The Chancellor of the Exchequer’s Pre-Budget Report suggests that New Labour wants to bring down as many as possible of Old Labour’s traditional targets in its own death-throes. Businesses, higher earners and trusts are the chief victims and the headline reduction in VAT has more than one sting in its tail. As always, the populist measures designed to appeal to Old Labour’s traditional allies will hurt most those on the margins – small businesses and small trusts – who are the unregarded victims of headline-grabbing attacks meant for bigger fish and to impress a particular sector of the electorate.
Logic, as well as fairness, goes out of the window when you purport to tackle imminent mass unemployment by increasing employers’ National Insurance Contributions. A tax on employment – for that is what it is – will hurt bigger businesses, but will devastate smaller ones whose owners are already squeezed by the withdrawal of bank support, pressure on their mortgages and the falling-off in trade.
The trifling reduction in VAT is unlikely to help either the most needy consumers or those from whom they buy. The primary essentials of life like food and children’s clothes, are zero-rated anyway. The fact that the price of a Woolworths CD may drop from £9.99 to £9.78 is unlikely to help the Administrators to save the 30,000 jobs which hang in the balance. By the time Argos have reprinted their vast catalogue and dumped the old ones in landfill they will have incurred costs which are unlikely to be recouped by any increased business and which they will doubtless seek to pass on to their customers. What will it cost a small business to re-price all the goods on its shelves and circulate the new price lists? Thanks to a web site publishing error, we know that the Government plans to increase VAT to 18.5% in 2011-12 but decided at the last minute to conceal that plan, presumably until after the election.
The plan to increase income tax for high earners is the first overt breach of Labour’s 1997 commitment not to raise income tax – they have done so covertly, of course, by pegging personal allowances and by more stealth taxes than can be counted. The political calculation is that there are more votes to be won by taxing the rich than will be lost by not doing so. It all helps to remind us of 1979, when those best able to generate employment and tax revenues were those most harshly penalised in an attempt – futile as it turned out – to win over more traditional Labour voters.
The attack on trusts, which take a further bashing in the Pre-Budget Report, is consistent with what has gone before, in effect and in intent and in the manner of the announcement. The dividend trust rate, presently 32.5%, is to increase to 37.5% and the trust tax rate will rise from 40% to 45% from 6 April 2011 in line with the new higher rate for those whose table income exceeds £150,000.
Whatever one thinks of a higher rate for higher earnings, it seems utterly wrong to tax nearly all trusts at the same rate whatever their size and income and whatever their purpose. The implications for any set of circumstances will vary but, on the face of it, a personal injury trust set up to protect the result of a damages claim may be treated in the same way as a banker’s family trust. True to form, this announcement is made quietly in an obscure section. Perhaps the Government is embarrassed at taxing an elderly widow’s small trust fund or the proceeds of a motor accident claim at the same rate as an Earl’s landed trust.
This seems unlikely. Ministers seem unabashed at their own insulation from the world in which the voters live – they have never had business overdrafts and employees to worry about, their second home mortgages will be still be paid for them, their generous non-accountable expenses will continue, recession or no recession, and when the voters put them out of office their pensions will be unaffected by the ravages which they have inflicted on the rest of us.
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