Should Labour support or oppose increases in corporation tax?
The UK economy is presently suffering from a collapse in aggregate demand (as well as widespread disruption to the supply side of the economy) as a result of the Covid-19 pandemic. The government should prioritise a return to growth by maintaining or increasing spending and maintain or cutting taxes, rather than closing the deficit. For that reason, so the argument goes, it is logical for Labour to oppose any tax rises.
Only when the economy is expanding again is it likely to be sensible to try and close the deficit in day-to-day spending; there is some disagreement as to whether governments should ever run a balanced budget but a broad consensus that very large deficits are unsustainable and undesirable in the medium term and beyond. At some point, revenue and expenditure will need to be brought more in line with one another.
There are competing arguments as to whether it makes sense to pay down the newly expanded national debt — to “pay the costs of Covid” as it is commonly put. On the one hand, ultra-low interest rates for the foreseeable future mean that it is not very costly to carry debt that is close to 100 per cent of national income. We can largely just carry on with a structurally higher level of national debt. Other countries — such as Japan — show this is possible.
The counterargument is that it is not prudent to assume that interest rates will remain low forever, and even a relatively small upward movement in interest rates would be very costly for the exchequer. Moreover, we cannot predict when the next national emergency might require another large increase in debt, so better to reduce debt levels when we can. Even if you found these arguments persuasive, paying down the national debt certainly should not be a priority anytime soon, and certainly not until the recovery is in full swing.
In this version of the argument, austerity is synonymous with “deficit fetishism”: irrationally elevating closing the gap between government income and expenditure to be primary objective of macroeconomic policy, rather than, say, growth or full employment. Austerity policies are those that attempt to close the gap by either raising taxes or lowering expenditure or both. Labour is therefore doing the right thing by opposing any tax rises before the economy has recovered.
The problem is that in popular discourse in this country, “austerity” has a much narrower meaning. It is commonly understood to be the policy of closing the deficit by focusing on cutting government expenditure on welfare and public services, rather than by raising revenue through higher levels of progressive taxation. Aside from the massive increase in VAT from 15 per cent to 20 per cent (which is highly regressive), most Tory chancellors have sought to address the deficit by slashing the size of the state.
Austerity measures for government spending can take different forms — from real cash cuts (see the big reductions in local government budgets), to real terms cuts (see what’s happened to job seekers’ allowance, for example) or by slowing the rate of spending growth compared to historic trends (as experienced by the NHS with an average of 1 per cent growth during the coalition government). For the most part, rightly or wrongly, higher taxes on corporate profits are not perceived as austerity measures by either the public or those that are politically-engaged.
So Labour’s first political problem is with its base: opposition to increases in corporation tax do not appear to be part of general stance against austerity, but rather an attempt to shift the party rightwards by demonstrating that it is no longer reflexively in favour of any and all tax rises. The risk is that Labour no longer knows what it is about; that if it does not support addressing inequality through higher taxes on the wealthy and big business, then what exactly does it stand for? In my view, if Labour wanted to counter-intuitively support tax cuts, there are many better options available — from lowering employers’ NI as furlough ends to protect jobs or even cutting VAT to get consumer spending going again.
The second political problem is with the wider public. People are aware that the government has borrowed heavily during the pandemic. They see that borrowing as necessary and have largely welcomed the big support measures such as the furlough scheme. But the public are increasingly wary and of the view that all this additional borrowing will need to be “paid back”. If Labour is against higher taxes on big business and the wealthy, people fear that it is either irresponsible (and thinks spending can be limitless) or that ordinary families should pay. This might be the result of what Simon Wren-Lewis calls “mediamacro”, but the political problem is real.
The third political problem is more fundamental. Labour’s mission should be to achieve social, economic and climate justice. This will require deep and wide-ranging reforms to the economy that include measures such as increasing corporation tax and equalising the rates of capital gains tax with those of income tax, as proposed by the IPPR Commission on Economic Justice (which I chaired). By opposing increases in corporation tax, Labour shifts the realm of political possibility rightwards, thereby undermining the space for its future policy platform. Rather than creating the conditions for a progressive manifesto — where Labour’s ideas are seen to represent the new common sense — Labour are making it tougher for themselves in the future.
For me, the fundamental economic problem Britain has faced for the past ten years or more is chronically deficient demand, the underlying driver of which is grotesque inequality. Businesses invest when they can sell more goods or services; so stagnant household incomes aren’t just bad for families, but also undermine investment. And it is investment that is the engine of growth. The benefits of beginning to address inequality by raising tax on big businesses and the wealthy surely exceed the costs of a modest impact on aggregate demand from higher corporation tax. It isn’t an either or, but the reality of opposition is that the government gets to set the agenda and frame the choices.
What’s more, it does not make sense to analyse a single tax measure alone. The multiplier on corporation tax is extremely low, largely because the beneficiaries of lower tax rates are much more likely to save than to spend. All other things being equal, it would help the recovery to raise corporation tax and to use precisely the revenue raised to expand government spending, whether or benefits, public services, or capital investment. Indeed, including a few revenue raising measures in the budget is probably necessary to create the political space for sustaining increased spending. After all, there’s a reason it’s called “political economy” and not just “economy”.
The best thing for Labour would be to support the rise in corporation tax and focus its efforts on other, less popular, measures in the budget.
