Tax reform must be properly thought through before going to the country

Oh dear! The New Statesman magazine is returning from its summer break with what it obviously hopes to be a major piece by Harry Lambert, its editor, to challenge Labour Party policy. Mr Lambert shows his credentials as a journalist with extensive reportage. But there is nothing here that anybody who wants to seriously understand tax and the economy to get their teeth into – it is the intellectual equivalent of ultra-processed food. Your taste buds might be excited but it is not nutritious fare. To be fair, it’s not immediately apparent that either the Labour leader, Sir Keir Starmer, or the Shadow Chancellor, Rachel Reeves, are seriously interested in economics – and these are the people the article sees to influence. But the pair are very much interested in hard politics, and the article fares no better in that department.

The article reinforces my suspicion of anything in a journal billed as a “long read”. I’ve noticed a propensity to do this both in The Guardian and the Financial Times. I take this as a warning to stay clear, to avoid articles that aren’t properly edited and waste a lot of reading time*. Mr Lambert’s article was not billed as a long read, but it should have been – there is a mass of verbiage, which you have to wade through before you come to his three policy proposals, and even these aren’t stated succinctly. These proposals are: to replace Council Tax with a 0.5% tax on property values (covering just domestic property, as far as I can see); applying National Insurance to property rental income; and raising the rate of Capital Gains Tax. These, he estimates would raise £28 billion a year (though the property tax reform would be revenue-neutral): not coincidentally the amount of Labour’s proposal for spending on the green energy transition, which they are now backtracking from. More sensibly he suggests that the extra revenue is used to reduce tax on work (income tax, or better still, National Insurance).

I will start by reflecting on the overview, which is summarised by this statement:

In order to spend money in government the party will need to raise it. There is a very good way to do that. It is to shift the tax burden away from labour and on to capital, away from work and on to wealth. 

Harry Lambert, New Statesman 30 August 2023

There are two words of warning on this. The first is that the words “wealth” and “capital” are treated as synonyms (as are “labour” and “work” more justifiably). They can be, but when talking about economics they are different things. Capital refers to the assets tied up by businesses in order to be able to operate: premises, machinery, working capital and so on. By and large it isn’t a good idea to tax this directly, as it would reduce investment. Taxes on profits generated by the capital before it is distributed to owners – such as corporation tax – is another matter. This is in effect a tax on capital, but a very efficient one. It is one of the few things that the Prime Minister and Chancellor Rishi Sunak has insisted on raising, in contrast to his predecessor as Chancellor, George Osborne. Wealth, on the other hand, is owned by individuals for their disposal. The proposed property tax is a tax on wealth, not capital, unless it is applied to businesses too. That applies to Capital Gains Tax too (demonstrating that the word “capital” has yet another nuance when applied to taxes). Where the proposed extra tax on property rent sits is ambiguous.

The second word of caution comes from Modern Monetary Theory (MMT). This way of looking at things seems to be currently out of fashion, but I think that it captures many economic realties quite well. Supporters of MMT suggest that the main purpose of taxes is to manage demand in the economy, to prevent excess demand leading to inflation. It isn’t to manage the national debt, which can be paid off by creating money – if that is under national control, as it is in the UK. MMT was popular on the left once because it was suggested that the country could expand public spending without raising taxes, because inflation was dormant. Alas the excess spending across the Covid pandemic has led to inflation, showing that the inflation constraint is a real one, even if the national debt wasn’t – though to be fair that is also because the pandemic and other factors, such as the Ukraine war, constrained supply. The problem is that taxes on “work” (or spending, such as Value Added Tax) are much more effective at this demand management job than are taxes on wealth, as the wealthy spend a much lower proportion of their assets on consumption. So taxing more on wealth to tax less on incomes is in practice a much trickier exercise than it might first appear. Which is not to say that there aren’t good reasons to tax wealth, of course. It is good for managing the national debt (which is harder some supporters of MMT appear to think) , but much less so for funding increases in public spending.

But the main problem with Mr Lambert’s proposals is that they clearly haven’t been thought through. The country is surely sick of half-baked policies that turn out to be nightmares (Brexit, NHS reform – don’t even mention Liz Truss). The new property tax and the tax on rental income are radical changes which raise a lot of important questions of detail. Council Tax may be awful, but it contains a warning. There has not been a revaluation of the tax since it was introduced 30 years ago because of the political and logistical difficulties. How are property valuations to be determined and maintained? Then there are other questions: how would business assets be treated? Wouldn’t it be better to tax land values instead (there is a long history of advocacy of Land Value Tax)? And tax on rental income? What about properties owned by companies? And what would be the impact on rents and the availability of property to let? Mr Lambert can point to no major piece of research that tackles the details.

The fuzziness of such details would make the policies very easy to attack should Labour try to adopt them – and in fact they would take years to design and implement. The best way for the Labour leadership to take them forward is to propose them after they take power, as part of a comprehensive review of taxes to make the system fairer, and use the full resources of government to design them – and then put them to the country in the election after next. Meanwhile they wouldn’t need to even put the idea into their manifesto. Raising tax on capital gains is another matter – this has gone up and down periodically, and could be done relatively easily. And it would be not at all surprising if Labour did this in government. But there’s no need to highlight it now.

Which brings us to the high politics. Alas opinion polling on subjects like this that are not a matter of intense national debate are nearly useless. I can draw a parallel with electoral reform. In polls most people supported the idea: until a referendum in 2011 made it politically contested, when it was crushed. The political problems is as ever, is what people are now starting to once again call the petty bourgeoisie (or petit bourgeoisie if you prefer). These are self-employed people, or others who aren’t tied to major businesses or government agencies, who have the idea that they have made their own way in life with little help from government. They are electorally decisive but sceptical of big government and taxes of any sort. The political right are absolute masters of presenting taxes on the very wealthy as attacks on this group. This is why the Labour leadership are treading so carefully on tax. They think they are going far enough already by proposing changes to the taxation of private schools and non-domiciled taxpayers.

Harry Lambert’s ideas just aren’t ready to present to the electorate. That is the reason that the Labour leadership will ignore them – and wait until they have the resources of government to develop them.

*Readers might consider this cheeky as my own articles aren’t short by journalistic standards – but I don’t like things very short either!

The US Republican company tax reform might be a good idea

I like to see the bright side. With the accession of Donald Trump as US President, alongside the Republicans controlling both houses of Congress, that is hard. Mostly, I simply hope that the process of challenge will make liberals stronger and harder. There is too much complacency in liberal thinking. And there is more cosying up to vested interests than we might like to think.

And among the flood of bad ideas coming out ot the new administration, there may be the odd good one. Reforming company tax might be one of them.

