HOW MR HATTERSLEY WOULD HIT THE RICH

Since 1979 the rich have got richer.

Andrew Gimson discusses Labour's proposals, intended

to make them nearly as poor as the poor

LAST Sunday Mr David Blunkett, a mem- ber of the Labour Party's National Execu- tive, told Mr Roy Hattersley to be honest, by admitting that the Labour Party's plans could not be implemented without raising the standard rate of income tax. According to Mr Blunkett, `You can't sustain a credible drive for socialism if you only say you will increase tax for those earning over £28,000 or £30,000 a year.'

Yet he insists that the only part of this shortfall which he will try to fund out of taxation is that which can be met by taxing the rich. Indeed, he has for some time been emphasising the need to tax the `bloody rich' more heavily:

Q: Do you see a massive need to take back the money that Margaret Thatcher gave to the rich in tax reductions?

A: Yes I do. I see it as a moral necessity as well as an economic necessity.

That money is necessary to fund the social programme, the poverty programme. But I also find it offensive to live in a society where the rich have had tax cuts and the poor now pay a greater percentage of their earnings in taxes.

0: Who do you call 'the rich'?

A: I call the rich the top 15 per cent who earn £20,000 a year or more. They may not all be very rich but, compared with the constituents that I represent, they are bloody rich. It's a different world they live in.

(Tribune, 10 May 1985)

We must believe him when he says that `they' live in a different world. He lives in it too. But his idea of where the frontier lies between `our' world and `their' world is not fixed. In September last year, addressing a Labour Party meeting in Ilford, he de- clared:

Before we can think of tax cuts in general we have to ensure that the wealthiest five per cent pay their proper share. The wealthiest five per cent are individuals on incomes of £20,000 per annum or more — not families but individuals.

It is conceivable that the change in the above two quotations from 15 to five is attributable to a misprint rather than to Mr Hattersley. But in September this year, addressing an audience of journalists at the Labour Party's headquarters in Walworth

Road, he said it was those with incomes not of £20,000, but of more than £27,000 who would be taxed more heavily. There are, he asserted, 'a myriad of ways in which £3.6 billion can be raised' from this group, £3.6 billion being the amount 'given' to them in tax cuts since 1979. On this occasion he included himself and most of the journalists in the 'richest five per cent of the community', but refrained from using the term 'bloody rich', which is reserved for the more left-wing, activist readership of Tribune.

His press conference was brief: nobody had time to point out that the shadow Chancellor of the Exchequer speaks as if the wealthiest five per cent were the five per cent with the highest incomes. (When so much wealth exists in such forms as land, houses, securities and pension rights, a mo- ment's thought is needed to see that although the two groups overlap, they cannot possibly be identical.) We were distracted by our attempts to guess how much Mr Hatters- ley makes from his col- umns in the Guardian and Punch, in addition to the salary and allowances he receives as an MP.

Instead someone asked him whether his assertion that 'the ordinary taxpayer', with an income of less than £27,000 a year, would suffer no tax increase under a future Labour government, meant that the SDP was now more socialist than the Labour Party (or more honest?). When the SDP's poverty plan was unveiled, it was suggested that all those with incomes of over £10,500 would be worse off, and even after this initial gaffe the figure seemed to rise no higher than £17,000.

No, Mr Hattersley replied, for to be truly left-wing you must be practical, and the SDP's proposals would not work.

How then would his proposal to raise £3.6 billion from the rich work? Mr Hat- tersley would not specify. Suggestions are going to be put to the shadow Cabinet and the shadow Cabinet will decide. He does not wish to give tax avoiders a head start by telling them what will be in his first Finance Bill.

But from various sources within the Labour Party, some general principles of the tax reforms it intends to make can be gathered. As Mr Hattersley confirmed in Blackpool on Tuesday, it will not reimpose exchange controls, or not in the form they took until 1979. At first this looks strangely lenient, for surely any of the bloody rich who have not already done so will move their capital abroad rather than risk having it devoured by Mr Hattersley. But all except the bloody silly rich will have done this before Mr Hattersley comes to power. Besides, if he wished to restore exchange controls, he would have to replace the 750 people at the Bank of England who once administered them. To do this would be difficult without giving the City some inkling of what he had in mind. And in any case, the Labour Party has another plan:

Individuals who invest excessively in foreign assets, be they property, bank deposits or securities, will equally lose some of their tax exemptions. We intend to make it more attractive for individuals to invest in Britain than abroad (Investing in Britain, September 1985).

