by Gordon Brown
The pension credit was based on the same principle of progressive universalism as tax credits. An additional payment on top of the state pension, pension credit was designed to provide security in old age for the poor and nearly poor. It had a major impact in reducing poverty. Even after housing costs are taken into account, pensioner poverty fell from 29 per cent to 15 per cent between 1997 and 2010. By April 2010, all the single pensioners on the pension credit were above the poverty line.
We did not, however, always satisfy those concerned about pensioner incomes. I readily concede that when the inflation-linked rise to the state pension amounted to only 75p per week in 1999, it was a public relations disaster. By way of compensation, that Christmas we increased the new winter fuel allowance fivefold – eventually it would run to £200 a year for the under-eighties and £300 for the over-eighties. That may have made pensioners better off, but it did not end the accusation that we had shortchanged those on the basic pension, even after our introduction of free TV licences for the over-seventy-fives and free pensioner bus travel.
The most controversial source of revenue for any government is income tax. Our 1997 manifesto contained two main commitments on this: not to raise the basic and higher rates of income tax over the lifetime of the parliament; and a long-term objective for a new 10p starting rate. In January 1998, only months before my first March Budget, I was sent a memo from Tony’s private office that contained an astonishing proposal: to abolish all income-tax reliefs and allowances, other than a small personal tax credit, and use the proceeds to reduce the basic rate of tax to 20p and the top rate to 35p. Many would lose out under his proposal. I still have the formal response of the Treasury, which showed that there would be 12.6 million losers and 700,000 low earners taken into tax. High earners would gain around £2,000 but more than 1.5 million pensioners would lose about £500 per year. The proposal went no further.
I had always considered tax credits the high-hanging fruit and the 10p rate the low-hanging fruit. The first was initially difficult to reach, almost an impossible dream until, at great difficulty, we created the billions in extra resources needed to make it an instrument for transforming the incomes of the poorest families. The second was easier to deliver but a necessary element of our anti-poverty strategy only, in my view, until we had introduced tax credits. Then it became optional but not essential: once tax credits boosted the income of families, particularly those with children, then the case for the 10p rate – which was spread thinly, benefiting every taxpayer, including the very rich and not just those on low incomes – became much weaker.
Not until the 1999 Budget was I able to announce the 10p rate would apply for the first £1,500 of each individual’s taxable income. This was the lowest starting rate of tax for nearly forty years, and reduced the marginal rate of tax to 10p for 1.8 million people. But I also cut the basic rate from April 2000 as I abolished the 20p rate which Norman Lamont had introduced with such devastating political results before the 1992 election. Most of the gainers were on low incomes.
By 2006 tax credits were now making a significant impact on poverty and I saw a chance to both extend them further and simultaneously deal with another tax issue that bothered me. As long as the basic rate was 22p and not 20p, the tax issue remained a potent weapon in our opponents’ hands. Indeed, I believed that sooner or later – probably sooner – the Conservatives would fight an election on cutting the basic rate to 20p. With inflation low, revenues high, the system of tax credits firmly established and the opportunity for reform now available, I believed it the right time to kill the income-tax issue for good.
In the 2007 Budget, when I cut the basic rate to 20p and extended tax credits for those on low incomes, I spent £1 billion raising tax allowances for those aged sixty-five and over, another £1 billion raising the child tax credit and an additional £1.3 billion bringing more people on modest incomes into tax credits. Taking the Budget package as a whole, the poorest third of the population emerged as the biggest winners, largely thanks to the increase in tax credits. As was now the norm, we tested our Budgets for fairness – how they shifted the distribution of incomes as a whole – and once again our Budget changes ensured that, while the highest 10 per cent saw their incomes reducing to pay for the reform, the lowest 10 per cent saw theirs increasing.
But I had made a mistake. Taxpayers on incomes between £5,435 and £19,355 lost more from the abolition of the starting rate than they gained from the cut in the basic rate. The loss from this one individual measure was greatest at £232 a year for someone earning £7,755, and though most of these taxpayers were receiving tax credits that wiped out any loss, they would see their income-tax bills rise. While we protected most poor pensioners and poor families with children, too little had been done for childless adults who did not qualify for a big enough tax credit and for earlier retirees who had lost their working tax credits when they left their jobs but were too young to benefit from the more generous tax allowances for the over sixty-fives.
