Forget about cutting taxes - let's whack the high earners

JUST TO be sure we're all crystal clear about things, William Hague has taken to going around saying "sacrosanct" a lot. "The chancellor always talks about the basic rate of tax but why should the top rate of tax be sacrosanct? It's not sacrosanct," he said. Hague is trying to re- establish in peoples' minds that if you want to keep more of your income, then you had better vote Tory. It was on the basis of this simple message, the Tories believe, that, under Margaret Thatcher and John Major, they won four general election victories in a row.

It isn't just the Tories who believe this message. Labour's cunning general election strategy was based on the simple premise that Gordon Brown would go on the Today programme and commit the Labour Party to never raising income tax, and - hey presto - we would win. It killed the Tory attack on Labour as the high tax party, but the result is that Labour has now governed for two years without a redistributive economic strategy. This is not only the cause of a great deal of Angst in the Labour Party, but raises serious questions about the ideological content of New Labour's economic policy. Indeed, it raises the question of to what extent "New" Labour has very much in common with traditional social democracy.

But back to Mr Hague. What may seem odd about William Hague's latest tax-cutting announcement is that relatively few tax payers would benefit by a reduction in the top rate. According to the provisional figures for 1998-99, 2.4 million people are paying the top rate at 40 pence in the pound, compared to just over 16 million paying at the basic rate and seven million on the lower rate. On first inspection, this is hardly a rich seam to mine.

Underneath these statistics lies quite a serious electoral issue. The average income in the UK is, very roughly, pounds 20,000, which is comfortable but not exactly rich. Anyone living in London on pounds 20,000 who tried to get a mortgage would be lucky to do so, and if they managed to get past the bank manager they would struggle to buy anything larger than a shoe box.

The biggest mistake Labour made in the 1992 general election was to refuse to raise the ceiling at which National Insurance contributions began to be payable, which meant that many middle income earners in the South-east effectively faced a tax rise. At that time the average income in Scotland was around pounds 15,000 while in London it was just over pounds 20,000. Viewed from the regions and nations of the UK outside the South-east, a tax increase for people on pounds 20,000 looked progressive. Looked at from the point of view of the cost of living in the capital, though, it looked suicidal.

Consequently, Labour's decision to make an early commitment not to increase taxes on middle income earners in the 1997 election campaign was actually quite wise and right. Middle income earners are one half of the basic electoral bloc Labour must hold in order to win. Proportionately, the middle has actually contributed too much, and the upper echelons of society too little, to the financing of redistribution in the British economy. Unfortunately, the commitment not to increase taxes on "Mondeo man" in 1997 was accompanied with no tax increases on the rich either. This is the greatest weakness of New Labour's economics.

As the richest in our society have been paying less in tax they have simultaneously been benefiting from unearned income. Fifteen years after the Conservatives came to power, wages and salaries had declined as a proportion of the British economy from 66 per cent to 62 per cent. That was equivalent to pounds 17.50 a week out of the pockets of every wage earner. The Tories' official theory was once spelt out to me by John Major in an exchange in the House of Commons while he was still Prime Minister: "We have at the moment perhaps the best environment for investment that we have had for very many years ... Since 1980 UK investment has grown quite substantially. In the present economic climate I would expect it to continue to do so."

This boils down to the theory that high dividends paid to company shareholders lead to a dynamic economy, and we should therefore do everything to make it easy for firms to maximise their profits. But, despite giving companies every opportunity to do just that, the opposite happened. Dividend payments to shareholders quadrupled under Thatcher and Major, but investment fell by the equivalent of 3.9 per cent of the British national income - an amount in fact almost identical to the increase in shareholders' dividends during the same period. The consequence of these Tory policies is that we live in an under-taxed under-invested economy.

The thinking behind the new Tory strategy is not that there are millions of people earning pounds 50,000 but that there are quite a lot of people earning between pounds 20,000 and pounds 30,000 who would expect to graduate into the top bracket as they move up the promotion ladder. Hague clearly wants to tap into the aspirations of this group, which is much wider than just those already in the top bracket for tax. A very high proportion of people who find themselves in the top bracket earn less than pounds 50,000 - just over half on recent estimates.

The British economy is in fact deeply under taxed. The Economist pointed out in 1997 that, of the European economies, only Portugal has a lower tax take. British society and politics has to get out of the tax-cutting mentality before we end up like the Americans, who cannot resolve any of their social problems because they have a culture in which any politician who favours tax rises is treated as if they have just farted in public.

The Government should have taken the opportunity of the Budget this year to use a big increase in taxation on high incomes and dividends to generate a sharp rise in public spending, particularly investment. Instead of cutting corporation tax to 30 per cent we should have increased it to 40 per cent with rebates for firms increasing their productive capacity. My own preference has always been to whack up taxes on the rich and the very rich. That means a top rate of tax of 50 per cent on all earnings over pounds 50,000, 60 per cent on pounds 100,000 and a special greedy bastard Cedric Brown rate of 99 per cent on everything over pounds 2,000,000! I fear that my friends in the Treasury will not agree, and since we have promised not to increase income tax I would suggest we might instead raise the top level of National Insurance contributions on earnings over pounds 40,000. How's that for moderation?