A richer debate?

April 13, 2012 by
Filed under: Politics, Public policy 


A few years ago, when running ippr, I had an idea. It was to create a new top rate of tax for the wealthy but to give these taxpayers the option of choosing where their tax revenues were directed. The reaction I received from my left of centre policy wonk friends is relevant to the heated debate about the imposition of a cap on tax relief; but, first, some context.

Back in 2003 the personal tax base was narrowing. The Government was able to rely on business taxes – particularly those generated by financial services – to fill the coffers. This strategy blew up disastrously with the credit crunch. Indeed, as the current ippr director Nick Pearce has argued, it was the over-reliance on taxes related to financial services and property transactions – much more than over spending – which was the biggest cause of the deterioration in public finances in the wake of the crunch. However, given political nervousness and hostility from the well-off it was difficult to see a way of making an increase in wealth taxes a realistic policy, thus my idea.

The strong opposition to the proposal from ippr colleagues (as a consequence of which it never surfaced) explains why the Guardian is defending the tax cap and why Ed Miliband is performing verbal contortions to condemn the Government without actually opposing the policy.

The first objection was that rich people’s choices would tilt spending in unfair and irrational ways. This is exactly the same charge levelled at tax relief in a recent Guardian leader:

the chancellor is right to limit the tax relief that wealthy people receive for supporting good causes. This is effectively money that pensioners and the low-paid, along with other taxpayers, are handing to the rich to indulge their philanthropic activities      

The second objection is more subtle and profound. Although in proportionate terms low and medium earners actually donate more of their income than the well off, most people can’t afford to make large donations to good causes. They have to accept their contribution to society is made through the taxes they pay, and they have no individual control over how those taxes are spent. From a left of centre perspective, the problem with my idea was accepting the principle that by paying more aggregate tax rich people should have greater rights as taxpayers and citizens. This could even be seen as the first step in a slippery slope back to property qualifications on the franchise.  The critique applies more directly to my idea than to the case against the tax cap, but it is still applicable.

Behind the critique of Government cock–up and the understandable but instrumental complaints of the charity sector lie deeper issues. Do we think high tax payers should, in essence, have more control than the rest of us over where their tax is spent?  If the rich do have more control, isn’t that a good thing in that it means bold, controversial or decorative causes which the state might not support get independent funding? Conversely, given that the majority of big domestic donations go to either, or both, elite institutions or London-based good causes, doesn’t tax relief just add an extra dimension to the imbalance of culture and social capacity between London and the rest of England?

Given the best defence of the Coalition policy is from the left, and charities will probably fight shy from explicitly defending the principle that rich people should be uniquely free to hypothecate their taxes, I suspect the public debate about the tax relief cap may not get to the heart of the matter.

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7 Comments on A richer debate?

  1. Johnny Shostakovich on Fri, 13th Apr 2012 8:02 pm
  2. Urgh, this is interesting, but also quite annoying. Your proposal which made your friends at ippr choke on their cornflakes was only really formalising the current state of affairs in which the very rich are actively encouraged to affirm their beneficence by sponsoring social initiatives or lending their name to a new wing of an art gallery. All your idea did was turn one of the many implicitly elitist and antidemocratic rigs encoded in the tax system into an explicit policy outcome; perhaps this was the purpose of your provocation? However, the process by which the whims of the rich increasingly are ostensibly subsidised by pensioners and the low-paid depends upon the parallel process by which the bold controversial and decorative causes have migrated out of the public sphere by design of a generation of politicians giving the wealthy either the right to free-ride on public & cultural infrastructure or take credit for whatever shortfalls might come about.

    While one might ‘blame’ the progressive policies of free museum entry for the growth of their commodifying fundraising activities & development departments, or the progressive policies of widening HE access, (with the Dickson Poon School of Law at Kings, London only the latest humiliation of this trend) it seems short-sighted to diagnose the trade-off between caps on tax relief & the funding requirements of fringe leftfield institutions and initiatives as unrelated to the broader retreat of the state from cultivating society’s unknown flowers.

