N e w s f r o m C a t a l y s t
2 0 S e p t e m b e r 2 0 0 2
Included in this mailing:
1. POLICIES FOR EQUALITY - Catalyst at Labour Party Conference
2. THE RETURN TO REDISTRIBUTION - new article at www.catalystforum.org.uk
The Prime Minister has affirmed his government's goal of a country "in which
we achieve true equality - equal status and equal opportunity rather than
equality of outcome ... a Britain in which we continue to redistribute
power, wealth and opportunity".
But what are the policies that can move us towards a meaningful equality
today? And after years in which the "r" word has barely passed any senior
Labour politician's lips, do we still have the ideological resources to
argue publicly for a principle that must be the foundation of any
progressive government's agenda?
Catalyst will be hosting an challenging discussion of these questions at
this year's Labour Party Conference in Blackpool - and today publishes a
timely and valuable new article that restates the fundamental philosophical
case for a redistributive politics.
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1.
POLICIES FOR EQUALITY
Catalyst fringe at Labour Party Conference
Wednesday 2 October 2002, 7pm - 9pm
Park House Hotel, 308 North Promenade, Blackpool
Catalyst's fringe meeting at this year's Labour Party conference brings
together some of the country's most eminent academic experts on welfare,
health, education and labour law, to identify the challenges of developing a
radical egalitarian agenda for British society in the twenty-first century.
Speakers:
FIONA WILLIAMS
Professor of Social Policy, Leeds University; Catalyst Forum National
Council
RICHARD WILKINSON
Professor of Social Epidemiology, Nottingham University; Catalyst Forum
National Council
SALLY TOMLINSON
Professor of Education, Oxford University; co-author of forthcoming Catalyst
pamphlet on education
KEITH EWING
Professor of Public Law, Kings College London; author of forthcoming
Catalyst report on party funding
Chair:
ROY HATTERSLEY
All welcome - you will not need conference accreditation to gain access. The
meeting will be followed by a reception for Catalyst friends and supporters
where we also hope you will join us. For more information please contact the
Catalyst office on 020 7733 2111 or email [log in to unmask]
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2.
FROM THEM THAT HATH: NEW LABOUR AND THE QUESTION OF REDISTRIBUTION
By Kevin Hickson
In this valuable and timely new article Kevin Hickson sets out in clear
terms the compelling moral, economic and political case for proactive
policies to create a more equal society.
"If the government is to move beyond the recent budget it needs to be
more open about redistribution and help to build a new progressive consensus
with the electorate. It is best placed to achieve this if it makes a case
similar to the one presented here. The immediate option would be to phase
out the National Insurance ceiling. The government also needs to raise the
higher rate of income tax, and therefore has to put the case for this now in
time for the next general election."
Kevin Hickson recently completed his PhD on the 1976 IMF Crisis and is
editing a book with Raymond Plant on the political thought of the Labour
Party, to which he is contributing a chapter on equality. He is a Catalyst
Research Associate.
The full text of the article follows; it can also be read online at
http://www.catalystforum.org.uk/pubs/article5.html
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FROM THEM THAT HATH: NEW LABOUR AND THE QUESTION OF REDISTRIBUTION
By Kevin Hickson
http://www.catalystforum.org.uk/pubs/article5.html
The last budget statement marked a turning point in the policy of the
current Labour government. As many commentators have pointed out, the Labour
Government, especially since 1999, has been quietly redistributive. Much of
this has been done by "stealth", redistributing by means of indirect and
corporate taxation, and masking increases in welfare expenditure behind
tough talk on responsibilities. The budget changed all of this by financing
an expansion of public services by means of increases in National Insurance
and calling for a national debate on public spending. For those who were
still unsure whether New Labour was more neo-liberal than social democratic
on public expenditure, the budget should remove any remaining doubts.
Brown followed this up with a radical spending review this summer. The
government is now committed to substantial increases in public expenditure
over the remainder of the current Parliament and into the next. In total
this amounts to one of the largest sustained increases in public expenditure
of any government since 1945. It should also be pointed out that this is in
sharp contrast to the fateful years of 1974-76 when the then Labour
government, which was committed in its manifesto to raising public spending,
continually reduced expenditure.
A lot still to do
It would appear then that the case for greater redistribution has been won.
In fact, however, there is still much work to be done to ensure that this is
the case. This is so for three reasons.
The first is that current taxation could and should be more redistributive.
