The Poison Pill Strategy

The opinion polls continue to look dire, with YouGov in the Times showing the Conservatives on 45%, Labour on 25% and the Liberal Democrats on 18%. These may of course just be the mid-term blues. But it is possible that Labour will lose the next general election.

Before people leap out and call for Gordon Brown to step down and make way for someone else, all polls (including the YouGov one) show that changing the leader wouldn't make any difference. The real damage to the Labour party started with the Iraq war, and as soon as people started regarding us sceptically, it was on the cards that the scepticism would snowball and they would start to blame us for everything and anything they didn't like - sub-prime mess in the USA, it's Gordon's fault for not regulating lending in America; oil price hike, it's Gordon Brown's fault for not controlling world oil demand and so on. There is not a lot you can do about this once people get into this negative frame of mind, especially when it is magnified by a hostile press. Any successor to the PM would face the same problems. We also simply don't have the time to change leaders and in any case potential leaders (my preferred successor is Ed Miliband) need time to develop.

However, the next election won't be till 2010, which means we still have two years to go. If we are going down, we might as well go down as Labour, it won't make any difference to the outcome, but will cheer up our supporters and make things a little difficult for the succeeding government.

What do I mean by this? Well I was thinking primarily about tax and the example provided by Germany. The red-green government led by Schroeder followed a New Labour like strategy, cutting the top rate of tax from 51% to 42%. However, the red-blue Grand Coalition led by Angela Merkel has done something quite different and made the tax system more progressive.

First lets look at the German tax system. As of 2008, corporation tax is 15%, and businesses pay a 14%-17% municipality tax in addition. VAT is 19%. Individuals and employers in Germany pay about 20% each in social insurance and West Germans pay a solidarity surcharge of 5.5%. The income tax regime is as follows:

Tax % Tax Base (EUR)
0 Up to 7,664
15% 7,665-52,152
42% 52,153-250,000
45% 250,001 and over

Using an exchange rate of 1 euro = £0.7962, you can see that the 45% rate kicks in at £199,050.

Obviously some of the German taxes are completely unacceptable to a Labour government (particularly the VAT rates). However the shape of the income tax regime is very attractive. I think we could use the next two years to cut the basic rate to 15% and put in a 45% top rate for those earning over say £180,000.

Of course the high earners in the City will scream blue murder about this. But given that we might lose the next election anyway, we should simply shrug and tell them to take it up with the next government. If the next government turns out to be Labour, we can then point to a mandate for the regime.

We can also point out that in the City of London's main rival, New York City, high earning individuals are subject to 35% federal tax, 3.65% New York city income tax and 6.85% New York state income tax, making a grand total of 45.5%. The highest bracket 6.85% New York state tax kicks in at $40k (approx £20k) and the 3.65% New York city tax kicks in at $500,000 (approx £250k) and the 35% federal income tax kicks in at $357,701 (approx £179). Even if you earn less that $500k, you get clobbered because New York state has a highly progressive tax regime with five tax bands starting at 4% for low earners. New York city also has a lot of bands starting at 1.9%. And strangely (or not!) you don't see New York financial people decamping to low-tax Georgia. New Yorkers are now thinking of a millionaire's surcharge, and Americans don't have a non-dom system - if you are a citizen, you pay tax regardless of where on earth you live. Also note that the likely incoming Obama government will raise federal taxes on the highly paid.

How would this affect a possible incoming Tory government? In my opinion they will struggle to reverse the tax regime. If abolishing a 10p rate which applied to £2230 of income caused people to get upset, then raising the basic rate back to 20% from 15% (affecting income on the £34k above the personal allowance) in order to pay for a cut in the top rate will cause riots. They could try to raise VAT, but will find it has a knock-on effect on inflation and interest rates. (Mrs Thatcher managed this in the early 80's, abolishing the 25% initial rate of tax and doubling VAT in order to cut the top rate - but she only got away with it because the Labour party had split into Labour and the SDP. That's not going to happen again.) They could try to cut spending, but oops they have pledged to keep to Labour spending for three years, and in any case David Cameron has made much about how he will spend more than Labour on the NHS, defence, and whatever takes his fancy depending on the day of the week.

This strategy means that even if Labour loses the next election, Labour people can go to their beds happy that they've cut tax for the poor and made the high earners contribute more.