    There are two unexamined assumptions going unchallenged here – first, that the whole system of reliefs grants & excemptions are a natural outcome of a continuously improving if unplanned tax system; and second, that higher rates really are a deterrent to wealthy people paying taxes at all or coming to/staying in/having loyalty with Blighty in the first place. The former assumption is one which will come under increasing pressure as the UK model of capitalism is subject to ever greater scrutiny & policymakers get deficit monovision (see Sam Wheeler’s excellent piece on Shifting Grounds y/day http://shiftinggrounds.org/2012/04/taxes-and-the-impoverishment-of-the-left/ which included the beguiling idea of HMRC offering any accountant or auditor a % of recovered capital from tax evasion, or by extension, even certain forms of aggressive tax avoidance); the latter notoriously has very weak evidence to support, despite its status as a formal assumption underpinning top-rate tax policy – wealth-creators incentives, aspiration &c… (though how often do you hear these arguments from actual wealth-creators, as opposed to glorified administrators in corporate bureaucracies or failed businessmen trying to justify their inherited privilege, like Lord Sainsbury…)

    The deeper point here is that while individual, elite decision-making in backing brave and unexpected initiatives should always have a place, the promise of returning such a process to the state, but under a more intensive & engaged democratic direction, can’t be overlooked either. Consider one last fact in relation to the low tax/progressive goals regime we’re struggling in vain now to maintain – that the new director to the V&A museum has been considering reintroducing charges for entry to help make up the shortfall in funding, all while its development team go into overdrive trying to grab all the private funds they can before the cap of tax relief comes into effect. Hm, Matthew, hm.

  3. junius on Fri, 13th Apr 2012 8:03 pm
  4. It strikes me, Mr Taylor, that your idea would rob government of its capacity to conduct a public fiscal or welfare policy without any guarantees that the wealthy’s choice of priorites for spending taxes would, of necessity, be public spirited or, indeed, that they would desist from the favourite pastime of tax avoidance and evasion. What happens if those in the London Square Mile choose to hypothecate the complex financial packages they deal in as the chief beneficiaries of taxation to produce more profits for themselves?

    This is not to deny that there is a philanthropic element to the wealthy but converting charitable tax reliefs where the taxes paid by middle and lower earners effectively subsidize ‘giving’ by the rich into a scheme permitting the rich absolute powers to select their own priorities (and indulge in tax avoidance) does not seem a very good deal for the wider public.

    There are, of course, democratic negatives to your idea; not only that the rich would gain ‘greater rights’ over other taxpayers, but that those not paying taxes at all should lose rights (such as voting) altogether.

    In other words, I think your colleagues were, on the whole, right….

  5. Peter on Fri, 13th Apr 2012 9:17 pm
  6. If all the other economic policy of government is promoting a meritocracy where the rich are rich because in their lives they’ve been prudent and clever allocators of their own time and resources then I see merits to the idea.

    If however the rich are only rich because e.g. they’ve been born so then such a policy might further entrench problems in society.

    What I have problems with generally and The Guardian certianly falls into this is talking about “The Rich” as some kind of them and us. I think there are all sorts of “Rich”. It’s very hard to define.

    Certain types of profession (footballers) say are considered “rich” because they make millions in a few years but later in life they possibly made sacrifices in terms of educating themselves to be a doctor or architect careers that have longer, more steadily rising earning profiles.

    So who is trully the richer of the two groups?

    Who is “the rich” between someone working 50 hours a week for £50,000 a year or 10 hours a week for £30,000 a year?

    Who is “the rich” between a stunt man, miner, bomb disposal expert paid £60,000 a year (or other highly paid but risky profession) or “the bishop” say paid £50,000 for a less risky job.

    Then perhaps there is a Melinda Gates kind of rich. A complicated one but certainly her and Bill’s foundation have created a very admirable organization allocating capital to good causes. Some but not all departments of government would surely admit to being less efficient / seeing money well spent vs some highly professional and generally doing good for society charities.

    All in all we should be careful in policy a not to see the rich as some single ‘other’ who should pay more; and also to ensure that the best allocators of capital in society are doing so.

    The writer’s suggestion has got be brilliant particularly if the alternative is the money sitting in some vault in Switzerland, Dubai or such.. Moved there by an embittered ‘rich’ person who feels justified having been labelled as some demon ‘other’ by the rest of society.

  7. Indy Neogy on Fri, 13th Apr 2012 10:34 pm
  8. junius hits the nail on the head. It’s not enough to look at the upsides of the scheme, we have to consider possible downsides.