The universal increase in National Insurance at the last budget means that
higher earners only pay a 1 per cent rate of NI. There is a need to abolish,
or at the very least begin to phase out the upper earnings ceiling. The
higher rate of income tax, at 40 per cent, is lower than other European
rates and is lower than it was during most of the Thatcher years.
The second reason for continuing to argue for greater redistribution is that
the recent spending increases depend on economic growth. In previous growth
forecasts, the Chancellor has given a rate lower than other forecasters. The
result has been that when growth exceeded the Chancellor's forecast there
has been excess revenue to fund spending increases. This time, the
Chancellor's forecast is less prudent, being at the upper end of the range
of forecasts. If growth slows then the government will either need to cut
expenditure, raise taxes or borrow. Expenditure cuts would be disastrous
electorally as the government fails to improve public services and borrowing
will break the Chancellor's PSBR targets destroying his reputation for
prudence. There may therefore be a need to raise taxes again before the next
general election even if there are no further increases in expenditure.
The final reason why the case for greater redistribution still has to be won
is that there are many on the right of the Labour Party who remain
unconvinced about the need to redistribute. These are often people in
positions of influence at the heart of the New Labour project. Several
arguments have been made against further redistribution, of which an
increase in the higher rate of income tax would be the crucial change. These
can be summarised as the philosophical, economic and electoral arguments.
Often these arguments are not made explicitly, but instead can be detected
in the discourse of New Labour.
Before going on to examine the fundamental arguments in favour of
redistributive taxation, we need to quickly recap on the fiscal history of
the recent past. In 1979, a radical Conservative Government under the
leadership of Margaret Thatcher was elected with a commitment to reduce the
overall tax burden. The Conservatives were not to leave office until 1997.
Over the course of eighteen years all rates of income tax were cut, but the
largest cuts occurred at the top end. Other taxes were reformed - notably
there was a shift towards regressive indirect taxation. The net result of
complex changes was that only those earning over £64,000 per year benefited
under the Conservatives (1).
As will be seen below, the Conservative Government, imbued with a
neo-liberal ideology, were to boast of this "achievement" both in terms of
political theory and economic policy. However, for democratic socialists
committed to social justice it is deemed as unjust. There is therefore a
need to address the issue of the higher rate of income tax directly.
The philosophical argument
To neo-liberals such as Hayek, what matters is the absolute position of the
poor, rather than the relative position of the poor to the rich (2). It
follows that since we live in a society far wealthier than past societies in
which the lot of the poor is now much improved, there is no real poverty in
society. More specifically, we can detect three arguments presented by
right-wing Conservatives which, when taken together, suggest that there is
no need to bring about improvements in living standards by means of
deliberate state intervention (fiscal redistribution).
Firstly, it was fashionable for Conservative politicians in the 1980s to
argue that the poor were poor because of their own failures. In this, they
turned the clock back to the Victorian era and rejected the "One Nation"
Conservatism of the post-1945 period. The most famous example of this was
Norman Tebbit's call for the unemployed to, "get on their bikes and look for
work". However, as even Hayek notes, the market does not always distribute
on the basis of merit, effort and so forth. Instead, as social democrats
have often pointed out family background, genetic inheritance, market power
and other such factors have their influence. In addition to showing that
there is no automatic relationship between poverty and desert, there is also
no such automatic relationship between wealth and desert. High incomes are
just as likely to reflect market power and privilege than they are desert
(3).
Hayek also argues that present inequalities cannot be described in terms of
justice and injustice (4). The outcomes of the market are the result of a
large number of decisions. No individual intends to bring about the outcomes
of market operations. Justice can only be the result of intent. As the
outcomes of market operations are not intended, they are not unjust. The
market is in itself amoral. But as the political philosopher Raymond Plant
has argued, the notion that the justice and injustice of an act are only
related to the intentional aspect is difficult to accept. Certain market
actions have predictable results, which occur even though they were not
intended. Justice can therefore apply to how we respond to the unintended
outcomes of market operations. If it is predictable that the free operation
of the market will lead to greater inequalities in income and wealth, and
therefore greater relative poverty, we can measure our response in terms of
social justice. Redistributive taxation is therefore central to the
attainment of social justice and equality (5).
