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Coffee House General Election 2017 Money

Labour’s manifesto adds up… to economic ruin

16 May 2017

2:18 PM

16 May 2017

2:18 PM

Another day, another tax rise. So far in this campaign, the Labour party has rolled out one hit or another on the wealthy and big business just about every morning. The City is getting a Robin Hood tax on every financial transaction. Companies are getting a one-third increase in corporation tax. Anyone on more than £80,000 will see their income tax go up, and a new levy in high-earners will whack any business paying a star performer more than £330,000. They haven’t slapped a 50pc VAT rate on Range Rovers and Marc Jacobs crocodile handbags – but heck, it is still only Tuesday and there are still three more weeks of this stuff to go.

As it launched its manifesto today, the party made the audacious claim that its programme was ‘fully costed’. In fact,  Labour’s costings are so dodgy, it is hard to imagine that anyone is expected to take them seriously. The only thing it actually adds up to is an economic catastrophe.

Just because you say something is ‘costed’ doesn’t mean it necessarily is. Let’s take a couple of examples. Labour estimates that it will raise £19 billion from reversing the cuts in corporation tax since the coalition came to power in 2010. But will it? Even though the level of corporation tax has been reduced, the percentage of GDP it raises has remained roughly the same at 2.3pc, suggesting that as you lower the rate, companies either declare higher profits, or the lower rate encourages profitable business to move here. Increase it, and it will probably stay the same as well.

Next, Labour throws in another £3.8 billion from an ‘efficiency review of corporate tax reliefs’. But most of those reliefs have been introduced by successive Chancellors to encourage companies to do stuff we think would be good. For example, the ‘patent box’, which allows companies to deduct the cost of R&D, is a big one. So are capital allowances which allow you to deduct the cost of new machinery. Don’t we want companies to invest in R&D and new machinery? Surely that is what Labour is in favour of?

Likewise, Labour is promising to reverse a promised cut in capital gains tax to 20pc, which is still higher than under the last Labour Government. It was put up to 28pc by the coalition, in a move demanded by the Lib Dems in one of their ‘soak-the-rich’ moments. And what happened? The amount collected went down. That’s hardly surprising, since you can choose whether or not to make a capital gain by simply holding onto an asset. The same thing will happen all over again.

In total, Labour expects to raise an extra £49 billion. And yet the real problem here is that the party doesn’t seem to understand that taxes change behaviour. You can argue about the rights and wrongs of the Laffer Curve, which holds that at a certain point the revenue from raising taxes go down, all day long. What you can’t argue with is that people will respond to each tax rise in one way or another, and usually by trying to reduce their tax bill. The result? The amount you raise will always be very different from what you forecast.

Rather oddly, Labour believes the state can achieve all sorts of miraculous things – but that its taxes, which affect us day-to-day more than anything else the government does, have no impact at all. The Labour manifesto may be many things – but ‘costed’ is certainly not one of them. In fact, the only real certainty is that the tax rises will destroy incentives, and drive businesses out of the country. That is the actual cost. But clearly Labour doesn’t care about that.

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