I enjoy a good upset victory as much as the next person, but the elevation of Jeremy Corbyn to the position of Leader of the Opposition means that we are going to have to spend time in the months ahead debating things that we thought had been settled by the time the Berlin Wall collapsed.
The man Mr Corbyn has chosen to articulate his economic ideas from the Despatch Box is John McDonnell. A backbencher since 1997 and serial rebel against his party’s previous leaderships, he is perhaps best known for attempting to stand for the Labour leadership in 2007 when he failed to secure enough nominations from his parliamentary colleagues to make it onto the ballot paper. He is a man who is on record stating his belief in “the overthrow of capitalism”.
Messrs Corbyn and McDonnell have consistently promoted a range of stunningly bad economic policies over the years. Whether it’s a maximum wage, price controls, nationalising industries (without compensation) or South American-style money printing, rest assured that the idea will have already been tried and failed.
So let’s have a look at a few of the new Shadow Chancellor’s big fiscal ideas:
A wealth tax on the richest 10%
Despite frequent and fervent arguments to the contrary, as this factsheet from the Institute of Economic Affairs demonstrates:
“wealth inequality in the UK is low by historical standards, has not been rising rapidly in the UK in recent years, or indeed over the past generation, and is actually lower than in most other developed countries.”
The last serious attempt to introduce a wealth tax in Britain came in the 1970s, but then Chancellor of the Exchequer Denis Healey gave up after finding it “impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle”.
In other European countries that have introduced such taxes, they have led to substantial capital flight. Sweden, much admired by the left, abolished its wealth tax in 2007. As reported by the Financial Times at the time:
“The move will have virtually no effect on government finances. The tax raises around SKr4.5bn a year from just 2.5 per cent of all tax payers, but it has been blamed for years of massive capital flight from the country estimated at up to SKr1,500bn.”
A “Robin Hood tax” on financial transactions
Another favourite of the left, this “tiny” tax would supposedly raise vast sums of money and pay for just about everything: dealing with climate change, education, gender equality, combating HIV and malaria and so on. Despite being penalised to the tune of £20 billion, about the same as the total global profits of London’s largest banks in 2011, financial institutions would continue to operate in London and trade away despite there being no money to be made, presumably through a strong sense of altruism.
Originally, financial transaction taxes were promoted to restrain violent exchange rate fluctuations. But that is less of an issue than it once was: more countries have floating exchange rates, meaning more fluid shifts in rates rather than dramatic movements when speculators were able to target vulnerable pegs as George Soros famously did one Wednesday in 1993.
Of course, this “tiny” tax that would raise many billions would not be paid by banks in the same way that Corporation Tax is not paid by corporations. It would be paid by savers as explained here.
As Allister Heath pointed out in 2011:
“Sweden is the only country that has ever imposed a unilateral Tobin tax; the experiment was an unmitigated disaster in the 1980s and was reversed. Instead of raising 1.5bn kroner on bonds alone, as predicted, the tax collected 50m kroner a year. The cost of government borrowing went up, as investors demanded greater compensation to hold a security on which taxes had just been hiked, eroding the miniscule revenues collected. The number of transactions in shares collapsed, eroding capital gains tax receipts (stock prices also fell as a result of the tax, further cutting gains as well as making it harder for firms to raise capital for expansion and jobs). Over half of all equity trading moved to London. During the first week of the Tobin tax on bonds, trading slumped 85 per cent, even though the levy on five-year bonds was only 0.03 per cent. Futures trading collapsed 98 per cent and options trading stopped altogether.“
Cutting £93 billion “subsidies to corporations”
The £93bn figure is based on a report from the University of Sheffield.
Simply put, the report demonstrates either an extremely poor understanding of the tax system and basic accounting or is intentionally misleading. However the same could be said for much of Mr McDonnell’s rhetoric, so it’s hardly surprising to see him throwing the figure around in op-eds.
Jolyon Maugham, the tax QC who advised Labour on its non-dom policy in the run up to the 2015 election, has pointed out that this £93 billion can only be spent if there is a means by which it can be extracted.
Given that the total includes Capital Allowances, tax credits, education and the purchase of goods and services from the private sector, it’s not clear how much of this £93 billion could be “extracted.”
60 per cent tax on incomes above £100,000
Another classic – tax high earners more.
The Exchequer is perilously reliant on a very small number of high earners for a very high proportion of its revenue. The latest statistics show the top 5 per cent of earners are responsible for almost 50 per cent of all Income Tax receipts. These earners are highly mobile and would not be short of job offers abroad.
Francois Hollande went even further in France by introducing a 75 per cent “supertax” on earnings above €1m. It raised next to nothing and the wealthy fled the country.
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That’s just a flavour of the clashes ahead in the battle of ideas which we look forward to waging…