The final philosophical argument presented by the neo-liberals is in terms
of a defence of negative liberty. Negative liberty is concerned only with
the removal of legal constraints on action - freedom from external
constraint, rather than freedom to do something. Positive liberty requires a
redistribution of resources in order to allow the underprivileged to do
things that they would otherwise not be able to do. To the neo-liberal, this
will be arbitrary in that someone - i.e. the government - must decide what
level of resources is necessary for the realisation of positive liberty.
There is a need for a consensus, which is not possible given that each
individual has different capacities and wants. Furthermore, it requires an
infringement of negative liberty in taking resources away from the wealthy
in order to redistribute to the poor.
It is, however, possible to defend the redistribution of incomes and wealth
in theoretical terms. Given, as we have already established, that high
incomes are based at least as much on power, status, luck and so on than
they are on desert, we can offset the injustice in this by redistribution.
We can assume that since everybody has a claim to be morally equal we should
seek to obtain an equal a distribution of incomes as possible. What
inequalities remain are to be defended in terms of "rent of ability". That
is that society seeks to reward some people with higher incomes as a return
for the higher social benefits of their particular work. This is the notion
of "democratic equality" advocated by John Rawls and supported by Tony
Crosland in his essay "Socialism Now". It has been defended eloquently by
Roy Hattersley (6).
Moreover, we can overcome the neo-liberal argument in favour of negative
liberty by asking what is the purpose of liberty. The only justifiable
answer is that liberty is useful in that it allows us to do things. It
therefore implies a capacity or an ability to do something. If society
allows the underprivileged the theoretical freedom to do certain things, it
must also provide the means of realising those things. This means that the
incomes of the poorest must be sufficient to achieve basic liberties.
Moreover, this does not infringe on the liberties of the wealthy because
their incomes are sufficient to achieve basic liberties, unless the level of
direct taxation was to be raised so high that almost all of the income of
the wealthy was taken away.
Finally, it is possible to construct a consensus around what are fundamental
liberties. Here the notion of relative poverty can be re-established. If
positive liberty is concerned with providing the opportunities for the
poorest in society to have a meaningful life and to realise their basic
liberties, to be full and active citizens, then income levels have to be
seen in relative terms. It is clearly absurd to argue, as the neo-liberals
do, that the poor are not really poor because they are substantially
wealthier than the poor were in past times. The poor have to have the
opportunity to fulfil their own life chances in current society - that is
that they have to have the basic liberties available to the non-poor in
current society.
Such liberties would include shelter, food, health care and clothing in
order to have basic subsistence. Moreover, such liberties would include
education, good quality housing, recreation facilities, holidays, travel,
access to radio, television, the internet etc., in order to acquire
information, and other such things that make life meaningful and enjoyable.
These things can hardly be regarded as unreasonable demands given that they
are necessary to fulfil basic liberties in current society. But many people
do not have them. Even the first list of items necessary for subsistence are
not universally realised in current British society given the problem of
homelessness. There is still much to be done in the second area.
Redistributive taxation would not result in a loss in the liberty of the
wealthy because they would still be able to realise such basic liberties as
outlined above.
The economic argument
What about the economic constraints on redistribution? Broadly, there are
three issues here: incentives; the so-called "trickle-down" theory; and
globalisation. I deal with each in turn.
Neo-liberals argue that high levels of direct taxation act as a disincentive
to hard work. Knowing that if a person earns more then they will be taxed
more discourages people from working harder in order to earn more money.
This is the famous "Laffer curve": high levels of taxation result in a lower
total tax yield as people are less prepared to work. The Laffer curve was,
for most of the 1980s and 1990s synonymous with the New Right, being far
more explicit about financial incentives, self-interested human agency and
the implications for fiscal policy than theories such as monetarism. Anthony
Giddens, Director of the LSE and Blair's favourite academic, supports the
idea in a recent publication (7), showing the degree to which the Third Way,
supposedly modernised social democracy, buys into neo-liberal economics.
Leaving aside the point made earlier that there is no automatic relationship
between desert and income; it is also possible to subject the Laffer curve
to empirical criticism. As has been noted, the tax burden on those earning
over £64,000 per year fell between 1979-1997. Yet this has had little
bearing on real economic performance. It appears that the recipients of tax
cuts were not prepared to work any harder.
