Nick Clegg and his taxing wealth of troubles

By Babak Moussavi

Should the wealthy be taxed more?

The apolitical summer is over. It seems like an age since Tory backbenchers mothballed Lords reform, and the Lib Dems retaliated by blocking the boundary changes. The jubilant Olympic August seems to have ensured that that fight is now water under the bridge for the Coalition government (if not parliament), but in timely fashion, new conflicts have arisen. Coalition harmony may be a thing of the past.

This time, Nick Clegg started it. In proposing a wealth tax in a morning interview at the end of August, he drew ire from Tory backbenchers, and a mixture of bewilderment and disagreement from some fellow ministers. Bernard Jenkin, a Tory backbencher and chair of the public administration select committee, described the call as stoking the “politics of envy”. The Chancellor, George Osborne, stuck to his neo-liberal line, claiming such a measure would hamper the recovery by driving away “wealth creators”.

Mr Clegg, however, had argued that such a measure should be a temporary one in the current emergency. Assuming austerity even works (and there are strong reasons to believe it does not, as many critics have pointed out) it hurts the poor most. With a further £10bn of spending cuts of welfare likely to be announced, such an emergency measure focusing on the rich may strike many as socially just. The impression that the Coalition government – and especially its Conservative component – cares more for the rich than the poor is not one that can easily be dismissed given that Mr Osborne has overseen both a cut in the top rate of income tax, and a first budget that was “very clearly regressive” and hit the poorest hardest. If even greater welfare cuts, which self-evidently affect the poor more than the rich, are to be enacted, Mr Clegg’s political instincts, and commitment to social mobility, must have told him that a balance must be achieved.

Moreover, although right-wing Tories scoff at the idea, some voices have argued that this makes some economic sense too, including the Financial Times – a quality paper not usually associated with social justice. If a levy on trapped wealth were to be matched with tax cuts on things that impede economic activity, such as national insurance (which, it is claimed, discourages hiring), the total tax revenue could increase as economic activity could be expected to pick up (and unemployment could be expected to fall).

Furthermore, a similar ‘emergency levy’ was the one enacted by former Labour Chancellor Alistair Darling on bankers’ bonuses between December 2009 and April 2010. This was considered a success. It raised a tidy £3.5 billion – £1 billion more than the Office of National Statistics had first estimated.

On the subject of fairer taxation, I would prefer to see the introduction of a carbon tax, balanced against other taxes on economic activity such as income, which would aim to rebalance the economy onto a more sustainable footing, correct an obvious market failure given the negative externality of carbon emissions, and incentivise technological innovation without necessarily reducing overall tax revenue. Stephen Smith, a Professor of Economics at UCL, describes the merits of such an approach in his short book on environmental economics. I shall explore this idea in more depth in a future post. For now, it can be said that this looks like a distant prospect – even more so, now that Mr Osborne has expressed a desire to build another runway in the south-east, in the face of environmental concerns.

In any case, it seems unlikely that the Coalition will attempt the emergency wealth tax approach, however, given how politically damaging it would be for the Conservative Party (a party normally associated with the well-off). Mr Clegg will therefore probably lose this battle with his Conservative colleague, Mr Osborne. Again. Nevertheless, as the double-dip recession drags on, options are rapidly shrinking.

Anything left to lose?

What’s left?

Mr Clegg may have been bruised by the debacle, but to have it followed up by a suggestion from Lord Oakeshott, a vocal Lib Dem, that the party re-examine its “strategy and management” in the face of its disastrous poll ratings, must have really hurt. His leadership position is now at its most fragile, just as key allies such as David Laws have joined him in government. As Robert Hazell and Ben Yong of the Constitution Unit explain in their book, The Politics of Coalition, informal channels of communication between individuals within government, often built on strong personal relationships, are crucial to the operation of the Coalition. If Mr Clegg were ousted now, the edifice could collapse, and an early election would almost certainly lead to disaster for the Lib Dems.

Mr Clegg may be disappointed at having failed to achieve many of the things he sought to do in government (constitutional reform, in particular). The party grassroots, however, may be even more disappointed in him. But the sudden call for a wealth tax may be a sign that the Deputy Prime Minister is more confident about showing what he stands for, and differentiating his party from the Conservatives. If so, it is possible that he will pursue an agenda more committed to social justice than anything seen so far. After all, he has little left to lose.

  1. Reblogged this on The Political and commented:
    I see Clegg’s actions as those desperation, rather than increased confidence; though they shall not amount to much. Few left in the Liberal Democrats want social justice, and fewer still see it as a priority.

    • We shall see. You do sound like you’ve lost all respect for the party.

      Many thanks for reblogging the piece.

  2. Kleptocratistan said:

    Just picking up on your suggestion that Carbon taxes could be re-distributive or at least correct externality of CO2 emissions. Carbon tax is basically a VAT increase on goods & services that the poorest in society already struggle to afford > energy. This “VAT” doesn’t take into your account your ability to pay and is not means tested. It doesn’t matter where you apply the tax (to the corporate at point of production or to the consumer at point of consumption) – there’s enough examples to know that any increase in costs of doing business is always eventually passed to the consumer.

    Re-balancing Carbon tax against income tax reductions is great – if you pay income tax – otherwise if you’re below the threshold or retired, young, unemployed etc you’re just subsidising a tax break for the rich by paying more for life’s basics.

    We should be arguing to stop printing money and giving to the banks, go after off-shore wealth + income (personal & corporate) and seriously fund the Green Investment Bank which in its current form is mere window dressing.

    • Thanks for the comment. I was obviously very vague in my prescriptions for an adjusted tax system (given that this wasn’t the purpose of the article). But while we must ensure our efforts are progressive, many economists and scientists do argue for a carbon tax as a way of achieving necessary reductions in our greenhouse gas emissions. Given that that is something we need to prioritise, I think a carbon tax should play a role in a reworked tax system in order to correct incentives and reduce the harm caused by negative externalities. I’m not opposed to some of your other suggestions though (especially on clamping down on the practice of stashing away money in the Cayman Islands…).

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