What I am thinking of are the plans proposed by Paul Ryan, the Speaker of the House of Representatives.  Liberals should support it, though alas many won’t because of who is proposing it, rather than its merits.  One part of the plan is to cut the rate of company tax to 20%, but reduce the number of deductions. This is an old debate. I am sympathetic to lower marginal rates and fewer deductions, though 20% is aggressive. I do not share the view that company profits should not be taxed, and that the burden of taxation should entirely be on distribution of profit instead.

There’s another old idea in the mix too: 100% write off of capital investments in the year the money is spent. Older British accountants like me will remember that we had that system here in the 1980s – called 100% capital allowances. It was the basis of many a tax avoidance scheme, and perhaps tilted the balance too much in favour of investing in plant rather than people. But there is some merit to it.

But the really interesting idea is the so-called “border adjustment”. This exempts from tax sales outside the US, and disallows as deductions spending on imports. This can be painted in different ways. To nativists this sounds like encouraging exports and discouraging imports. Alternatively it can be presented as a sort of value-added tax, which is well-established here in Europe. Neither presentation does it justice. It is not VAT, not least because the costs paying people is within its scope. And its effect on corporate incentives can be beneficial to the world economy rather than detrimental. It amounts to a constructive proposal to deal with a major problem: the taxation of transnational businesses.

At the moment companies are taxed by the location of profits, apportioned “fairly” using general accounting principles. This falls foul of manipulation through transfer pricing – what country-level subsidiaries within a transnational business charge each other. Thus when a multinational sells you something in Britain, it may treat as part of its costs the use of intellectual property based in a low tax regime, such as the Netherlands or Luxembourg. National tax authorities have been fighting a losing battle against abuse. The G20 recently adopted some new rules to reduce abuse, but this is sticking plaster to repair a fracture. It is best seen as an attempt by corporate lobbyists to stave off more radical approaches.

One such radical approach to reform corporate tax is unitary taxation. This method means that tax authorities assess a business’s global profit, and then allocate it to country based on the location of some combination of sales, employment or property. This is how US states tax the profits of US businesses, mostly allocating them using the Massachusetts formula. I have been advocating this for years internationally, but I have unable to persuade even the Liberal Democrats to pursue the idea.

Mr Ryan’s border adjustments are an alternative idea, and look simpler. In essence corporate taxes would be based on the location of revenues – something that would not be easy to distort. So, applied in the UK, Amazon or Starbucks would not be able to use spurious intellectual property charges to relocate profits to tax havens. Overall the scheme favours countries that have trade deficits (like the UK or US) rather than surpluses (like Germany or China), but that is no bad thing.

And probably unilateral action by the US is the only way much is going to happen. Multinational forums like the G20, and even the European Union, have completely failed to deal with this problem. Only the US has the power for unilateral implementation. Where it leads, others will be forced to follow. And post-Brexit Britain should be able to follow quickly.

Alas the power of corporate lobbyists in our democracies remains massive. They are masters of quietly undermining radical ideas and promoting “compromises” that have only superficial effects. Mr Trump is a sceptic, and that’s a very bad start. The hope must be that Mr Ryan will get his way in the inevitable horse-trading between the presidency and congress. Mr Trump may be sceptical, but he is not strongly against it either.

But even if this reform attempt fails, I hope that liberals everywhere will take on the challenge of corporate tax evasion with a radical approach, such as border adjustment or unitary tax. Alas I am not optimistic.

Why I’m sceptical about the Citizen’s Income idea

There is growing interest in the idea of a Universal Basic Income (UBI), also called Citizen’s Income, to replace means-tested benefits. This was given a lift last week by the think tank RSA. The Lib Dems are also reported to be looking at it as part their review of welfare. The idea already has some totemic value on the left – it is part of the Green Party policy pitch. It is an interesting idea, but my scepticism is growing. But it has along pedigree: I first remember it being advocated by Paddy Ashdown in the 1990s.

Why the interest? Well the benefit system has become fiendishly complex, with entitlement hedged around by all kinds of rules. Applying for benefits is often demeaning, and the bureaucracy involved is arbitrary. Although the government is trying to reduce the complexity of benefits with the introduction of Universal Credit (UC), which is phased out as income rises, this brings its own nightmare. To work, it needs up to date information on what people are earning. The systems difficulties associated with this have led to repeated delays in its introduction. Some of these problems may in the end prove insoluble; the project has borne many of the hallmarks of over-ambitious failed technology projects, though the bad press has eased over the last year.

A UBI would replace these benefits, including the old age pension, child benefit, unemployment pay and the tax free allowance on income, with a single system of payments to everybody. This would doubtless have to be age-related. The RSA version suggests a low rate for children (payable to parents), and a high one for the elderly. Extra allowances would need to be made for those with certain types of disability. This cuts through the current complexity.

Of course the first big design issue is affordability. How high would taxes have be to pay for it? Consider the basic maths. If the allowance was set at the mean level of earned income (spreading the income from those that work across those that don’t) across the economy, then tax on income would have to be 100%. On top of that you would have to pay for the NHS, defence, schools, the police, and so on.  If it was set at 50% of average income, tax would have to be 50% just to pay for it, and so on. So any design has to push the boundaries of how low can you get away with. But how low can the entitlement be and still be able to realistically provide a sole income for the unlucky? The RSA version can only get through this conundrum by sidestepping the rather central question of housing costs.

After you have navigated that rather central problem of scale, more problems await:

  • Incentives to work. If the income is going to be sufficient to sustain people through unemployment, might it not encourage a frugal lifestyle of people who never work (legally, anyway), reducing the tax base? This would be parasitic, and surely seen as such. Which then leads to the toxic politics of people who suspect that this is the case of their neighbours, minorities, and the like. The experience of places where something like the UBI currently works (Native American reservations with gambling or natural resources income, for example) is not particularly encouraging: too many people can lapse into a hopeless, dependent lifestyle.
  • Housing is a harder problem than just affordability, as it varies so much from place to place. But, to be fair, this is a problem with the current system too. A whole new approach is needed to housing policy, and that would need to work alongside this reform. This encompasses such issues as the availability of social housing, regulated the private rental sector, and the access to housing finance which seems to be too easy, so pushing up prices needlessly). This, for my money, is a more urgent problem.
  • Who is an isn’t entitled? At what point do people coming to live in the country become entitled? At want point do people choosing to move overseas lose entitlement? This is one area where being in the EU, with its multiplicity of benefits systems and no-discrimination rules, makes things harder.
  • Enforcement. There is an invitation to fraud here, as people will be tempted to create claims for fictitious people, or the deceased, etc.,and that points to the use of some kind of central registration. The RSA suggests linking to the electoral register. This sits uneasily with British traditions of keeping the state at arms length.
  • Taxes. There is a need to roll in personal tax free Income Tax and National Insurance allowances to make it pay. That means all income is taxable. This could involve quite a lot of extra administration as more people are brought into the scope of taxation.

