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Sunday, 22nd April 2018

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Boris Johnson misunderstands how modern economies work – Ken Livingstone writes in Guardian

Ken Livingstone’s article on today’s Comment Is Free.

The current pressure to remove the top rate of tax should be strongly opposed. The duty of any fair-minded human being is to provide help to the most vulnerable in our society. For any decent politician that means protecting the frail, the poor and all those who benefit the least in our economy. It also means protecting the vast majority, too. So, as the first big Tory cuts begin to bite – the VAT hike and slashed council budgets, with huge welfare cuts to come – Boris Johnson has decided to launch a campaign to protect that most beleaguered minority: bankers.

Twice in recent days Johnson has defended bankers and campaigned against the 50p higher income tax rate, arguing that the higher tax rate will harm London’s role as an international financial centre.

Johnson has form in this area, having previously argued that 9,000 bankers would leave Britain if the bonus tax was imposed. In a letter to the Treasury select committee he even argued: “Goldman Sachs is considering relocating staff and JP Morgan is reviewing whether or not to axe plans to open a new European headquarters in Canary Wharf.”

The highly paid, in some cases astronomically paid, investment bankers haven’t deserted London at all, and have in some circumstances increased their payrolls. The chief of JP Morgan duly unveiled the new European headquarters in Docklands, adding for good measure: “This acquisition is a long-term investment and represents part of our continued commitment to London as one of the world’s most important financial centres.”

The same argument – that bankers will flee higher taxes – has proved false in both of these cases, the bonus tax and the 50p higher rate. It misunderstands how modern, successful economies work. Britain has a leading role in financial services just as it has in other industries like pharmaceuticals. This can only arise after years of sustained investment in those industries, most especially in the interconnected skills of a highly specialist workforce.

Of course, many other countries and centres would like to capture some of that business for themselves. The only way to maintain competitive advantage is to continually reproduce the causes of the initial success, by investing in technology, in infrastructure but above all in the skills of the workforce.

The lowest corporate tax rates in the OECD prior to the crisis were set by Iceland and Ireland and helped to deepen their crises. The highest corporate tax rates were the US and Japan, followed by France and Germany. Higher taxes clearly do not deter businesses and – invested properly in education, transport and infrastructure – can be used to attract business investment.

Prior to these latest adjustments put in place by the Labour government, the total “tax wedge” (which combines taxes with social security contributions) in Britain was the lowest of any European country except for Iceland. This is not an advert for low income tax rates.

The idea that a modest tax adjustments lead to a flight of talent is a myth perpetuated by those who favour regressive systems where the poor pay an ever-rising proportion of their incomes on consumption taxes like VAT, while ultra-high earners and bankers’ profits go virtually untaxed.

Johnson’s campaign to defend the bankers put him to the right not only of George Osborne and David Cameron but even of Margaret Thatcher, who was content to set a higher tax rate of 60p for most of her time as prime minister. This Tory-led government is itself an extremist one, with actual cuts to services being twice as deep in real terms as those made by their heroine, Thatcher. Yet Johnson is their critic from the right of the Conservative party.

The 50p tax rate has been defended by former chairman of Cadbury and CBI president-in-waiting, Roger Carr and supported by the public by 57% to 22% in a Populus poll and 68% to 20% in a YouGov poll.

So while services are being decimated, taxes on the poor are increased and vital investment in education and transport are cut, Johnson steps forward to defend the bonuses and profits of the bankers. Naturally, the bankers will support their champion – but there’s no reason why anyone else should.

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