Sunday, April 26, 2009

The Obama factor in Labour's budget

Most of the commentariat are busily discussing the supposed "death of New Labour" and trying to come up with reasons why Peter Mandelson and co sanctioned the introduction of the 50% top rate if income tax.

They've overlooked an important point: Labour was only able to do this because the election of Barack Obama gave us cover. Here's what I wrote on 5th November 2008 (the day after his win):

Obama has stated that he thinks a person on an income of $250k is rich (this is about £158k at current rates). He intends to raise the top federal tax rates to to 36% and 39.6% (from the current 33% and 35%). Remember that Americans pay state income tax in addition to federal income tax. The American state that mirrors Britain's economy most is New York State. There, the state income tax if your income range is between $100,001 and $500,000, is 7.375%. If your income range is $500,001 and over, your tax rate is 7.7%. People living in New York City pay city income tax too of between 2.9% and 3.6%.

That means that the top marginal rate of tax for high earners in New York City (London's great rival) will go up from the current 46.3% to 50.9% under Obama. Compare that to the 41% levied in the UK. It gives cover for the Labour govt to raise N.I. by a mere 1% over the upper earnings limit (to take the marginal rate to 42%), should they wish. Especially as the Irish have introduced an income levy of 1% (and 2% for earnings over €100000) to take top rate to 43%. Alistair Darling has ruled out tax increases for now. But what has happened in the USA gives us room for manoeuvre if we need it.

People always overlook the fact that you may want to do something, but are constrained by your neighbours and can only take action when they move. This applies to tax more than anything. It explains why there is a lot of corporate tax competition within the EU, with every EU nation's corp tax rate coming down including Germany's - in the UK corp tax is 28% compared to 33% in 1997. But in the USA, even under Bush, the corporate tax rate remained 35%. That's because the US federal government is able to impose a blanket rate (the state corporate tax rates are offset against the federal ones). The EU imposes no such blanket rate, and hence this opens things up for the states to compete on corporate tax, the opening salvo of which was fired by Ireland in the early 1990's. The American states compete on income tax rather than corporate tax.

All movements in matters of taxation have to be relative to that of your main rival. London's main rival is New York in high paid individuals and the financial services industry. In the USA, Obama has also helpfully capped the earnings of people in bailed out firms at $75000 (£51724 at current exchange rates). Many bankers will prefer to remain in the UK and bite the bullet of the 50% tax than move to the USA. I expect the Labour government is also calculating that their move on income tax will give cover to the other EU nations should they need to raise taxes (and many will not want to do this, but will need to do so due to the exceptional circumstances we are living in). Many of the high paid of the UK have been threatening to go to Switzerland. But the Swiss are in trouble with their banking system, which will probably need to be bailed out by the Swiss government - and they will likely have to pay for it by, you guessed it, tax rises.

As for the "death of New Labour" - what is happening is no different to the evolution that took place in our sister party the US Democrats, from Bill Clinton to Obama. We sustained the "Bill Clinton" bit a little longer than they did - but then they had to endure the extreme-right wing Bush in the interim, which provoked a bigger backlash. One of the what-ifs of history is what would have happened had Al Gore been elected in 2000. The forces bearing on the Labour government would have been quite different. Oh well.

Wednesday, April 22, 2009

Initial Budget Reaction

Well no-one can accuse Alistair Darling of being boring now! It was the most exciting budget in decades.

The reaction from the Tory Commentariat is interesting: Ian Dale in the Guardian declared he was "fizzing" with anger at the 50% tax rate for earnings over £150k, and Danny Finklestein wrote in the Times that "I think the tax rises will go down very badly with the bulk of voters". Both of course opposed the VAT cut because it benefitted rather more than the top 2% of the workforce.

Their knee-jerk response is very much the politics of the last 30 years. They assume that everyone identifies with the rich and that at least 40% of the population believe they will become part of the top 2% next year. While simultaneously believing that ordinary people are unhappy with the VAT refund on their sales slips.

I'm not sure if this thinking holds anymore. We shall find out if there has been a step-change in attitudes soon enough, at the next election...

Of course Tories will try to get around the "we are the party of the top two percent" by claiming that this hurts "entrepreneurs". But as most entrepreneurs will testify, they take their income in the form of dividends, are careful to retain as much in the company as possible (to fund future growth) and only set the dividend amount to be within the lowest tax rate bands. And when they make it and cash out (usually by allowing their small firm to get taken over by a bigger one for a tidy sum), they take their money in the form of capital gains which are taxed at just 18% (compared to 40% under the last Tory government). And why not if they've created a company and jobs out of nothing. So true entrepreneurs will not suffer at all.

However what could be termed the "officer" class, those who are high level management and directors, who pay themselves big amounts at the shareholders expense, bankers in the City who've done so much to ruin their industry, some extremely high paid staff in councils - these are the types of people who will be taxed at the new 50% rate. But they are not entrepreneurs. If they are encouraged to switch from being rentier types to becoming true entrepreneurs, then good. And if some of the bankers wish to bestow their talents for ruining businesses on the good people of Hong Kong or Dubai instead, I wish them bon voyage and cross my fingers that those countries will take them in.

Saturday, April 04, 2009

G20 Reaction

It's safe to say that the outcome of the G20 last week was a surprise to everyone. Last November the Americans were expecting to sweep into London and dictate the agenda, while the French and Germans were expecting they would get to lecture everyone about how their economies had survived intact while the Anglo-Saxon economies had not. And both the Tories and the press were loudly anticipating a failure by the Brown government to get all the differing parties onto the same page right up to the eve of the summit.

As it turned out, Gordon Brown not only pulled it off, Britain was central in driving the agenda (the first time this has happened at these meetings in decades).

It wasn't just the official agenda that went right, the peripheral one of welcoming the Obamas on their first visit abroad went right too. We saw Sarah Brown again for the first time since Glenrothes, and again she was a hit. She managed to strike exactly the right note, from getting her friend JK Rowling to give a reading (thrilling not only the Obamas but the Medvedevs), to making tea in a cancer centre, she was pretty much the perfect representative for Britain.

Everyone likes Sarah. Part of it is that she isn't pushy like Cherie (who was vilified by the press) but not cringingly shy like Norma Major (who was bullied by the press). She is very much as middle England likes to see itself - kind, well-mannered, endearingly plump and sometimes a little frumpy. Cherie (and Samantha Cameron who fancies herself as a fashionista) would not have been able to resist competing with Michelle Obama in the fashion stakes. Sarah, who is the same age as Michelle, didn't bother to try, and her instincts were right. While the Americans and French supposedly don't mind seeing their leaders' wives spend thousands on couture in the middle of a recession, Brits are a different cup of tea.

It's a rare skill to be able to tap your country's mood without even trying. Sarah Brown turned out to be the big winner of the G20 summit.