The Laffer curve is based on an assumption that an individual's decisions in
relation to work are based on monetary decisions. However, evidence suggests
that other considerations are present in decisions of this kind. This is not
to say that excessive rates of direct taxation will not act as a
disincentive. But the levels of taxation are not yet close to this point and
there is scope for tax increases without producing disincentives. The
paradigmatic thinker of postwar social democracy, Tony Crosland, argued in
The Future of Socialism that at over 80 per cent income tax was close to
reaching the point where it would act as a disincentive. If this was so in
the 1950s, why is that 40 per cent is now a disincentive?
The second economic argument put forward by neo-liberals is the
"trickle-down" theory. This states that the poor benefit by allowing higher
income earners to earn more and allowing a share of that wealth to
trickle-down to the poor. This is a key part of the neo-liberal case since
it is the means of justifying the increased inequality that will ensue from
allowing the wealthy to retain more and more of their wealth. It also
appears to have been accepted by Tony Blair in a Newsnight interview with
Jeremy Paxman during the last election. It was this apparent acceptance that
led Roy Hattersley to launch an attack on the Labour Government following
the election (8). According to the neo-liberals, and possibly Blair, the
market is more effective in reducing poverty than is a state-led strategy of
redistribution.
However, evidence shows that this is not the case. Over the course of the
1980s, the wealthy benefited from tax reforms and the gap between rich and
poor increased. If the trickle-down theory is correct, then the absolute
position of the poor should have improved. But it didn't happen.
Unemployment increased and more people claimed benefits. Benefits were
themselves cut and application procedures tightened. Absolute poverty
increased and charities were left to fill the gap. In short, there was
little evidence to support the trickle-down theory in the 1980s. There is no
alternative to a direct strategy of redistribution, other than to allow the
poor to become poorer.
The third economic argument put forward by neo-liberals and democratic
socialist apologists alike is that it is not possible to raise taxes in the
context of a global economy. High-income earners will go elsewhere if they
are forced to pay higher income taxes. Neo-liberals put forward this
argument with some satisfaction, as it appears to justify their
philosophical arguments by showing that there is no alternative. Socialist
apologists maintain an ideological commitment to redistribution, but argue
that it is no longer possible.
There is, it must be admitted, an element of truth in this argument. As with
the incentive argument, excessive levels of direct taxation would result in
the emigration of high earners to lower tax countries. Moreover, the
globalisation thesis has much force in any consideration in the
redistribution of wealth as distinct from income. In a sense, this has
always been a problem, given that the wealthy could hold overseas bank
accounts and other assets beyond the reach of British authorities. But
globalisation has made this problem much worse in that funds can be moved
around in the international banking sector much more rapidly (although
corporate wealth can be taxed by the use of a Tobin tax). Thinking here is
at a very early stage and any response is likely to be complex.
Taxation of income is much easier. Income is taxed at source and is
therefore subject to the controls of British authorities. It is unlikely
that a more modest increase in higher rates of direct taxation would result
in a mass exodus of the higher earners. This is especially true when we
consider that Britain is a relatively low tax country (9). Britain has a
lower tax burden than the EU and OECD averages. Moreover, although the tax
burden is lower in the United States, taxes on incomes are higher than in
Britain. There is therefore much scope for higher levels of direct taxation
at the top end of the income spectrum without the expected costs put forward
by the globalisation theorists.
The electoral argument
The final broad argument put forward by those who remain reluctant to
advocate increases in the higher rate of direct taxation is that it is
electorally unpopular. This is particularly so of those close to New Labour.
Given that the Party was out of power for so long, it is seen as an
unnecessary risk to advocate increases in income tax.
Given the force of the philosophical arguments outlined above in favour of
redistribution, it may be regarded as a necessary risk. Moreover, there is
sufficient strength in the democratic socialist argument to win over the
waverers. But it may also be argued that the extent to which such a pledge
is regarded as an electoral risk has been exaggerated. It shows a
fundamental caution at the heart of New Labour.
This is due largely to the legacy of the 1992 General Election. The proposed
shadow budget, which included an increase in the higher rates of direct
taxation, was regarded as unpopular. It was decided by the Labour Party
leadership after the election of Blair in 1994 that there was a trade-off
between electoral popularity and redistribution. Higher taxation is
unpopular and should be avoided. There are a number of responses that show
that this attitude is incorrect.
First is the simple point that Labour had a massive obstacle to overcome
given the extent of the Party's electoral defeat in 1987. It had come close
in 1992, and would just require one more push at the next election. This
attitude appeared to shape Labour Party thinking under the leadership of
John Smith. Given the ease with which Labour won the 1997 General Election
against a tired and discredited Conservative Government, this attitude could
be regarded as correct. But this can only be said with hindsight. Labour's
caution in 1997 can be excused. Its caution in 2001 cannot.