There are no doubt many more design issues. The problem is not so much that these difficulties are insuperable, but that the idea is revolutionary. And revolutions usually fail, because it is impossible to foresee consequences. All the modelling is based on the idea that behaviours will not change very much – when they are bound to. If possible change should be in smaller, evolutionary steps.

But I have a deeper, philosophical problem. This all reeks of a Big Idea to be dropped from a great height on people by central government. Liberals are rather prone to this. They love the idea of universal righst and entitlements, because they think they are empowering. But the alternative view is that such grand, centrally designed systems are dehumanising and create dependency.

My view is that instead of such systems of legal rights and entitlements, we need to give the state a human face. That means that individuals in difficulty have access to intermediated services and support which tie together, physical health, mental health, social support, housing and so on. These would in packages that are designed to move people onto a sustainable path, and also conditional on to some extent on how the individual engages. Universal income is based on a heartless idea of “Take the money and you’re on your own.” Of course intermediated services might be considered illiberal, because they place considerable discretionary power in the hands of agents of the state.  I think that can be managed through stronger local accountability. And I think that current British society has the civic strengths to pull it off. Though even here, I must beware of my own Big Idea to be dumped on an unknowing public.

But Citizen’s Income is supported by a lot people I respect. No doubt the idea is worth exploring further. But I will take a lot of convincing that this is the best way forward for welfare reform.

Saving tax credits means raising taxes. I’m OK about that.

The current political storm over the British government’s proposed scaling back of tax credits is not showing politics at its best. On one side a cynical Conservative government is pushing through changes will make the poor poorer and reduce social mobility. On the other we have opposition grandstanding that has no interest in suggesting alternatives. I despair.

First of all, what is the fuss about? Tax credits were introduced by the Labour government in 2003. They are a way of providing means tested benefits to those already in work, but on low incomes, and especially those with children. They are designed to taper off as income grows, so that claimants will always benefit from any increase in earned income. They are copied from a US idea, but they have been Britannicised so that they can operate within the country’s system of taxation at source, PAYE. In America claims are made at the end of the tax year when tax returns are filed; the UK use a monthly system.

Originally the problem with tax credits was the operation of the monthly calculations. Inevitably the information they used was often out of date, and so many claimants were faced with clawback claims, for which they were not prepared. We hear much less of this these days. Nowadays the problem is the cost. Claims about this vary, but it was always expensive, and, with low paid jobs multiplying, it has grown sharply. And yet they are well targeted to those most in need, especially families. They do not penalise work, so many means-tested benefits do, while costing much less than universal benefits.

During the coalition years of 2010 to 2015 the government trimmed back tax credits, in particular they tapered off the withdrawal more sharply. Previously incomes up to around £40,000 (from memory – this figure may well be incorrect) could claim something, but this has been reduced. Now the government proposes to reduce tax credits even more harshly, and especially for larger families. It estimates that the savings will be between £4bn and £5bn. That will cause real hardship for many families that include working people. In fact, the very “hard-working families” that we got so sick of hearing about from politicians at this May’s election. The cuts will also be a setback for attempts to give children from poor families a better start, and so reduce inequality.

For all that there is a certain honesty about the plan from the Conservative Chancellor George Osborne. The government’s financial deficit is running at about 5%, far higher than it should at this stage in the economic cycle. During the election the Conservatives made it very clear that they wanted to balance the budget. They also made it clear that they would do so by making cuts to benefits. They were very coy about where these cuts would fall, and even suggested that child tax credits might not be affected – but there really is no other way to make their plans work. This is what politicians do in a democracy: vaguely promise “tough” measures before an election; implement them soon after, and hope the fuss has blown over by the time the next election comes around. A lot of publicity has been attracted by a Conservative voter saying that she felt very let down – but I’m afraid that’s political naivety. If the issue was that important to her, she should have voted for somebody else.

The government are honest, by the standards we have to apply to politicians (no truly honest politician would get elected), but misguided. But a lot of the opposition is a nonsense. It amounts to no more than a collective yelp of pain, and wishes for the government to “reconsider” without offering any kind of escape route. This is particularly annoying from Conservative MPs. They offer no alternative. The various mitigations proposed, such as raising the minimum wage, or tax thresholds, are badly targeted and won’t help much. Tax credits are the most efficient way of doing what they do. Any change is going to make things worse. There is no clever wheeze that will make the problem go away.

The opposition parties: Labour, the SNP and the Lib Dems are at least a little more honest than the Tory moaners. Labour initially got itself into a tangle, but soon put that right. I personally dislike the way these parties (and especially Labour) treat the status quo as a sacred thing to be “defended”, and any change that makes people worse off as tantamount to robbery. It’s still somebody else’s money. If systems of benefits, or public services, aren’t doing what they are supposed to, they should be changed, even it makes some people worse off. Still, that’s what politicians do. And in this case I think they are right. There is so much evidence that poverty in early life ruins chances later, which is why benefits focusing on families are a good idea. The system could be improved, no doubt, but not in a way that makes it any less expensive.

But these parties still should be clearer on what they think the government should do instead. All three of those parties have said they want the fiscal deficit reduced. They make an exception for capital spending – but tax credits is patently not that. Neither are they advocating cuts anywhere else (with exception of nuclear weapons systems, in some cases, but they usually want to increase spending on conventional forces instead).

Neither is it realistic to appeal to economic growth. This is not something that can be turned on and off like a tap by politicians. If it was the Conservatives would have that tap in the “on ” position already. Keynesian stimulus, which may have been relevant in 2010-2012, does not apply at this point in the economic cycle.

The only way to convincingly square the circle is to raise taxes. Of course the far left think they have the answer here: to crack down on tax avoidance and evasion, and to reform corporate taxes. Closer examination reveals these ideas to be chimerical. That still leaves the idea of taxing the rich harder. But the rich are slippery. There are still some things that can be done: taxing land, in particular, and tightening inheritance tax, rather than loosening it, as the Conservatives are doing. I wouldn’t bet on these ideas yielding much new money quickly though.

To have real credibility in “defending” tax credits, the NHS, local government spending, the police, or any other aspect of expenditure, politicians will not carry conviction unless they are prepared to raise one or more of the big three taxes: Income Tax, National Insurance, or VAT. Alas on this all parties are silent.

But such is the importance of tax credits to me, that I would indeed support the raising of one of the big three to keep them in being at current levels. I just wish the governments’ critics would say so too, and so start some real debate about the country’s fiscal priorities.

