employment. By so doing, it facilitates workers strengthening their economic and social power, of building their organisations, and preparing themselves as the future ruling class. Moreover, by facilitating the most rapid development of the productive forces, it facilitates the future task of workers in transforming capitalist property into collective social property, and the transformation of capitalism into socialism.

The proposals set forth here, whilst being appropriate for Labour as a social-democratic party, should also thereby form part of the minimum economic programme of a socialist party, as transitional demands needed for effecting that transition from capitalist society to socialism.

Marx writes,

“Nevertheless, having to choose between two systems of taxation, we recommend the total abolition of indirect taxes, and the general substitution of direct taxes. [In Marx's rough manuscript, French and German texts are: "because direct taxes are cheaper to collect and do not interfere with production".]

Because indirect taxes enhance the prices of commodities, the tradesmen adding to those prices not only the amount of the indirect taxes, but the interest and profit upon the capital advanced in their payment

Because indirect taxes conceal from an individual what he is paying to the state, whereas a direct tax is undisguised, unsophisticated, and not to be misunderstood by the meanest capacity. Direct taxation prompts therefore every individual to control the governing powers while indirect taxation destroys all tendency to self-government.”

Marx does not raise this demand, therefore, on the basis of any concept of redistribution, but purely in terms of efficiency, and because direct taxes “do not interfere with production". But, indirect taxes, like VAT do also impact workers more than the rich, because a larger proportion of workers income is spent, as a requirement for the reproduction of their labour-power, than is the case for the rich, who are able to use a large part of their income for savings, thereby enhancing their potential for increasing their future revenue, and immediately increasing their ownership of wealth and capital.

Labour should commit itself to scrapping VAT. It not only falls most heavily on those least able to pay, but it is a burdensome tax to collect, and distorts prices and production. Scrapping VAT would take a large cost burden from industry, which would thereby be available for additional investment and production, raising the demand for labour-power, and strengthening the position of workers. By reducing the majority of prices by 20%, it would effectively put a large sum of money into workers pockets, and thereby also act as a significant stimulus to demand for wage goods, encouraging a stimulation of production in those spheres of the economy.

VAT raises around 17% of the total Government revenues. In 2016/7, it was projected to raise £120 billion, by the IFS.

The EU says that the standard rate of VAT should not be lower than 15%. But, that does not stop governments from establishing zero rated categories. Outside the EU, that restriction would not apply, and in any case, a Labour government should do it and challenge the EU, by forging links with other EU social-democratic and socialist forces for such a policy.

Obviously, if the government revenue was reduced by around £120 billion, that revenue needs to be raised from elsewhere. I will turn to where that can be raised later. Part of the answer is that by stimulating aggregate demand, national income would rise, and so taxes from incomes would rise with it, but this could only account for a small portion of the £120 billion required.

Income tax was forecast to raise £182 billion in 2016/17. That is around 25% of the total. Almost the same proportion of the total revenue as VAT is raised by NI, which is income tax by another name, but which falls more heavily on workers and the lower paid. According to the IFS, it accounts for around £126 billion. Once again, National Insurance falls more heavily on workers and the lower paid, in particular. National Insurance is not paid, for example, on income received as dividends, rents or interest, which is the main form of income of the very wealthiest in society.

National Insurance is levied on all income without the benefit of a tax free personal allowance, as is the case with income tax. There is, however, a lower earnings limit of £155 per week. But also, all income above £827 per week pays National Insurance contributions at 2%, as opposed to the 12% levy for earnings between £155 and £827 per week. Although, National Insurance is linked to the provision of unemployment benefit, sickness benefit, pensions, and healthcare there is no real practical connection, because the money raised can be used by the government for anything it chooses.

National Insurance simply clouds how much is being levied in tax by the state, and also introduces a variety of other distortions, and it also provides a basis for discrimination in the benefits system. It is also costly to collect. It should be scrapped, and simply incorporated into Income Tax, in relation to employee contributions. I will deal with the employer contributions portion of National Insurance later.

In contrast to the 25% of government revenue raised by income tax, the 17% from VAT, and the similar amount raised by National Insurance, only 6% is raised by Corporation Tax. It produces only £42.7 billion. Partly that is because companies are given a whole series of allowances for making capital investments, partly because of the difficulty in collecting the tax, as the experience with Google, Amazon and other large companies has shown in recent years. At the same time, it is a costly tax to collect in proportion to the amount collected. For the reasons I have set out previously, I would scrap Corporation Tax, and instead I would introduce heavier taxes on unearned income, i.e. taxes on dividends, interest, rent and capital transfers.  The current revenue raised from employer National Insurance contributions should be collected by these taxes on dividends and interest payments.

Corporation Tax raises a relatively small amount of money, but by scrapping it, not only is a large cost of collection removed, but it provides an additional incentive for firms to invest profits in capital accumulation. By imposing higher levels of taxation, at source, on the payment of dividends and interest on bonds, it provides an incentive for firms to invest rather than to pay out revenues to share and bondholders. Coupled with the proposals I have previously suggested of changes in the laws of Corporate Governance, to remove the right of shareholders to appoint Boards of Directors, or determine company policy, and instead to have Boards of Directors elected by the workers and managers within the company, this would act as a strong impetus for additional invest in productive-capital.