Finding a solution was not easy. The 10p rate could not be restored because integral to its affordability was the cut of the basic rate to 20p. We found a way through only after examining every option available. In May 2008, Alistair Darling raised the basic personal allowance a further £600 and every basic-rate taxpayer gained an extra £120. By the time of the Pre-Budget Report in November, we were already in the throes of the downturn, so Alistair announced an additional increase in the personal allowance of £130 from April 2009. All but a few of the losers from the abolition of the 10p rate were now better off. A mistake had been made and rectified – but at a price. Abolition of the 10p rate was an error I made in a rush to boost tax credits and kill off the income tax ‘issue’ and I was wrong to assume that a rise in tax credits could compensate all of the losers.
Nevertheless, the tax credit revolution had changed Britain. People wanted both security – to know what their week-to-week income would be – and also flexibility, so that if circumstances changed – such as going on maternity leave, or losing income through the denial of expected overtime – tax credits could adjust for any loss of income. Without them and other measures, the Institute for Fiscal Studies estimates that child poverty would have gone as high as 31 per cent instead of falling to 18 per cent. Simulations suggest that had financial support merely risen in line with inflation from 1997 to 2010, child poverty would have increased to 4.3 million, instead of falling to 2.5 million children.
However, even when we were distributing nearly £30 billion a year in tax credits, I never succeeded in popularising them in the way I had hoped – despite many attempts to do so. Tax credits were, it was suggested, redistribution by stealth, but at no point did I have any desire to hide what we were doing. Indeed, when we launched tax credits we ran a massive advertising campaign to explain what they were and how they would help families.
The problem was that tax credits were difficult to explain. The general public understood cash benefits – money that came from government as a universal payment like child benefit, the state pension or as a means-tested giro cheque. They also understood taxes, perhaps all too well, as the money they paid to government. Tax credits were different: while this was money paid by the government directly, much of what came through was wiped out by the money going out in tax. And because tax credits were flexible – going up and down according to circumstances – there was never a flat payment easily identified like a lump-sum benefit. Our problem was not, in the end, a failure in policy. With tax credits, as on many other occasions, there was a failure in presentation. It was difficult to explain how we were helping millions, not because we did not try; it was because the new system would take years to be understood – and, on this, we were not helped by early administrative difficulties, which we eventually ironed out.
Perhaps we should have talked of our tax and pension credits in more populist terms – as a form of tax cut, or income tax in reverse, or as child benefit-plus or pension-plus. While cutting or ra
ising tax thresholds does far less for reducing poverty than tax credits, it is more easily understood. It was only when the Conservatives tried to cut back on tax credits that a truly popular campaign emerged to defend them. Of course, some will always argue that all benefits should be universal; but I am in no doubt that the real challenge is to explain and popularise the more progressive policy of doing more to help those who need help most.
Like tax credits, environmental taxes were in their infancy between 1997 and 2010. We pioneered new environmental taxes – namely the climate change levy, a tax on the supply of energy to business – and increased the rates of air passenger duty and landfill tax. In opposition, I had promoted the concept of taxes on ‘bads’ and tax reliefs on ‘goods’ to deal with environmental pollution. Each reform was a battle in itself: hours spent persuading industry that all revenues from the climate change levy would flow back to environmentally efficient firms; time spent explaining how the landfill levy would work in practice; and dealing with pressure from interest groups everywhere – and giving into some, like remote islands which all wanted their own airport levies. And, of course, our policy on fuel taxation was heavily influenced by our desire to promote cleaner fuels and vehicles.
In Europe there is a new system of carbon trading through emission permits, and part of the challenge is getting the balance right between incentives – through the tax system and market mechanisms – and the imposition of standards through regulation. What is clear is that the fight for a more ecologically sound tax system is only in its infancy and future governments will have to do much more.
