Is there a case for a Labour Tax Cut?

Analysing the 'Tax cut for Tax raise' political strategy

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Roughly twelve months out from the next election we have reached that cyclical moment within our political system: another roaring argument about tax. Now before you click off to do better things, or are so perturbed by the headline you unsubscribe, just ponder one question. How can the Labour party change the country and win an election in 2024?

To begin, this is not a pro-1997 argument. The year is not 1997 and never will be again, neither will Tony Blair ever be Labour leader again. Any comparisons or political analysis using this pseudo-mythical-pedestal election is defunct. Compared to 1997, the political battleground has shifted towards a bigger state, and the economy is in a much worse position – as is geopolitics. The circumstantial difference is enormous and therefore the opportunities. Simply saying Starmer doesn’t = Blair or it doesn’t feel like 1997 for X, Y or Z  reason is a lazy political take.

Instead, what the best commentators have realised is that the block to a Labour government first getting elected, and then actually having the ability to enact reforms is simply: TAX. Almost unbelievably (not really) this is because the tax system has not been reformed for decades, and the UK has an incredible aversion to taxing wealth or capital. Work, and especially low-income work, has been the main casualty of tax, creating large inequalities; council tax being the notorious culprit, affecting homeowners in poorer areas ten times worse. As a result there are many opportunities for a ‘progressive’ tax agenda shift – both to raise revenue for spending and to install a fairer tax system, but it is difficult to pull off.

New Politics, New Consensus

The underlying change in politics towards government interventionism is akin to a ship steaming through global politics. It is one captained by Joe Biden, and rides the powerful waves of crisis  capitalism. Its destination is the paradise island called ‘decarbonisation’, an escape from climate emergency. In 2024 Starmer will be boarding this ship as a low-ranking officer, maybe sixth in command if he is lucky, but will have the opportunity to play his role in a consensus shift that is taking place in the halls of power, from Beijing to Wall St. Put Simply: big government is back. 

Ok, great, big change is afoot. But how the hell do we pay for it, especially in the UK? Well, no matter what any pundit or politician espouses, it will certainly come through tax rises as Martin Wolf has succinctly argued. The UK tax rate still has room to grow – still only at 39% ratio. More importantly, however, borrowing has become much harder. Foreign debt ownership has almost doubled since 2000 to 2023, from 13% to 25% –  the second highest in the G7. Interest rates could peak just under 6% in the UK, and we have just experienced the first 21st century Prime Minister (Liz Truss) brought down by the bond market. Quantitative Easing is over and harsh tapering (offloading of bonds onto the market) will begin – which in itself could create further bond crises. This all adds up to one thing: the age of easy, cheap and safe borrowing is over. Tax is the way forward.

So tax is the main revenue raiser to enable ‘radical’ Labour change in the next government. But  the wider aim for Labour should not just be a traditional increase in tax and spend but also a major rebalancing of our tax system. The progressive case for simply taxing more is quite weak: not only does it reinforce the inequality-fuelling worker-focused taxes in our system but also destroys the political hope and power of a Labour movement in an election. This is why the 1997 election script is so strong among the political commentariat.

Electoral Icebergs

Labour is perennially destroyed by the tax question in elections. Here's how it almost always goes: in attempting to preach fiscal responsibility by explaining how reforms and spending will be paid for, Labour sets out several individually popular but collectively unpopular tax policies; ranging from wealth, capital, income tax, corporation tax or national insurance. This fuels the fire of ‘Labour will just tax you’, leading to a media narrative overload with tax as the dominating issue of the campaign. Every time tax dominates an election Labour loses. The whole New Labour philosophy of winning elections is simply based on avoiding this common death, Philip Gould being its main architect.