By abolishing VAT, National Insurance and Corporation Tax, a large cost burden is lifted off companies, and also off the government in terms of the staff and resources required to collect these taxes. I would reallocate, those staff and resources to be used to ensure that all remaining taxes are fully collected, thereby eliminating a large amount of the tax that is currently dodged either through tax avoidance schemes, or by tax evasion. By drastically simplifying the tax regime, the potential for tax avoidance itself becomes much more difficult.

As previously suggested in the blog post referenced above. In addition to scrapping Corporation Tax, I would also scrap Inheritance Tax, and instead I would transfer the collection of that tax on to the recipients of such inheritances via Capital Gains Tax. Currently, there is an annual Capital Gains Tax Allowance of £10,000, which I would keep, but I would tax all capital gains above that limit at the appropriate rate of Income Tax for the recipient. I would also introduce a £10,000 annual allowance for unearned income, but I would introduce a new Unearned Income Tax, to be levied on all dividends, interest, rent, and capital transfers at a rate of 50%, for everything over the £10,000 allowance. 

In order that the 17% of government revenue from the scrapped VAT could be covered, I would transfer the majority of this burden, along with the incorporation of National Insurance, into Income Tax. That would mean, as Marx indicated, that individuals would have a much clearer indication of just how much of their income the capitalist state was taking from them. If the current revenue generated by VAT was collected from Income Tax, for example, it would mean raising Income Tax by around 64% from its current levels. In other words, the 20% rate would rise to around 33%, and the 40% rate to around 66%. Incorporating National Insurance into Income Tax, would further increase the rate, by similar amounts. In other words, the basic rate would rise to around 45%, and the higher rate to around 90%. But, just stating it in this way, demonstrates Marx's point of just what proportion of workers income is currently being appropriated in taxes by the capitalist state.

Another regressive tax is Council Tax, and Business Rates. I would scrap both of these taxes, which also introduce further distortions into the economy. Council Tax only produces around 4% of total government revenue, and Business Rates a similar amount, which means the cost of collection is proportionately high. The cost of collection for local Council's is ridiculously high, because each Council tends to have its own large computer system for its calculation and collection, along with entire departments of tax collectors working alongside their counterparts paying out Council Tax Benefits!  With modern computer systems, it would be far more rational to hypothecate a proportion of the proposed much higher income tax rates, to a local income tax, which could be done simply by adding a local area prefix or suffix to tax codes.

Having scrapped VAT, there would still be some forms of consumption that the government would want to discourage, and so levy a duty against. That includes all the traditional areas such as alcohol and tobacco. Given that these commodities also usually are subject to VAT at 20%, the current Duty charged on them would have to be raised appropriately so that their prices did not fall from current levels. A simple Excise Duty is much easier and cheaper to collect than VAT, because it is simply a matter of the retailer adding the duty to the selling price, and remitting it to HMRC.

I would introduce a further tax, which would be a Wealth Tax. In Spain, such a Wealth Tax applies to all global assets, and not just to those owned by the citizen within Spain. Each individual is given an annual personal allowance, which means that for most people, an average home is exempt from the tax. I would give, an annual allowance of £1 million per person, and levy a tax at the rate of 5% p.a. on all assets over this figure. Taking as an example, the richest person in Britain, according to the Sunday Times Rich List, they have wealth of £13 billion. A wealth tax of 5% would produce just from them £650 million per year. There are 120 billionaires living in Britain, with a combined wealth of £344 billion. A 5% wealth tax on those assets would produce £17.2 billion per year. There are more than 1 million millionaires in Britain, 1 in 65 of the population, not including the value of their home. A Wealth Tax alone levied, as proposed, could cover most of the revenue lost by scrapping VAT, even without that burden being transferred to Income Tax. Yet, it could hardly be claimed that a tax levied at just 5% is burdensome for a billionaire!

I would, therefore, use some of these revenues to lift the least well paid workers out of Income Tax. It is crazy that a worker who only gets the Minimum Wage, is still expected to pay Income Tax. Alongside Labour's proposal for a £10 per hour Minimum Wage (£20,000 per year), I would raise the personal allowance to £20,000 p.a., and keep it along with the Minimum Wage indexed with a triple lock similar to pensions, so that it rose by the largest of either the rise in average earnings, the rise in RPI, or 2.5% p.a.

That of course, is only one side of the governments revenue and expenditure. I will cover in a future post, what Labour should say on Spending and Benefits. However, its clear that if the least well paid sections of workers benefit most from a scrapping of VAT and National Insurance contributions, and from being lifted out of income tax, many of the current benefits they receive would become unnecessary, because their after tax income would rise substantially, and their real income would rise as a result of the fall in prices, following the scrapping of VAT. As a result, the burden of benefits, and the cost of them paid for by other workers, via the complex and bureaucratic system of welfarism would be removed.