Poor Company

Is an Associate Professor a Reader in old money? Anyway, Keir Starmer and Rachel Reeves, for heaven’s sake, you are to the right of one of those at UCL, writing in The Guardian, and still starry-eyed about Joe Biden. Josh Ryan-Collins writes:

Labour’s shadow chancellor, Rachel Reeves, confirmed last weekend what many progressives have long feared: the party has no serious plans for reforming Britain’s regressive taxation system. There will be no new property taxes or wealth tax. Nor will tax rates on capital gains – unearned income from increases in the value of property or financial assets – be raised to match those on wages.

The politics of maintaining the tax status quo can be debated. History suggests that Britain’s swing voters in marginal constituencies may be particularly averse to tax rises or reforms. But the economics of this stance are unambiguously flawed, and here Labour is taking an almighty gamble. For without major tax rises and reforms, it is impossible to see how Labour will generate the levels of growth it has made one of its central missions when in government.

Reeves asserted: “I don’t see the way to prosperity as being through taxation.” This would appear an implicit backing for “trickle-down” economics: encourage the “wealth creators” by keeping taxes low and the cake will get bigger for everyone. This central tenet of neoliberalism has been thoroughly discredited. There is no evidence that the reductions in taxation on the rich that have proliferated over the past half century have led to higher rates of growth; rather, they have simply increased inequality.

Reeves claims to be a supporter of “Bidenomics”. But Joe Biden’s administration has fully and publicly rejected trickle-down economics, embarking on aggressive tax rises to support a massive fiscal expansion as part of the Inflation Reduction Act that has helped the US so effectively recover from the pandemic.

The truth is that the UK is a leading global example of an economy where the tax system incentivises a form of “wealth creation” that doesn’t actually support growth. By taxing capital gains less than income (as much as 50%, less according to a recent study) and instigating a swathe of tax breaks favouring property ownership and housing investment, we have supported the creation of a sophisticated form of “rentier capitalism”.

In such a system, the majority of investment flows into the capture and ownership of assets such as property, infrastructure or financial assets. This money does not then flow into the creation of new businesses, inventions or socially useful infrastructure, nor rising wages for middle- and low-income earners.

Instead, it goes to private domestic and international investors and households lucky enough to own property, whose assets further inflate. None of the income generated goes into productive investment. Instead, the rest of society faces higher house prices and rents. The banking and asset management sectors have fully embraced this approach, preferring bigger loans against less risky assets, such as property, to lending to small firms.

This capital misallocation is a key structural driver of the UK’s stagnant growth and low productivity. A key mission of the Labour party is to have the highest rate of growth in the G7; but to do so, the country must move from the bottom of the G7 league table for private capital investment.

Factors other than the tax regime have also contributed to this record of course, including the lack of an industrial strategy, a national obsession with home ownership and, since the financial crisis of 2008, fiscal austerity. But to pretend the tax system has nothing to do with this is deeply flawed.

Added to this long-term, structural problem of capital misallocation is the more immediate challenge posed by inflation. The major increases in spending on public services and the green transition that Labour will be expected to deliver become much more challenging in an environment of high core inflation, which – in the UK, currently, at least – is proving persistent.

The way to temper the inflationary effects of such spending is to tax spending power out of other parts of the economy where it is less needed: most obviously from the wealthy. By raising taxes on capital gains or other forms of wealth while increasing public spending and investment, Labour has a good chance of repeating what Biden’s administration appears to have managed: a progressive deflation where the wages of lower earners are allowed to catch up with those of the rest, and growth remains healthy.

What is even more remarkable about the Labour leadership’s current position on tax is that it is out of sync with nearly the entire official economic establishment. The OECD, IMF, Institute for Fiscal Studies and Financial Times have all come out in favour of higher taxes on property and wealth in recent times as a means to support public investment and growth and reduce inequality.

Labour finds itself siding with an increasingly small minority of economists who continue to believe that taxing wealth less than income will support growth. It’s poor company for them to be in.