Secondly, other factors help to explain the General Election defeat in 1992.
These include a lack of confidence in Neil Kinnock, the scepticism over
Labour's potential management of the economy, election campaign gaffs such
as the Sheffield Rally, the reinvigoration of the Tories after the fall of
Thatcher and the impact of a largely right-wing press. The tax issue is only
one issue among many, and opinion poll evidence suggests that the issue of
the management of the economy was most important in shaping voter
preferences.
Finally, the tax proposals in 1992 were complex and were easy to construe as
large tax increases. This of course is what the Conservatives did. The
alternative is to pledge an increase in income tax at a specific level of
income to a particular level of taxation. This would have the distinct
advantage of transparency. The Conservative Party and hostile press would
not be able to manipulate such a commitment as they did so successfully in
1992. Here, the Fabian Commission on taxation is relevant. The Report shows
that, when presented in this way, there is broad support. In an opinion poll
from August 2000, 80 per cent said that the Government should increase
spending rather than cut taxes. Even among Conservative voters, there is a
significantly higher proportion in favour of higher public expenditure. In a
separate poll, of those earning above £70,000, 69 per cent said that income
tax was too low or about right (10).
In short, there appears to be more support for higher income tax at the top
end than may sometimes be believed. The increase in the rate of National
Insurance contributions at the last budget provides us with more precise
evidence on voter attitudes, given that this was a measurement of what
voters thought of a decision already taken rather than a hypothetical
situation. The budget was the most popular in Britain since 1977 with all
sections of the electorate showing a net approval for the budget, including
Conservative voters. The following month Labour scored a popularity rating
of 50 per cent, a lead over the Tories of 23 per cent and up 3 per cent on
the previous month. Moreover, Brown was the most popular government minister
following the budget with a 67 per cent approval rating.
Conclusion
If the government is to move beyond the recent budget it needs to be more
open about redistribution and help to build a new progressive consensus with
the electorate. It is best placed to achieve this if it makes a case similar
to the one presented here. The immediate option would be to phase out the
National Insurance ceiling. The government also needs to raise the higher
rate of income tax, and therefore has to put the case for this now in time
for the next general election.
The rate is open for debate and is ultimately a matter of judgement in which
the amount of extra revenue, likely public expenditure requirements and
public opinion are all considered. This too ought to be a matter for open
and honest debate on the Left. The Fabian Tax Commission has put out a
marker at 50 per cent on incomes over £100,000, although this must be seen
as a cautious estimate when we consider the level of inequality present in
society. If the aim is not only to redistribute in order to improve public
services, but also to reduce inequality, then we must aim for more.
Notes
1. Fabian Society Commission on Taxation and Citizenship, (2000) Paying for
Progress: A New Politics of Tax for Public Spending, London, Fabian Society,
pp.58-60.
2. Hayek, F, (1976) The Mirage of Social Justice, (Vol. 2 of Law,
Legislation and Liberty), London, Murray; Joseph, K, and Sumption, J, (1979)
Equality, London, Murray.
3. Tawney, RH, (1964) Equality, London, Allen and Unwin; Crosland, CAR,
(1956), The Future of Socialism, London, Cape; Crosland, CAR, (1976)
Socialism Now, London, Cape.
4. Hayek, F, (1976) Ibid; Joseph, K, and Sumption, J, (1979) Ibid.
5. Plant, R, (1984) Equality, Markets and the State, Fabian Tract 494,
London, Fabian Society.
6. Hattersley, R, (1987) Choose Freedom: The Future of Democratic Socialism,
London, Michael Joseph.
7. Giddens, A (2000) The Third Way and its Critics, Cambridge, Polity, p.
97.
8. Hattersley, R, (2001) "It's No Longer My Party", The Guardian, 24 June.
9. Fabian Society, (2000) Ibid, pp. 61-62.
10. Fabian Society, (2000) Ibid, pp.52-53.
Kevin Hickson recently completed his PhD on the 1976 IMF Crisis, and is
editing a book (with Raymond Plant) on the political thought of the Labour
Party to which he is contributing a chapter on equality. He is a Catalyst
Research Associate. Contact: [log in to unmask]
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