 

Corbynomics: hope, fantasy and shaky foundations

Jeremy Corbyn, the front runner in Labour’s leadership race, is clearly somebody that mainstream politicians and media types underestimate. The standard criticism of him is that he a blast form the past – somebody that wants to take the country back to the failed solutions of the 1970s. No doubt that’s how it looks if you just examine the various things the man has said down the years. But many of his supporters are young and are projecting something quite different onto him.  He has crafted his message to appeal to this group, to look like something much more modern. Today I want to take look at his economic ideas.

These have been set out in greatest detail in his paper The Economy in 2020, published on 22 July. It isn’t hard to see why he is enjoying so much support. He offers the hope of something fresh. He starts by attacking the government’s economic policies, which he characterises as “austerity” in the now familiar language of the left. Thankfully he has shown more sense than to use the word “neoliberal”, putting him ahead of the Green leader, Natalie Bennett, who put forward a strikingly similar prospectus in the May General Election.

“Austerity” is used as a general shorthand for economic liberalism, and in particular the attempt to keep government expenditure and taxation in check – which at present means reducing the scale of government expenditure. It also refers to attempts to reform public services through such policies as privatisation. Instead Mr Corbyn calls for investment to rebalance the economy towards higher paying jobs, though not ones in financial services. He has time for some supportive words for private industry – recognising that private enterprise will have to be part of the growth and investment process. It reads as constructive and hopeful.

This overarching narrative has some macroeconomic credibility. The current British economy is nothing like as strong as the government claims, and many of his criticisms are on the mark. Alas it falls apart on closer scrutiny. I want to quickly look at three aspects in particular: the so-called tax gap of £120bn, corporate subsidies of £93bn, and the idea of “people’s QE”.

But first I must mention a name that keeps popping up, and who ideas seem to be behind much of the document: Richard Murphy, an activist associated with the Tax Justice Movement. There are some striking parallels between Mr Murphy and me: he was born in 1958, he took an economics degree, and he is a Chartered Accountant. The main difference was that his Economics degree was joint Economics and Accountancy (at Southampton) in the 1970s, and mine was full Economics (at UCL) in the 2000s. It is one of the rare occasions when my formal qualifications in economics outrank that of a public policy wonk.

The Tax Gap estimate comes from this paper commissioned by the Public and Commercial Services Union and written by Richard Murphy in 2014. Mr Murphy (like me born in 1958 and a Chartered Accountant) is a prominent campaigner for Tax Justice. I first came across this document when it featured in a 38 Degrees campaign (“it isn’t rocket science”, which suggested that collecting more tax was basically quite easy), and I think its claims are firmly embedded in the hard left mythology. It suggests that the Revenue & Customs vastly underestimates the amount of tax lost through avoidance, evasion and the like – and that the real gap is £120bn and not £35bn (and falling). This is important because it suggests that a huge amount of extra tax could be collected if only politicians were less indulgent of wealthy taxpayers. To give some context, the Lib Dems were criticised in the General election for being speculative when they suggested that £10bn cold be gained by tackling the tax gap (more than the other parties, except the Greens, of course). Mr Corbyn has his eyes on something much grander – and thus funding extra government spending without raising taxes on ordinary working people.

The biggest part of this gap is the untaxed shadow economy, which Mr Murphy says is much bigger than official estimates. I can’t offer an opinion on whether this is true – but I can suggest that this is hardly low hanging fruit, and is by no means confined to fat cats (think small building jobs, domestic cleaners, to say nothing of drug dealers and the smuggling of booze and fags). This does explain a rather tangential reference to cracking down on small business tax evasion though in Mr Corbyn’s document.  It is hard to see how any government could do much more than make a marginal difference without a draconian clampdown on the black and grey economies which would carry a lot of uncomfortable implications right across our society.

Another number that gets an airing is the idea the government subsidises business to the tune of £93bn. The source of that seems to be the Guardian newspaper, and its correspondent Adtiya Chakrabortty (“The 93bn handshake” is their headline). This is unbelievably flaky. The biggest single item is £44bn of corporate tax benefits. This is mainly credits for investment expenditure. Calling this a subsidy is more than a stretch – it is simply putting capital expenditure on a level playing field with revenue expenditure by, in effect, making depreciation tax-deductible on some types of investment. I’m not clear whether the figure includes tax releif for research and development, but that would be entirely consistent with the logic. If Labour is serious about helping manufacturing industry, it will need more of this sort of thing, not less. Another thing thrown into the pot is export credits, which allow British exporters to compete on a level playing field. If George Osborne abolished this the noise from Labour benches would be deafening. Cleaning up old nuclear power stations is in there too. There is something not a little bizarre in on the one hand suggesting that the government should promote investment, and on the other hand attacking all attempts by government to promote private sector investment as corporate welfare that should be stopped.

Next comes the idea that the Bank of England’s Quantitative Easing (QE) programme should focus on public investment in housing and infrastructure and the like – “People’s QE” – rather than buying government and other bonds. This is promoted by Mr Murphy again (his ideas pop up several times – and not all of them are bad), in spite of his lack of economic qualifications. Quite apart form the fact that the Bank of England has ended QE because the monetary conditions no longer apply, it gets the Bank into the unenviable position of evaluating public investment projects.  Getting unelected technocrats to do this sort of thing rather than government ministers (funded by gilts subject to QE) is hardly democratic either. To be fair, Mr Corbyn just says that the idea should be looked at, not that he would do it. But it betrays a very weak understanding of economics. He seems unaware that the Keynesian critique of austerity is weakening all the time, especially now that real wage increases are growing, suggesting that economic slack has been taken up. The Keynesian critique may have had authority in 2010, but 2015 is another matter.

The truth about the modern economy is this: the world has moved on from the easy textbook world of the 1960s, and even the 1990s. Technology has made manufacturing so efficient that there are few jobs in it any more; most white collar jobs have likewise been automated away; we are left with a lot of important jobs (carers, nurses, cleaners, etc.) that cannot be made more productive (and so better paid) through investment programmes. Some things can and should be done: investing in public housing, rail infrastructure and building up renewable energy, for example. But these will not yield the hordes of well-paid jobs that politicians left and right so badly want. Productivity improvement has moved from the workplace to our private lives (think smartphones and search engines). And you can’t tax that. Meanwhile demographic change is adding a further brake to the formal economy. This is the real reason why the economy under the Conservatives is not doing well, not “austerity”. Mr Corbyn is offering 20th Century solutions to a 21st Century problem (as is George Osborne, the Conservative Chancellor, I must add).

Slower growth means that it will be a struggle to raise much more in taxes, and certainly not without increasing taxes on middle income people. That is a hard political sell that Mr Corbyn only hints at (“there will be hard choices” he manages at one point). And it means that the government can’t just keep adding things to public expenditure without public services being unable to keep up with demand. That’s why abolishing student tuition fees is such a bad idea, for example – you only have to look at Scotland, where the state pays for university education, to see that. The universities can’t keep pace with demand, and fewer people from poorer backgrounds go to university than in England as a result.