The same approach will be adopted towards institutions such as pension funds:

The next Labour Government will withdraw `fiscal privilege' from pooled investment schemes that do not satisfy two basic criteria: first, the overseas contents of their portfolio should not exceed a given percentage; and second, a stated proportion of their portfolio should be invested in loan stock of the Ndtioffal Investment Bank (Ibid.).

Earlier this week, the Stock Exchange published a 44-page study questioning whether a state-sponsored investment bank would work as well as its supporters claim.

Another asset over which powers of direction will sometimes be taken is the second home:

Under Labour, local authorities would be allowed to designate areas in which there are a high proportion of second homes, or in which there might eventually be a high proportion. The local authority would then have a right to notification and first refusal on second home sales in the designated area or would be allowed to nominate individuals (from their waiting lists) to rent such proper- ty (Labour's Charter for Rural Areas, April 1986).

Mr Hattersley has, however, assured those who own second homes abroad that they will not be affected by plans to bring home British capital invested abroad. Nor, of course, will they be affected by British local authorities.

There will also be a wealth tax, though no details of its incidence appear to have been published.

So far as income is concerned, Mr Hattersley has said there will be no return to the old, very high marginal rates. Instead allowances which can be offset against tax will be limited to the standard rate, and national insurance contributions will be made more progressive. There will also be 'a clamp-down on fringe benefits, tax evasion and tax avoidance. This will require the creation of a substantial num- ber of jobs in the Inland Revenue, jobs which through revenue recovered will save many times their cost' (Social Security and Taxation, September 1986).

A researcher at Walworth Road told me it was 'a tremendous shame' that the number of staff employed by the Inland Revenue had fallen from 84,645 in 1979 to 70,000 in 1986. Bearing in mind that income tax, as a proportion of receipts, costs roughly four times as much to collect in this country as in the United States, one may ask whether 'a tremendous shame' is quite the right phrase. It has been esti- mated that the total administrative costs of British income tax, borne by the Govern- ment, by businesses and by individuals, amount to between four and six per cent of revenue raised. This helps to explain why so many graduates become accountants, and why accountants are so prosperous, but it is surely not a percentage which any political party should wish to increase.

The Labour Party is not, however, in- terested in tax reform because it is pragma- tic. For all Mr Hattersley's bluster about left-wing policies being practical policies, the true appeal of heavy taxes on the rich is emotional and moral. It is a matter of social justice. Earlier this year, Dr Oonagh McDonald, Labour's front-bench spokes- man on Treasury and economic affairs, elicited from the Treasury the information that a married couple with an income in the range £5,000 to £10,000 was on average paying £180 less income tax than in 1978- 79, while one with an income of £30,000 to £50,000 was paying £2,320 less on average, and one with over £50,000, £11,640. Never mind that these figures are not much use taken in isolation, with no indication, for example, of the favourable or unfavour- able effect on yields which changes in the rates may have had. It is evident from the figures that only the bloody rich have had any worthwhile tax deductions, and no less obvious that the rich are the ones who should pay for heavier spending.

This sort of uselessly simplistic analysis is epitomised in the last few lines of a leader published a fortnight ago in the New Statesman, by then already under new and brighter editorial control:

Statistical footnote. If Elm were declared the maximum personal wealth permitted for any individual, and all the surplus above that figure were confiscated from Britain's 20,000 (in 1986) millionaires and multi-millionaires, it would come to £30 billion — enough to pay for Labour's anti-poverty programme for ten years. Ask yourself: would that increase or decrease the amount of human freedom in our society?

Among the false assumptions underlying this footnote appears to be the conviction that the rich are necessarily rich at the expense of the poor, as if the wealth of a country were of fixed size. Wherever tax reform is discussed, the reformers tend to fall into two camps: those who regard the rich as cows, who can be milked for everyone's benefit, but only so long as they are not allowed to die of thirst, and those like the Statesman who regard the rich as wolves, liable, unless they are put to death, to gobble up everyone else's freedom and possessions.

The rich are probably capable of behav- ing like either cows or wolves, and will perhaps always contain individual exam- ples of each, but one disadvantage of treating them as out and out wolves is that they tend either to run away, or to don sheep's clothing. The easiest way to do that is to put your fortune, and if necessary your person, abroad, beyond the jurisdic- tion of the Inland Revenue even if it should recruit a million more inspectors.

