Delivering Change

Labour’s rejection of tax and spend appears to be motivated by age old concerns attacks on Labour for historically supporting ever-so-slightly-higher rates of income tax than the Tories. However, Britain is now totally different to the country it was in 1992 and, indeed, in 2019. The need to raise tax and taxing those who can afford it is now popular in ways that are important.  

It is important that Labour lost around half a million votes from 2019 and only gained 1.8 percent of the vote share in 2024. Next time, they need a generation of supporters who see real value from voting Labour in order to resist right-wing parties that will surely not permit a split vote again. They have five years in which to demonstrate that they can raise revenue to support the vast majority of Britons in desperate need of investment. 

The attempt by private schools and private school parents to use the Conservatives and an increasingly desperate Conservative-supporting press to advocate against the removal of charitable status has been soundly rejected, with 57 percent of the population supporting the policy and only 16 percent opposed. In the past, voters could imagine having sufficient resources at some point in a hypothetical future to pay for their children to go to private school. But now, it just looks like voters are paying for an ever-smaller group of people to gain unfair advantage over their own kids.  

This has been the first election since baby boomers reached adulthood, in which a clear majority of them have not seen their preferred party in government. For those under 50, a statement like ‘Labour will take us back to the 1970s’ sounds like a good thing. Frankly, things are very much worse now than they were then in a number of ways, and raising tax in order to fund the very things we have lost over the past four decades — nationalised infrastructure and functioning health, welfare and industrial sectors — is attractive. As well as manufacturing, we need production, including green energy, and services, including social care.  

The reality is that voters increasingly see tax as being a central means of improving our lives. 57 percent of the population think the Government should prioritise funding public services compared to just 27 percent who favoured giving people a tax cut. Years of reducing tax rates on business have failed to deal with regional inequality and poor productivity. Instead, we need a new economy that directs investment to where it is needed most. 

In historical terms, income tax in the UK is a relative aberration, with permanent introduction only taking place in 1842 and application only to the very highest earners until the early-middle part of the twentieth century. We should no longer believe that revision to marginal income tax rates associated with paid employment is the key means of funding reform. It isn’t, and it can’t be, because the relative value of pay from work has been reduced so significantly in recent decades. Significant net increases in all but the highest marginal rates are unpopular and politically unfeasible as a consequence.  

The key changes we need are those that focus on wealth. Unequal distribution of illiquid assets is of far greater importance than dealing with employment income inequality — important as that is — and lies at the heart of many aspects of the cost-of-living crisis. Those who own homes outright are protected from rapidly rising mortgage costs due to skyrocketing interest rates. In Act Now: A Vision for a Better Future and New Social Contract, the Common Sense Policy Group set out a plan to address this.

Raising Revenue

First, we need to close the fairness gap and equalise tax rates for income from dividends and other passive forms of activity with those from employment. Together, the abolition of employee National Insurance Contributions and replacement with income tax and the equalisation of income tax rates for income from dividends would raise £58.1 billion in additional revenue per year. 

Second, we need a proportional and progressive annual tax on household wealth levels above £2 million, with marginal rates of two percent up to £5 million and rising from there. Allowing for avoidance, we estimate that this would raise around £43 billion per year. The £2m threshold sits above any possible context in which someone depends upon that level of wealth simply to live. To deal with the possibility of capital flight and the offshoring of wealth, which has had a distortionary and damaging impact on our economy, we recommend the imposition of a tax on large financial transactions at the same rates. 

Third, we follow the Grantham Research Institute on Climate Change and the Environment’s recommendation that we tax carbon and fossil fuel production at around £55 to £60 per tonne in 2024, rising to £75 per tonne in 2030. This should raise around £6 billion per year in current prices. We also recommend a permanent excess tax on fossil fuel companies and a redirection of current subsidies to fossil fuel producers, as set out in recent research by Oxfam. These would raise just under £7 billion per year. That money increases tax yield and creates incentives to reduce carbon emissions, aiding the climate crisis in the process. 

Finally, perhaps the easiest reform is removing 40 of the largest unnecessary or badly targeted reliefs tax reliefs and allowances that enable the wealthy to avoid paying tax through avoidance schemes. One such example is agricultural relief which is essentially an inheritance tax loophole. These tax reliefs mean that the country loses hundreds of billions each year that should be spent on rebuilding Britain. According to HMRC statistics, abolishing just 40 reliefs and allowances that serve no good purpose other than tax avoidance would result in a gain of just under £74 billion. 

Overall, the reforms we set out would result in increased tax revenues of just under £340 billion — which is more than enough to fund a genuine decade of national renewal.  

In our survey for the report, we found an average level of support for the new economy of 69.2 percent in the Red Wall, with 60.2 percent among Conservative and 80.5 percent among 2019 Labour voters. Nationally, approval was 72.6 percent, with 48.6 percent among those intended to vote Conservative, 76 percent among those intended to vote Labour and 66 percent among undecided voters. 

In effect, the new economy would simply reflect the rhetoric of politicians across the spectrum: rewarding hard work, investing in the nation as one would a business and removing a great deal of the bureaucracy and red tape currently involved in the tax system. 

The Labour Government can achieve a decade of renewal, but only if it commits to the kinds of changes we propose above. It must act now.