I believe that there is a way forward from here. It does not come from the current government’s economic liberalism. It comes from strengthening local communities and the small businesses that serve them. It will not necessarily produce lots of conventional economic growth, and it will not produce masses of new tax. But it might produce public services that don’t keep failing; it would stop national and multinational chains sucking the life out of local economies; it would harness the potential of the underemployed.

Some of the ideas Mr Corbyn is promoting might help; he seems to suggest devolution of power to centres away from London. But too many look like national solutions that draw power back to London; others look like a path towards mass surveillance in order to collect more tax. I cannot see that it is any better than what the Tories are doing – and frankly I fear it would be worse.

Mr Corbyn promises hope, but his ideas are built partly on fantasy and definitely on shaky foundations. And that is even before he attempts to convince the public at large.

Real devolution is about taxes

The Scottish referendum was supposed to change everything. It was supposed to have created a constitutional crisis that Westminster politicians could not ignore. Well, the Labour and Conservative party conferences have been doing their very best to resurrect a different narrative, with a rapid return to the usual political nonsense. But before long the House of Commons will have to consider further devolution to Scotland, which will bring matters back into focus. It is still worth thinking about the practical issues of devolution. And the biggest issue that needs clearer thinking is tax.

Politics is not just about creating, changing or abolishing laws. It is about balancing revenues and expenditures. In fact, in modern politics, this latter is probably the most important job of politics. How much to tax? Where to spend the money? Unfortunately, the British model of devolution shies away from the taxation side of things. Central government passes on cash grants to the devolved authorities, who have very limited tax-raising powers of their own. Devolution is about spending priorities, not about how much to spend overall. To get more money, a devolved authority has to apply political pressure to the central government, who may or may not grant it. This creates a very unhealthy tension between the various levels of government. Or, to put it another way, if the devolved government finds itself short of funding, it can just blame the central government.

And the Scottish National Party (SNP) has been skilfully exploiting this tension to undermine the union. Scotland does have a rather fudged right to vary the rate of income tax – but is has never used it. Instead, it is blaming the UK government, and hence the union itself, for imposing “neoliberal” policies on Scotland. In the referendum there was a highly mendacious, but effective, claim that the NHS would be safer in an independent Scotland – in spite of the fact that the local NHS is already run by the Scottish government.

But the ability to raise taxes is one of the essential things that defines what a government is. Meaningful devolution, whether to the British nations, regions or local authorities, must involve the freedom to tax. There are many ways in which this is done in the various systems across the world. The most extreme is in the United States, where the states have almost unlimited freedom to tax, and where local taxes are clearly separate from federal taxes. That latter point is very important to achieve democratic accountability. In other countries the freedoms of devolved authorities is much more tightly defined. It is well worth thinking about what sorts of tax it is practical to devolve.

The classic economic answer to this is that the more geographically tied a tax is, the easier it is to devolve. So taxes on property are good to devolve; taxes on financial investments and capital are not. Let’s look at the British tax system in this light.

There are four main types of property tax. Council Tax, Business rates, Stamp Duty and Capital Gains Tax (CGT). The revenue from Council Tax already goes to local authorities, but its structure is set at national level, and powers to vary it are heavily constrained (though the Scottish government has fewer restrictions). Business rates were highly centralised, but this is being released back to local authorities in the typical sort of fudged British way that makes accountability unclear. Stamp Duty and CGT are tangled up with the same taxes on highly mobile assets, and are centralised. It would be quite easy to disentangle Stamp Duty on property transactions and devolve them – but much more difficult for CGT. But we have to be careful; financial engineers can blur the distinction between property and financial investment (the property can be held by an investment trust, for example), so anti-avoidance provisions would need to be designed.

At the other extreme we have capital taxes. These are Income Tax on the income derived, Stamp Duty and CGT again, and Corporation Tax. I will come back to Income Tax. Corporation Tax is the most contentious issue. Both the Scottish and Northern Irish governments want to be able to set their own rates. But this is usually dismissed as being impractical, or leading to tax avoidance in a sort of negative-sum game. Nothing is more mobile than capital, after all, and Corporation Tax is a quintessential tax on capital. This line of argument is overdone. One idea might be to determine profits at a UK level, but allocate using some variation of the “Massachusetts formula” using property, employment and sales as the basis of regional allocation. This works well enough in the USA, and I have long advocated its use internationally too. If all a company has in Scotland is a brass plate on a registered office, the Scottish Government would not be able to tax it.

In between capital and property we have people – or more properly income earned through employment, whether directly or deferred, though pensions. These are taxed through Income Tax and National Insurance. Income Tax is the most politically accountable of all taxes, and so it is quite natural that most debate centres around how this might be delegated. But this is very messy. It is also levied on investment income, and then you have the complexities associated with rate bands and tax free allowances. It would be much better to devolve National Insurance, either just that paid by employers, or including the Employee tax too. It could be renamed “Local Income Tax”. The tax was originally set up to fund social benefits such as pensions and unemployment benefit – but the Treasury has long since broken that link. There is one important issue with it though: it is not levied on pensions. But pensions should be a UK issue that is not devolved. Regions with a high density of pensioners would suffer from a low tax base: but this can be equalised – and I don’t think it is unhealthy for regions and localities to have an incentive to encourage employment, rather than just property ownership.

Two other areas of taxation are important. First is VAT (and theoretically, any sales tax). This could be localised, but there are two difficulties. First is that with the development of online sales, it is increasingly difficult to locate a sales geographically – something that has become a big problem in the US. The second is that VAT is tangled up in European Union treaties and law. It is best left alone. The other area of taxation is natural resources, and especially oil and gas. This can be geographically isolated, though most oil extracted in English waters is landed in Scotland. This is the biggest bone of contention between Scotland and Westminster. But I would be tempted to call the Scots bluff and devolve it. After all most of the issues of infrastructure that go with resource extraction fall on the Scots government.

So what is my straw man for Scotland, or any other devolved region? First, I think a diversity of sources of revenue is a big help.  I would create a new Local Income Tax in place of or alongside National Insurance, that would initially be structured in the same way. Next I would allow Corporation Tax to be split according to the Massachusetts formula, with variable rates. I would give devolved authorities more powers over Council Tax and Business Rates. I would devolve oil taxation. I would consider establishing a new property gains tax in place of CGT on property.

A fantasy I am afraid. The UK Treasury remains the most powerful force in British government. It has no intention of conceding any of this – and would feel the state would be fatally undermined if it did. It would rather fudge something around Income Tax – the one tax that I think should be entirely “Federal”.