Until the 1914 Finance Act, a British company was not taxed on the profits it

made abroad unless it brought them back to Great Britain. In 1914 this ceased to be so. The Vestey brothers thought the change put them at a disadvantage com- pared to their main competitors, the American Beef Trust. In 1915, income tax rose from is 2d in the pound to 3s and the Vesteys went to Argentina for the rest of the war. In 1919, William Vestey wrote a letter to Lloyd George, the last Liberal Prime Minister:

If we can get an assurance that, should we return to England, we shall only be charged for taxation the same rate as the American Beef Trust pay on similar business and nothing extra because we work in England, we will return as speedily as possible.

Lloyd George declined this request, but he afterwards sold William Vestey a peerage, which enraged George V. The Vesteys meanwhile devised an ingenious trust which enabled them to come back to England, but to pay relatively little tax for the next 60 years..

The purpose of these details is not to suggest that the Vestey family were good or bad to act as they did. (Lord Thorney- croft commented, when some of their arrangements were being exposed in 1980 in, among other places, the House of Lords and the Sunday Times: 'I would not criti- cise the Vestey family. Good luck to anybody who can make a success of busi- ness.' Others, such as George V, thought their behaviour was disgraceful.) Their example is quoted here as an unusually public one of rich people taking their money elsewhere, in this case to a trust based in Paris whose accounts were kept.in Uruguay.

Although the loophole which the Ves- keys used has now been shut, the use of trusts is expected to continue. No less an authority than Professor G.S.A. Wheat- croft said in 1965 that 'in Great Britain it is probably true to say that 95 per cent of all discretionary and accumulation trusts are created solely for tax-saving reasons,' and Messrs Kay and King confirm in their beautifully lucid work The British Tax System (OUP, fourth edition pending), that 'the rewards for successful ingenuity in this area are great, and the use of trusts.. . seems likely to remain a vehicle for the rich to pass on their wealth'. It will never be 'Good heavens! Cocaine vouchers.' easy for the Inland Revenue to lay its hands on a blind discretionary trust based in Liechtenstein, especially if the ultimate beneficiary of the trust (ownership now lying with the trustees) is prepared, should the need arise, to follow his money into exile. He could, for example, prepare a holt hole in Monaco or Bermuda, where there is no income tax.

That leaves the rest of the British to pay more income tax. But income is just as mobile as capital, when the person earning it is able and willing to work abroad. People earning high salaries tend, on the average, to be better placed to go abroad than those earning only modest amounts. Nor would they all go to the classic tax havens. Once Mr Hattersley had raised the top rates of income tax, whether directly or by reducing allowances, centres such as New York or, nearer home, Dublin, would become more attractive. In any case it might only be a question of going abroad for five years.

The foreign banks based in the City of London would, however, be prepared to go abroad for ever, if their employees complained that they were losing too high a proportion of their salaries in tax, and it also appeared that the City was falling apart as a financial centre. Businesses like Lloyd's, in which members pledge their own wealth, but are prepared to do so because the profits are usually substantial, would cease to be viable. Mr Lawson has abolished dodges such as 'bond-washing', by which income taxed at the top rate was converted into a capital gain liable to only 30 per cent tax. If Mr Hattersley puts up the rate of taxes which have become much harder to avoid, to be a member of Lloyd's will cease to be profitable. Without mem- bers, Lloyd's vanishes.

Many of the objections which rich peo- ple make to heavy taxes can be read as special pleading: they are special pleading. But someone ought to plead the case of the middling people who will pay more if the rich, sitting in Monaco, are paying less, and someone ought to plead the case of the poor people who will lose their jobs be- cause the skilled people necessary to the success of the companies employing them have gone.

It is possible to devise a tax system which treats the poor better than they are treated now. Since 1979 the Tories have done much more to eradicate the problem of very high marginal rates of tax on high incomes, than the problem of very high rates of tax on low incomes: the poverty trap. But the reformer who starts, as Mr Hattersley appears to start, with the assumption that by oppressing the rich, he liberates the poor, is liable, having shut his mind to all reasoning and evidence which contradict this assumption, to leave every- one worse off. Too late the reformer discovers the greatest objection to punitive taxes on the rich, that they end up hurting the poor.