Concerns over Conservative economic policy

Two interesting pieces have appeared in the last few days on Gordon Brown and David Cameron's approaches to taxation and the economy.

Firstly, Fraser Nelson wrote in last week's Spectator:

"During what passed for Labour’s leadership campaign, Mr Brown was asked why he would not raise the top rate of income tax. His reply was instructive. ‘When we came to power, the richest 10 per cent paid 40 per cent of income tax,’ he said. ‘Now it is 52 per cent.’ The richest are shouldering a greater share of the burden, he was saying — and that’s precisely because their tax rate has not risen. If you want them to pay more, incentivise them to earn more. It was a direct echo of Nigel Lawson’s 1988 Budget, and the Conservative doctrine — the so-called ‘Laffer curve’ — from which modern Tories now shy away.

This takes us straight to the heart of the Brown paradox. It is precisely his addiction to tax revenues that has led him to the conclusion that he cannot raise the top rate of tax: higher tax rates, he has finally grasped, mean smaller revenues. This is very different indeed to what he believed before 1997, when he was keen on a new top rate of 50 per cent. But ten years in the Treasury has turned him into that rare thing: a redistributionist Prime Minister who understands and relishes the dynamics of the Laffer curve. ...

In effect, Mr Brown has applied low-tax Friedmanite economics to a tiny section of British society — City financiers — and reaped the benefits as talented foreigners flood to London. In one of many role reversals in the political landscape today, it is the Conservatives who now want to close the loopholes that benefit those in the private equity world. ‘If it looks like income, then it would be peculiar not to tax it like income,’ says George Osborne, the shadow chancellor. Similar moves are afoot in America. But not in Brown’s Britain."

All of this takes us into strange political territory. As Mr Brown vigorously protects his right flank, and Mr Cameron moves the Conservatives ‘into the mainstream’ (as he defines it), it is hard to see which party is positioned where. Mr Cameron says that upfront promises of tax cuts threaten ‘stability’; Mr Brown keeps his counsel. On the environment, NHS reform and private equity, the Conservatives are now attacking from the left. So amid all this political cross-dressing, Mr Brown is presenting himself as the safer bet for Middle Britain."

Secondly, Anatole Kaletsky wrote in yesterday's Times:

"Mr Brown did something I have long suspected he might do, but never fully believed: he started to outflank David Cameron from the Right and to reposition Labour as Britain’s most solidly pro-business party. ...

The minimal implication of these comments [given by Alistair Darling to the Financial Times on Wednesday 4 July] is that economic policy under the Darling-Brown regime will definitely not push Britain in the direction of more protectionism, higher marginal taxes, tighter regulation or generalised attacks against the City, the business community or “the rich”, however defined. A slightly more ambitious interpretation would hold that Mr Brown will actually give Messrs Darling and Hutton more latitude to deregulate and to move the tax system in a pro-competitive direction than he himself enjoyed under Tony Blair."

Business leaders are beginning to take note. Today's Financial Times reports that Martin Broughton, President of the CBI, introduced David Cameron at the organisation's Mersey dinner last night by warning him of business concerns about the "mixed messages" the Conservatives were sending to companies. Mr Broughton noted that corporate concerns about the Tory leader's rhetoric on standing up to big business had been exacerbated by the Party's decision to "announce an airline tax proposal specifically to pre-empt a Gordon Brown speech."He went on to say:

"We begin to ask ourselves, is David Cameron an opportunistic chameleon or a principled politician? Is Cameron PR going to override national interest, common sense or just good old-fashioned Tory principles of lower taxation and lighter regulation?"

It would not be difficult for the Conservatives to assuage the legitimate worries of business leaders. The Party's Tax Reform Commission proposed a serious and comprehensive reform of the tax system that would simplify its worst complexities and reduce its overall burden on families and businesses. All that is required is for the leadership to endorse the Tax Reform Commission's proposals in full.

The Institute of Economic Affairs produced an interested paper from four leading economists on the TRC report. You can download it here.

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