 

Rethinking Liberalism 4: taxing the wealthy

There is a growing view that”inequality is one of the main problems confronting the modern world. This is quite a change. Distribution of income or wealth (or indeed the difference between the two) was not a major concern in the previously dominant neoclassical economic world view. But now that the benefits of growth in the developed world go almost exclusively to a tiny elite, while median incomes stagnate, this view has become complacent. And the work of the French economist Thomas Piketty has drawn attention to the potential power of the very wealthy. This presents a major challenge for liberals.

The problem is that liberals should have no particular problem with inequality of income and wealth in their own right. We believe in individual responsibility and free choices. We have unequal economic outcomes because people want and choose different things. So what? In fact inequality is cover for a series of issues which liberals should care about. Today I am writing about one of them: the wealthy elite.

The problem is known colloquially as the “1%”, because a disproportionate share of developed world income is going to the top 1% (or 10%; or 0.1% depending on how you want to present the figures). Rather than providing evidence for this assertion, and how it specifically might apply to Britain (perhaps less than in some countries), I will take it as a given, and look at some of the issues of principle that it uncovers.

Why does it matter? To some it is a simple matter of social justice. Inequality is one thing, but the justification for these extremes is another. There is more than a suspicion that the lucky few are winning because of unfair advantages, rather than just ordinary luck and talent. But regardless of this is a further problem. This wealthy elite has the chance to consolidate its advantages with political influence, so as to rig the economy in its favour. The growing influence of big money in politics, and the enormous lobby industry in places like Washington DC, points in this direction. There is an economic problem too: excess wealth is deadweight. The wealthy do not consume as high a proportion of their income as poorer people. And only a small proportion of their savings get channelled into constructive investment  (paying people to build things) rather than various forms of speculation in pre-existing assets.

Why is the problem growing? It seems to be a case of a weakening middle. In other words it is not a question of rising poverty, but a hollowing out of the middle class. It is easy to see the culprits: technologies that automate medium-skilled jobs, and globalisation that weakens local bargaining power. Thus we have the problem: the economy becomes more productive, but the benefits do not go to most workers. Can this trend be reversed? That is a central challenge for progressive policymakers, and it is a question I will return to.

But if we take the trend as a given, which I fear we must, then what can be done about it? The answer is clear: redistribution via taxation, public services and transfers. This issue divides politics like no other. On the right, we have “economic liberals”, who think that lower taxes and smaller government will unleash economic growth that will benefit all of society. On the right we have what I will call progressives (not all liberal), who appreciate that with today’s skewed power structures such growth will only benefit an elite, and will in any case be undermined by the deadweight effect of excessive wealth. Like most Liberals, I am in the progressive camp here.

Apart from the deep flaws in the economic liberal logic, progressive thinkers can see something else. The state has no choice but to grow. We have signed up to a society which seeks to (more or less) guarantee minimum levels of access to health care and old-age pensions.  The aging of developed world populations will increase the burden of these. And much of the investment needed to keep a modern economy growing, from education to roads and bridges, requires some level of state support. Meanwhile the ability of the middle classes to fund their own needs through savings is under pressure – both because their own incomes are not keeping pace with inflation, and because returns on saving are diminishing, a little appreciated aspect of the “hollowing out” process – with the exception of those able to own property in prosperous parts of the country.

So this comes back a stark truth. Taxes on the rich must rise. This serves to recycle wealth that would otherwise drop out of productive economic flows, and it helps fund the basics the state has to provide. So how to do this? There are broadly three directions: income, assets and capital gains.

Until now, most of the argument has been over income taxes, and in particular the best top rate of tax. When I started my first accountancy job in 1976, the top rate of tax was 83%, which rose to 98% for investment income. Conventional wisdom turned against the wisdom of such high rates. They dropped to 60% and then to 40% in the UK, before rising to 50% in 2010, and then being clipped to 45%. Economists are less sure about the wisdom of cutting such high rates. They did think that cutting tax rates would mean that rates of pay (for the elite) would fall, as it was cheaper to provide the same net salary. In fact the opposite has happened. This seems to point to senior salaries being more about power politics than market forces. Companies paid their executives more because they could; they did not do so when tax rates were high, because they did not like to see so much of the extra money disappearing in tax.

I can see no harm in reinstituting the 50% top rate of tax, though experience suggests that this won’t bring in a huge amount of extra revenue. Such high rates create a tax avoidance industry. There is a problem with very high rates of income tax though: they tend to entrench a wealthy elite, because they make it more difficult for outsiders to join them. The way to become wealthy becomes to to inherit rather than earn. This was the rather interesting conclusion of a quite wonderful contemporary study of the British tax system of the 1970s by Mervyn King and John Kay – which was recommended as a model piece of economic writing 30 years later by the UCL Economics department.

So should we not look at taxing wealth? This is the recommendation of Mr Piketty, who worries that the rate of return on the elite’s assets is too high, and entrenches their dominance. Such a tax would probably be about 1 or 2% per annum – which may not sound much, but is enough to dent annual returns significantly. Such a tax exists in the Netherlands, hardly as basket-case economy. A variation on this general idea is just to tax land – an idea (Land Value Tax) that has an ancient history in the Liberal movement. I personally have a difficulty with taxing a theoretical value of an asset, rather than a realised one – given that the reliability of asset valuations is weakening. But I have to admit the idea is growing on me, especially the land-only version.

A further way of taxing assets is at death. This is theoretically very sound, but too easy to avoid in practice. The rates here can be very high. In order to make this more watertight such taxes should no doubt be applied to large gifts as well. This used to be the case in the UK. But taxing legacies and gifts seems to attract a particular political opprobrium, and we have to tread carefully.

Finally we should mention capital gains: where assets and incomes meet. These are the commonest loopholes in tax systems. Aligning such taxes with income tax seems the best way of dealing with this. But this may undermine the case for an asset tax: the Netherlands does not tax capital gains.

But in discussing such details we must not miss two big and interrelated issues. The first is that our elites tend to be globally mobile. Taxing them will require growing levels of transnational cooperation. And indeed the need to tax such mobile elites puts greater importance on such transnational cooperation. The EU’s tax dimension should grow. Such bodies as the G20 need to focus on the matter too. It is not particularly surprising that so many rich businessmen are in favour of the UK leaving the European Union.

Which brings me to the second issue: politics. The rich seem to be of an economically liberal mindset (which is actually a recent development, as this article in the New Yorker observes). They increasing fund political movements with an economically liberal agenda. This is already poisoning the politics of the USA. It will make taxing the wealthy harder. But not impossible. If the public understands that the alternative is to cut basic pension and health systems the economic liberals will lose. But whereas we used to think that politics in the developed world was getting dull, this growing clash of economic interests will inject real conflict into it. Class war is back.

Pensions, savings: sensible steps forward

This week’s UK Budget has revealed the usual muddle amongst politicians, journalists and the public over the whole issue of pensions and savings – with opinion strongly favouring several flavours of having your cake and eating it. This masks some profound and sensible reforms carried out by the coalition government.