    I’d add that hypothecation is generally dangerous (as you yourself have noted) because citizens rarely have a full sense of the responsibilities of government. It’s easy for less visible issues to get underfunded right up to the point where a crisis ensues. And speaking of a crisis, how does hypothecation square up to crisis situations? Where is the flexibility to respond to changing circumstances?

  9. Katie Boswell on Sun, 15th Apr 2012 12:49 am
  10. Interesting article that gets to the heart of the concerns I have about the current debate on this issue. It is clear that richer citizens should NOT have greater control over how tax is spent or over which charities receive most funding, particularly since they are often the most out-of-touch with where the greatest needs in society lie.

    Living in America the last couple of years, I have seen the impact that this culture of philanthropy has when taken to its logical conclusion. With a reliance on individual philanthropy instead of state funding, charities in deprived areas or catering for ‘unglamorous’ causes end up significantly underfunded in comparison to those in richer areas or those tackling glamorous causes. I really hope that the UK charity sector does not end up in this situation.

    Thus, it seems to me that the coalition government is onto something in principle. However, they are only addressing one side of the coin. If they are going to disincentivise large philanthropic donations, then they need to provide an alternative source of third sector funding that is distributed fairly throughout the country (how about funding it through the extra tax claimed on large donations?). I have not heard any politician in the last few days saying that extra money is going to be distributed through the Big Lottery Fund or the Big Society Bank or any other mechanism as a result of the cap on tax relief for large donations. Indeed, any additional money paid to the state through the cap will probably be returned to other rich people through the abolition of the 50p tax rate. This is not a good deal for charities or for the wider public.

  11. Livy on Mon, 16th Apr 2012 11:02 am
  12. We may find it it unnerving that there are people whose wealth all but guarantees their great great great grandchildren will never have to do a day’s work in their lives. We may be alarmed, embittered even, due to the amount of undue power and influence these people command by virtue of their wealth or status alone; perhaps justifiably embittered in cases where they didn’t learn to sing, play football or cry on reality TV in order to earn it. Those of a leftist bent will naturally be enraged further still when considering those on low incomes, who work just as hard if not harder, now suffer, and will continue to suffer for some time the worst hardships during what will be the economic dark ages of the West.

    All because of posh people who wear three-piece suits who don’t want to pay their fair share of tax.

    Does anybody really believe it’s as simple as that?

    The world would be a reassuringly less complex place if it was. I just don’t know whether choosing to believe that it is will actually help us solve any of the economic challenges we face.

    For example, some of those evil rich people who oppose the 50p rate actually wouldn’t mind parting with 50 per cent of their income or more, they just want some indication their money will be spent wisely. And the recent history of unwise (to the point of dangerously wasteful) spending would form a list outside the scope of this forum.

    The reason many of those three-piece wearing guys are three-piece wearing guys is because they are prudent (if not ultra tight arse) about the investments they make. I’d urge anyone to go to a Proactive Investors event, just to observe this. It’s incredible. An audience full of potential investors listen to a whole load of entrepreneur speakers, once after the other, who do presentations about their projects and ask for cash. The audience members may have no background whatever in the commodity or venture they’re being asked to invest in, and it can get quasi-hostile, but the level of their questioning is astoundingly high. The number of mistakes they catch is shocking, the spur of the moment analytical ability is ridiculous, and the brief research they clearly do before the event is perfectly focused. The speaker, fearful of this, ensures he is armed to the teeth with responses, stats, projections and international data; he feels more accountable and the investors feel entitled to raw, cold, clean, hard and fast answers due to the amount of money that is being asked of them. And they get it. (Forgive me, but it puts both pro politics and public lectures full of wanabe intellectuals to shame.)

    Now…I wouldn’t be surprised if they carry that attitude over to other areas of their lives…

    Government is not some creepy, insidious leviathan out to screw us. Government can, and indeed has been used as an instrument of good, even through those years when we were in power and we pissed money up the wall. But there’s no more money to piss.

    The real question is whether government can continue to be that force for good without the money, and if it can’t…. who really cares where the new force for public good comes from?

    Livy

  13. matthew taylor on Fri, 20th Apr 2012 10:04 am
  14. This is a great conversation with some disparate views really well expressed. It just shows – newspapers please note – it is possible to have an on-line debate without caricature or name calling! Thank you

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