Last week, I predicted that Labour would begin harping on about “trickle-down economics”. It is the classic bogeyman wheeled out whenever the Tories consider cutting taxes on the better off. That it is a theory that no economist has ever advocated for has not stopped it being a staple of speeches and op-eds this week.
Which – though it may feel like ancient history now – suggests that Labour have forgotten their recent history. That is odd, when Keir Starmer is quoting Tony Blair from the conference stage. New Labour, to quote Peter Mandelson, were “intensely relaxed about people getting filthy rich as long as they pay their taxes.” So this week, we’ll give the Opposition a brief history lesson.
When, in last week’s mini-budget, the Chancellor’s decided to scrap the 45 per cent top rate of income tax, it certainly came as a surprise. Immediately, Labour hailed this as a tax cut for the rich and promised to reverse it in office. That rather skirts over the fact that it was set at 40 per cent for all but a month of the last 13 years in government.
Having reached a peak of 99.25 per cent during the Second World War, the top rate of income tax fell to 83 per cent (with an investment surcharge of 15 per cent) by the time Margaret Thatcher entered office. In Geoffrey Howe’s first budget, he cut it to 60 per cent. Almost a decade later, Nigel Lawson dropped the rate to 40 per cent in 1988.
There it remained from 1989 to 2010. That not only encompassed the entirety of the Thatcher government’s baroque period, but also all of John Major’s time in Number 10. Indeed, it also encompassed the entirety of Tony Blair’s decade as Prime Minister. It would have also covered the whole of Gordon Brown’s too – had it not been for some sly politicking on the part of the former Iron Chancellor.
In Alistair Darling’s last budget, the top rate was raised to 50 per cent. Nominally, this was due to the post-2008 deterioration of the public finances. But it became widely accepted that Brown has intended this as a trap for David Cameron and George Osbourne. He guessed that the Old Etonian and the Old Pauline would be too worried about being seen on the side of the wealthy to lower it.
And so it proved. Although Osborne reduced the top rate to 45 per cent in 2012, no subsequent budget saw the Tories willing to take the hit for helping the well-off. Yet the problem with this has been the exact same reason Brown chose not to raise the rate until it became politically expedient to do so: pax Arthur Laffer, a higher rate doesn’t bring more revenue.
When Brown first proposed raising the rate, the Institute for Fiscal Studies suggested the existing rate was the best one, and that higher rates would be pointless. Indeed, cutting the rate only costs £2.1 billion – and might pay for itself if it encourages more higher earners to domicile in Britain. By raising it again, Labour would, as Blair and Brown understood, be shooting themselves in the foot.