Balls’s taxes miss the point and hit jobs (Yorkshire Post)

CPS Head of Economic Research Adam Memon wrote for the Yorkshire Post on Ed Balls’ Labour Party conference speech, published Tuesday 23 September 2014. 

To view the original post, visit the Yorkshire Post website

“IN his speech to the Labour Party conference yesterday, Ed Balls outlined Labour’s tax policy programme. If it wins the next election, the Morley and Outwood MP promised that his party will introduce a plethora of new taxes on income and capital. In addition, he would cut and freeze business rates and reintroduce a limited version of the 10 per cent income tax rate. This was all largely a rehash of policies which had been announced before and it was a speech almost entirely devoid of any serious economic thought.

Since the election, Labour seems to have descended to a form of economic populism which is an unworthy successor to the some of the great intellects of Labour’s past. By promising ever higher taxes on profits, business and homes, Labour is making a profound mistake in its understanding of the economy.

Unfortunately, the economy is not a fixed construct but a living organism which is constantly in flux and which interprets signals, responds to incentives and grows and shrinks according to the policies with which we treat it.

In a new report published yesterday by the Centre for Policy Studies, The Cost of Labour: Estimating the employment effects of Labour’s tax policies, I collated the 10 tax policies which Labour has promised it will implement if it wins the election next May. This included eight tax rises and two tax cuts: increasing the Corporation Tax rate from 20 to 21 per cent, increasing the top rate of income tax from 45 to 50 per cent, reintroducing a 50 per cent payroll tax on bank bonuses, increasing the levy on bank balance sheets, introducing a tax on houses worth above £2m, imposing a levy on the profits of payday lenders, reintroducing a stamp duty reserve tax, introducing a financial transactions 
tax, introducing a new 10 per cent 
income tax rate and cutting and freezing business rates.

The results of my modelling were quite stark. If Labour implements all these policies this could lead to 300,000 fewer jobs created by 2019 than currently forecasted by the Office of Budget Responsibility. This would also mean almost £19bn less GDP over the same time period. If you look at the entire five year Parliament, the number of jobs lost could reach 375,000 and GDP could be more than £25bn less. Such is the price of populism.

One perfect example of this approach to the economy is the stamp duty reserve tax. A particular form of SDRT was abolished by the Government this year as a way to make the UK’s investment management industry more competitive.

Over the last decade, the UK has lost market share to countries such as Ireland and Luxemburg and total offshore funds have tripled since 2007. This means fewer jobs in the UK’s financial hubs, less liquidity for companies looking to borrow to invest and lower returns on our savings and pensions.

One of the main reasons for this deterioration was the highly uncompetitive tax treatment of the industry including SDRT compared to other countries. Everyone benefits from its abolishment. However, Labour has branded it a “hedge fund tax cut” in a risible attempt at generating resentment against the Government’s policies. This truly makes no sense. Not only does SDRT raise very little revenue but it costs an unacceptably large number of jobs. Our modelling suggests that up to 10,000 jobs could be at risk.

All governments need to raise tax revenue but some taxes are worse than others. Higher taxes on income are sometimes necessary but the top 50 per cent rate which Labour wants to bring back was a particularly poor policy. Again, it raised virtually no revenue but had a significant distortion on labour supply and encouraged tax avoidance. The new tax on homes which the party supports is also not good economics. It is highly unlikely to affect enough households to raise the revenue that Labour wants which means the threshold for the value of the houses subject to the tax would have to be much lower. Furthermore, what happens to pensioners with lower regular incomes? The effect on consumer spending combined with all the other tax rises could be seriously negative.

There are many reasons to generate tax revenue; public services need to be funded, deficits need to be paid off and some element of redistribution is also important. However, politicians and especially the Labour Party at the moment, need to be honest with the public that tax rises cost jobs.

To view the original post, visit the Yorkshire Post website

Date Added: Tuesday 23rd September 2014