First version of the cake. We like people to save. But we want them to spend to promote economic growth. We worry that a large part of the population will become dependent on the state and taxes because they save too little. But when they do, as in the early part of the 2008/09 crisis, we bemoan that fact that people aren’t spending and so causing economic slump. So interest rates crash to the floor in an attempt to reduce savings and increase consumption (alongside the vain hope that companies will be encouraged to invest more).

Next version. We want people to save more to not be dependent on the taxpayer, but we also want target state spending on the less well off, and tax the rich to pay for it. So we encourage people to save, and then confiscate the proceeds.

Another version of this is that we love the idea of exempting pension saving from tax but think that people who have accumulated sufficient savings for a reasonable pension (a million pounds for a pension of £35,000, for example) are part of a rich elite whose broad backs should carry the largest burden.

There is a genuine dilemma at the heart of this of course. For that reason a lot of hope resides in get-out-of- jail-free cards. One of these is strong economic growth. But that requires lots of people to work – which means retiring later and allowing immigration. We are clearly entering an era of low growth, thanks to demographics, personal preferences (i.e. people choosing unpaid leisure over work) and the changing nature of technological advance and the global economy. Remarkably few people have tried facing up to the consequences of this. Even some intelligent economists think that “trend growth” is a law of nature. Another get-out-of-jail-free card is that rising property values will compensate for lack of saving. Collectively this cannot make sense, but it has worked for many individuals, who therefore don’t engage with wider worries about the future.

Now let’s consider some difficult facts. I have already mentioned that economic growth is likely to be much lower in future. The next difficult fact is that private pension saving has collapsed in the last 25 years. Generous final salary schemes have been replaced by inadequate money-purchase schemes. It is now use just blaming Gordon Brown’s tax raid on pension schemes in the later 1990s for this (or Mrs Thatcher’s ill advised liberalisation of pension selling before that) and some are prone to do when you mention this. This at worst mildly accelerated a growing trend. The economics of businesses supporting these pension schemes became toxic even without the tax changes. This means that, as a generality, most people will not now have adequate private sector pensions. Instead as they approach retirement they will have accumulated a few tens of thousands of pounds in probably several schemes.

The next difficult fact is that the economics of long-term saving are toxic for all but the very well off (liquid assets of over £0.5m, say). The poor face the prospect of losing entitlements to state benefits if they accumulate wealth. Everybody will see any savings eaten away by costs which, even without a host of rip-offs, will always weigh most heavily on those with smaller savings. It becomes perfectly rational for a lot of people to not to bother with pensions savings – unless you count trying to own your own home.

When you consider all this, the attraction of tax funded state pensions become clear. That is why the current government has been right to make it reasonably generous, notwithstanding criticism form the right that we can’t afford it. It was also right to make this pension independent of private saving.

Now, what about the tax treatment of savings? To simplify, there are three groups of tax privileged savings. The first is domestic property. To buy your own home you pay out of taxed income and stamp duty on the purchase price, but the gain is exempt from tax. The second is Individual Savings Accounts (ISAs), which, like property, are paid for out of taxed funds (subject to an annual limit) but income and capital gains are tax free. And third are pension plans, for which contributions are exempt from income tax, but it is taxable on drawdown.

The first and last of these are problematic. Domestic property because its tax exempt status has made it a highly attractive investment – but instead of this fuelling much in the way of building new, efficient property, it has simply driven prices up, making ownership out of reach for many younger people and driving a wedge between families with property and those without. Pensions are a problem because that particular route for providing tax exemption makes for maximum complexity. In fact they have become so hedged about in rules that most people don’t understand them.

ISAs, on the other hand, have an elegant administrative design which makes them easier to own than even taxed assets. They also have more chance of channelling investment into more productive parts of the economy.

Here’s why this week’s proposed reforms make sense. Currently money purchase pensions are forced to buy annuities, except in some carefully crafted circumstances, which tend only to apply to the better off savers. The original fear behind this annuity rule was the worry than pensioners would blow their savings quickly and then throw themselves into the arms of the state. But the state of private pensions is such that most people will rely on the state anyway, and most pension pots are so small that the amount of income that would be derived from an annuity would be derisory (and, presumably, a lot of value would be lost in administration costs). And those with larger pots are likely to be prudent with their wealth. If done properly, this will simplify the pension system, and make private pensions more attractive.

Extending the ISA allowance is more controversial. Many simply view this as benefiting the wealthy, as nobody else can save up to the £15,000 a year limit. There is some truth to this, but it will help level the playing field between financial investments and owning your own property. Since it is unthinkable to tax capital gains on homes, it may help to make other assets comparable in their tax status.

A lot of nonsense has been uttered as commentary: fears over people blowing money on cruises and fast cars – or rushing into buying property. My main worry is that the reforms will make it easier for better off people to save for their children, to pass on at death. This could reinforce the effect of inherited wealth, which is already growing. There may be mounting pressure to reduce Inheritance Tax.

But overall this looks a sensible step forward – and actually quite brave. It is surely no accident that unlike its predecessors the current government’s Pensions Minister, Steve Webb, really knows his stuff, and has been kept in post for the whole period. Liberal Democrats can take pride that he is one of theirs. There is strong political consensus in his reforms, and no party political benefit. But it is nice to feel that our party has contributed something useful to the process of government.

Taxing multinationals – after the sound and fury we need solutions that work

Multinationals like Starbucks, Amazon and Google has been on the wrong end of publicity in recent weeks here in the UK.  They don’t seem to be paying very much corporate tax, in spite of well established and successful commercial operations here.  But there is something missing from the debate: nobody seems to be offering much of a solution to the problem of taxing multinationals.  There’s a lot of sound and fury, but it all ends in a bit of a whimper.  We can do better than that – but only by adopting policies the government’s Conservative members will be deeply uncomfortable with.

The problem is easy to see.  If a multinational makes something in one place and sells it in another (to take the simplest possible description of a multinational supply chain), then it has the opportunity to apportion profits to more then one place…and to manipulate this to where tax rates are lowest.  This has always been so, but with an increasing proportion of costs being attributable to soft things like intellectual property, this is getting much easier to do.  The traditional way of fairly attributing profit is through establishing a fair “transfer price” for goods or services as they move between countries along the chain – based on open market value.  The idea of open market value has always existed more in theory than practice, and the process often ends up in endless bickering between the company and the tax authorities of the various countries it operates in.  And in the end the results are often hard to justify.  What are the alternatives?  There are two main approaches.

