TAXATION WITHOUT TEARS POLITICAL SKILL ATTACHES TO MR CALLAGHAN’S NEW TAX

Press, Volume CV, Issue 31060, 16 May 1966, Page 12

TAXATION WITHOUT TEARS POLITICAL SKILL ATTACHES TO MR CALLAGHAN’S NEW TAX

IBy

I RONALD BUTT

<n the “Financial Tunes''J

(Reprinted bp arrangement!

Whatever the economic arguments about Mr Callaghan’s Selective Employment Tax, its political skill is clear. The Chancellor has achieved something which most of his predecessors who needed (or thought they needed) to raise between £2OO million and £3OO million in extra revenue would have envied. He has produced a tax which, if not positively popular, is at least less unpopular with the mass of electors than any other device for raising a comparable sum could be. The political importance of this for Labour in the long term is, I shall try to show, far greater than can be measured by the current retention of popularity for the Government.

In face of a fairly widesspread belief that a brake on consumption would be exerted through the traditional indirect taxation mechanism, a new tax has been devised for the Chancellor by his economics adviser Dr, Nicholas Kaldor which falls so broadly and thinly on the whole range of goods and services that it will raise no resentment in any large section of the population. Whatever its eventual effect in accentuating the rise in the cost of living, the new tax will not easily be identified as the culprit. Its impact will be lost in the existing erosion of money values to which most people are now stoically resigned. A Very Clever Tax This is a very clever tax: it is all things to all men. Economists who have advocated a payroll tax have got something like a payroll tax. Those who wanted a sales tax have got something like a sales tax. Those who wanted some sort of disguised export incentive to manufacturers which might avoid offending G.A.T.T. have perhaps, got one. Those Socialists who hanker after a tax which would soak the sybaritic services for the benefit of the pure virtue of manufacturing may cherish the illusion that they, too, have had their way. Those who advocated a redeployment of labour from “services” to “manufacturing” may feel that the new tax will help here. If they also worry that the subsidy to manufacturers may be no incentive to the more economic use of labour they will be reassured that the real purpcce of the tax is to raise revenue. The Treasury economists too, can feel that they have what they wanted: the removal of some £2OO million of purchasing power taking effect later this year. Real Economic Risk Most important, this purchasing power will be removed so gently as to avoid damaging growth. But this involves a real economic risk as a result of the general effect of the tax on prices. The Chancellor has argued that

the cost of living will be so little raised that the tax will constitute no ground for wage claims. Yet just because its impact will be so thinly spread and fragmented, it is a tax which will be almost impossible for anyone to avoid by cutting consumption. A tax on cigarettes or cars (in choosing these examples I am not advocating them) might have been avoided and the money even saved. The new tax, however, will be spread in such a way that it will simply add to the inexorable rise in prices. Of course, theoretically, if ail goods cost more,, people will be able to buy less. But will the psychology of the tax work this way? Will it work so gradually that people will have time to avoid cutting consumption and to claim wage increases to cover the rising cost of living? in the tight condition of the labour market this may be only too easy.

This Budget therefore looks softer than might have been expected: it even looks more like the sort of Budget one would have expected before a General Election than just after one. Why? Here lies the political skill. For years the Labour Party, and the Prime Minister in particular, have been preaching that “electoral calculations (by the Tories) have imposed a cyclical pattern on our economy and social progress.” Pre-election booms (Mr Wilson has argued) have under the Conservatives been followed by overheating and post-election deflation. What hostages would now have been given to the Conservatives if, after a General Election which, the Opposition believe, was partly won t y Labour because of the faJure to stop wages from out-pacing prices and production, the Labour Chancellor had to slam on heavy taxation. “Stop” Policy Avoided The Labour Government has pinned its whole economic policy on avoiding “stop.” To impose “stop” now would not merely undermine the Government’s growth policy: it would also be extremely dangerous politically for Labour. A heavy dose of post-Election taxation would have been the starting point for a new anti-Labour myth. The Conservatives would never have let it be forgotten that the Chancellor, after saying before the Election that he saw no need to impose severe taxation had

immediately afterwards gone back on his statement. Dr. Kaldor’s ingenious tax gets Mr Callaghan out of this difficulty. Whether a tax which is all things to all men can achieve any clear and predictable economic purpose I dare not try to guess, only time will show. Nor dare one guess whether future Chancellors will bless the tax (as Mr Callaghan predicted) and whether it will endure. Mr Callaghan may think that he is doing for future Chancellors what Pitt did In 1792 when he introduced income tax. But Mr Pitt (not having the subtle and ingenious Dr. Kaldor at his elbow) at least bequeathed his successors a tax with the overriding merit of simplicity. Yet in another way the new tax may be taking the Labour Party in a direction which could be historically significant. labour has always favoured direct as opposed to indirect taxation on the grounds that the latter hits those least able to afford it. Lately, a contrary view has been argued in certain sections of the Labour Party. It has been said that, as prosperity grows and better off workers earn more, they should be tempted to save by subjecting them to more indirect and less direct taxation so that they can choose to limit their consumption in order to save money. No Incentive to Save Will the Government eventually move in this direction? The new tax could certainly be built on for this purpose. But in its present form it offers no incentive to save. And though the distinction between “services” and “manufacturing” may superficially seem to reflect Labour’s puritanical instincts about the difference between “candyfloss" and “useful” employment, it hardly does so in practice. Its incidence is far too indiscriminate for that. The real characteristic of the tax is gentleness—it is taxation without tears. Politically Mr Callaghan has escaped from a very difficult position: he has handled his political problem and the presentation of his Budget with great skill —not least in his impressive television appearance. Mr Callaghan has been a rising star in the Cabinet this last 18 months and this Budget looks like keeping him in the ascendant providing the economy does not turn sour on him.