But it's not 1997. Starmer’s Labour is fundamentally to the left of New Labour – with its ideology forged at a time of spending-hungry problems and changed internal party dynamics of the 2010s when the soft / radical left reigned supreme. No one should blame Starmer if he wants to go into the election arguing the only tax rises will likely be a Windfall tax on energy companies and the de facto tax rise by ending the ‘non-dom’ tax status. But it is disingenuous, and unsustainable.

Escaping that electoral disingenuity will be difficult, but is wholly possible. One way of doing this is through Kit Haukeland’s idea that the wording of Rachel Reeves' ‘no wealth tax’ announcement leaves enough room to introduce ‘wealth tax’ style policies simply of another name, similar to ‘fiscal drag’ being tax rises (but not called so by Conservatives, or their ‘party in the media’). That's one option. Another is to wait for a crisis and use its fiscal pressures to argue for a raise in the main taxes – and then use these tax receipts for further reforms. Johnson did this, escaping his ‘tax lock’ promise of his 2019 manifesto and then using the crisis of the pandemic, and the universal allure of NHS funding, in 2020 to raise funds for his dubious social care plans.

There is, however, a rarely taken third option. Rather than spinning words or shielding your agenda behind a crisis, Labour could lean into their political weakness. When parties signal through policy they are doing the opposite of what the electorate fear of them, they tend to win. 2019 is a classic example, but so was 2010 and 1997. As Harry Lambert argued in his broad piece about tax system inequality, if Labour argued for an income tax cut (essentially increase in tax allowance) or a complete reframing of national insurance, many of the electorate, particular working / middle class, would not only be less fearful of a Labour government but actively attracted. A proportional tax rate to replace council tax, as argued by the IFS, is another place to start. This would then feed into the more progressive tax reforms of rebalancing the system away from lower-middle-income in work tax towards the ‘rentier’ aspects of stagnant capital and wealth – ranging from land, property and assets. Here is where a potent, if slightly populist, left wing argument can be made. By assuming the clichéd (but how the media comprehend it) ‘right wing’ policy of tax cuts for those at the bottom and the ‘left wing’ policy of limited and targeted tax increases at the very top you reach a coherent, if nuanced, political position. It is a stance Harold Wilson would be proud of.

Fantasy land?

Yes, this strategy is a bit wild. A better argument, probably, is to wait and use the ‘tax cut for tax rise’ argument as a second-term election strategy. After repairing the economy and country for five years Labour would be in a more secure position to pursue a harder political argument which could politically shift the very nature of distribution in the country for good. Thatcher only achieved her structural, and politically trickier, reforms after her second  election victory in 1983. But the key for Labour is not just to raise revenue, nor is it about technical progressive tax revenue. The very idea of shifting how Britain taxes is an example of an embedded consensus policy – something which becomes a structural foundation of a new Britain, built possibly on fairness and with the addition of security. Security against the climate emergency, with fair taxes and a shared burden. Surviving the next thirty years as a country will truly need to be a people's war.

Peter Hennessy calls these big consensus policies ‘bridge’ policies – the reforms which survive decades upon decades because once implemented they are not only popular but build in a ‘fairness’ which is politically toxic to revoke – especially going into an election. The NHS is a prime example. Just imagine if the tax system was partly or wholly reorientated towards capital and wealth: essentially raising revenue for substantial spending increases while allowing many lower-to-middle classes to potentially get hundreds or thousands off tax. How the hell could a Conservative party actively win an election on the promise of reversing tax cuts? Their manifesto would read: vote for us, we will raise taxes on workers and lower taxes on those with enormous inert wealth. It is an impossible proposition, especially with the shift towards a younger, less capital-owning electorate. And so the argument for a tax revolution, in both cuts and raises, strengthens a Labour Party searching for a governing-strategy in 2024. It could also, if done right, become part of a foundation for the new consensus.

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Tom Egerton is a political writer and researcher, his upcoming book ‘The Impossible Office: the history of the prime minister’ is out in February 2024, published by CUP and co-authored with Anthony Seldon. Follow him on X / Twitter here.

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