The first approach is to reduce corporate tax rates to make the issue irrelevant, and along the way to make your own jurisdiction very attractive to investors.  This is not as crazy as it sounds, and has quite a respectable intellectual pedigree.  Companies aren’t people, and ultimately taxation is about people.  Taxes are charged whenever people try to extract money from a company, through salaries, dividends and what have you.  Money that is left in companies is reinvested, and taxing it merely reduces the amount available for reinvestment.  This is an example of the idea that tax should be based on expenditure rather than income and capital.  It encourages saving and investment, and most of the time economists think that economies would be healthier if more resources were invested rather than consumed.

This line of reasoning was very popular in the late 20th century, but has since lost much of its appeal, except amongst the very rich.  Something has gone wrong with the savings and investment cycle.  The amount of constructive, worthwhile investment that comes out of savings is not what economists used to think.  A lot disappears into various forms of financial engineering that fatten up an overpaid finance industry and not much else, inflating selected asset values into unsustainable bubbles along the way.  Overall savings, especially by the very rich, seem to be a drag on an economy – often requiring “negative savings” from government deficits to keep the economy on track.  This process was described by Maynard Keynes in the 1930s and it is still true today.

Low capital taxes, including company taxes, simply seem to exacerbate a growing gap between the very wealthy and everybody else, without generating the needed investment. Profit taxes have a particular attraction: they are economically efficient and do no distort ordinary business decisions, outside the allocation of capital.

So what’s the alternative approach to taxing multinational businesses?  This is what we should be talking about a lot more: the top down apportionment of profits.  Under this system you establish a business’s worldwide profits, and then apportion it to national jurisdictions by a formula which measures activity: a combination of sales, employees, pay or suchlike.  Those jurisdictions can then decide what rate they want to charge.

The idea of top-down apportionment has been developed for some time by US states for allocating profits between the states of that country.  In the 1980s California tried to extend the idea to global operations, but was forced to back down, mainly after furious international lobbying from our own British government.  There is a nice irony if American companies are now runiing rings rounds us British.

But that example shows the idea’s main weakness: it needs international cooperation to get going.  It helps if all countries are doing it, and using the same formula.  There is an obvious first step for the British government though: to agree and apply such a system to the European Union.  I don’t think there would be much difficulty in mobilising the other EU countries; Ireland, a traditional advocate of tax sovereignty, is not in a particularly strong bargaining position these days, and we can let them keep their low rates.  Once the EU has an agreed system for recognising and apportioning profits, we would then need a treaty with the US.  Since that country is already a wide practitioner, there is good reason to hope for progress there too.  With the EU and US on board, a global critical mass starts to build.

But Britian’s coalition government does not seem to be thinking along these lines.  For its Conservative members, no doubt doing deals on tax with the EU is anathema.  Instead they are happy to quietly go down the first route and cutting business taxes, in spite of little evidence that this is stimulating investment.  Of the Liberal Democrats, however, I had expected better.

Can our bankers learn from the charities?

My applause for last month’s Budget on this blog looks more out of touch by the day.  The Budget has led to a string of PR difficulties, for which the government seemed ill-prepared.  First it was the age-related allowances, then hot takeaway food, and now it is charitable giving.  Perhaps the back-and-forth of coalition deal making leaves the PR behind.   But what the last week shows above all is just how skilled the charitable sector is at public relations and lobbying.  There is quite a bit of fuss about corporate lobbying in politics, but businesses look flat-footed by comparison.

The wave of protest from charities over the government’s proposed minimum tax on income is building into an overwhelming tsunami.  How have they achieved this, over a relatively obscure rule that affects only a few people?

Inevitably, truth is one of the first casualties in a battle like this.  It’s not that anybody is putting out lies, it’s that a concentrated smokescreen has been built up, so that few people have any idea what is really going on.  There are a couple of fine examples from last week’s radio coverage on the BBC.  One was a survey conducted by one of the lobbyists of charity chief executives asking them whether their charity might be seriously affected.  This was a bit like asking them “Do you want tax relief on charity giving to be restricted?” – not surprisingly nearly 90% said that they were.  This 90% figure quickly did the rounds to give the impression that 90% of charities would be in serious trouble.  In another case one senior person from one of the lobbies was asked how much charities would lose; she replied correctly that this was very difficult to estimate, and then proceeded to give a rather large and rather precise estimate – which quickly got quoted all over the place.  Very quickly the impression has been raised that charities’ income is going to be affected drastically, with the result that all sorts help to the poor and needy was going to get cut back.  Since then a steady stream of charity, arts and university types have piped in to add to the overall impression of impending disaster.

Meanwhile the government response has been a bit weak.  Some Customs and Revenue types were allowed to air their prejudice that most charities were tax dodges – but this idea was no more based on substance than the charities’ claims, and didn’t really help.

And as for the truth, I await some rather calmer analysis from the rather limited number of purveyors of calm, like The Economist.  For now what interests me is the pattern of the PR effort.  The basic idea is common enough from ordinary business PR.  A new regulation or tax is proposed that might force your business to change the way it does things.  So you scream murder and claim that the change will bring an end life as we know it.  Sometimes these claims may be grounded, but most often they are not; the thing is not to think about it too hard.  Anti-pollution regulations offer an instructive example: these are usually opposed vehemently by the industries that they affect; and yet the air and water  gets cleaner while the economy continues to prosper (the most widely quoted example of egregious protest was against sulphur dioxide pollution, in the 1980s, I think).  The general idea is that policy is developed through an adversarial process, like the British legal system.  Make your case as effectively as possible: the truth is somebody else’s concern.

How have the charities been so effective?  First of all they succeed in creating the impression that what they do is for the benefit of poor and needy, both here and abroad. The huge amount of marketing expenditure by big charities like Oxfam and Cancer Research, plus all those public sponsorship campaigns involving celebrities (like the recent Sports aid) help here.  Of course the picture is more complex than this: a lot of charities are about providing elitist education and entertainment (i.e. art) and some are downright nefarious extensions of rich egos.

Given this complex picture, the key thing is to keep solid and keep the message simple.  The supporters of poverty charities have not fallen into the trap of criticising their elitist fellow travellers – as this would fatally complicate the message, as well as opening a can of worms.  A second important point is timing.  The charities waited for the fuss over age-related allowances and Cornish pasties to calm down, before launching an onslaught.  And that onslaught looked well coordinated.  Whether or not their was much coordination I don’t know – but all that’s really necessary is to play follow-my-leader, which needs very little pre-planning.

Positive image for a few key leaders and low profile from the rest; simple oppositional messages; solidarity.  Can that PR disaster that is the British banking industry learn from this?  Banking, after all, has done more to alleviate human poverty than the charities ever will, through easing the path of trade and investment, the two real enemies of poverty.

I don’t think so either.  They don’t care enough about their image, and are too rivalrous to do the solidarity bit properly. Better stick to their usual strategy: passive resistance – the slow, patient picking apart and undermining of reform when the politicians are looking elsewhere.