I also wanted to use the tax system to do more to encourage charitable giving. Accordingly, we introduced a new system of Gift Aid that gave charities and faith groups up to £30 extra for every £100 they raised. And while we had to root out abuses – commercial enterprises posing as charities – the change boosted charities’ incomes substantially. The reform was welcomed by church groups, who sometimes came to me with requests. When Rowan Williams, the Archbishop of Canterbury, called me one day to an urgent meeting just before my Budget in 2003, I thought he was about to raise one of many ethical concerns then at the centre of our national debate. In fact, his concern was VAT. He wanted an exemption for church repairs – then impossible under European Union rules. I agreed to refund the VAT paid on church repairs.
There was another battle for fairness that had to be fought. In opposition, I had annoyed the tax avoidance industry by saying we would take it on, and in each Budget after 1997 I introduced measures to close the corporate loopholes that allowed smart accountants to reduce the tax bills of the wealthy and well connected. Our biggest confrontation was with UK-based multinationals who were exploiting the openness of the new global economy to escape corporation tax, in some cases paying nothing at all in the UK. Companies will always strive to minimise their tax bill. Governments, in turn, must show equal ingenuity and perseverance to keep pace. Economic activity should be taxed where it takes place. With an estimated $7 trillion held in tax havens, tackling tax avoidance – and its criminal cousin, evasion – is central to tackling inequality.
By the turn of the century more and more companies were channelling their profits through low-tax jurisdictions and wiping out their tax liabilities in countries like ours. The battle culminated in a head-on clash with the telecoms giant Vodafone, chaired by Christopher Gent, a well-known Tory. The issue came down to dealing with what we called a controlled foreign company, or CFC, that diverted taxable UK profits into low-tax territories.
We proposed to treat Vodafone’s Luxembourg subsidiary merely as a holding company for much of the group’s UK activities. After several tense meetings with Vodafone and other companies, some of which I chaired, we agreed that we would intervene only against artificial arrangements but refused to back down from the general principle that profits made in the UK had to be taxed in the UK. By the end of 2005 Vodafone’s accumulated potential tax liabilities alone ran to £5 billion. Such was their scale that, when they finally disclosed what they might have to pay, there was a 10 per cent fall in the group’s share price. The issue went back and forth in the courts, with the government winning in 2008 and being set back in 2009. In 2010, though, the new coalition government would make a deal to water down the rules – and then entered into private agreements with companies like Facebook and Apple. The battle to address the huge global tax avoidance industry was put on hold, at a cost to Britain of billions a year in lost revenues.
I was to find from the Panama Papers in 2016 just how widespread the scale of avoidance by both individuals and companies still is. The most notorious recent British example is Sir Philip Green, who reduced the UK tax liability of BHS by paying rent and interest to companies registered in Jersey and the British Virgin Islands and then transferring hundreds of millions of pounds of BHS profits tax-free to his wife, resident in Monaco.
In the wake of the financial crisis we did make some inroads on tax avoidance when we agreed a blacklist of tax havens that were not complying with international rules for the exchange of tax information, and proposed new global standards for automatic exchange of tax information, including greater transparency about who really owned companies and trusts. This advance was finally endorsed in 2013 at the G8 in Lough Erne, Northern Ireland. While most countries have complied and the UK will have country-by-country reporting by multinationals, America remains happy to demand tax information from other countries yet is immovable in its refusal to reciprocate. The state of Nevada, we discovered, was the eighth most mentioned tax haven in the Panama Papers.
Tax havens abound, and as Britain prepares to exit the EU some on the right have suggested the country should now become one. This would exacerbate tensions with our nearest neighbours, widen the gap between the top 1 per cent and the rest of Britain, and deprive us in future of the resources we undoubtedly need – and which we raised in government – for our public services, including the NHS.
And all too often, low-income Britain has been persuaded by those who have the most that the real problem is not those above them – even when they siphon off money needed for decent social services into tax havens – but immigrants and ethnic minorities. All too often, as I found, a tax rise for the wealthiest is rejected by millions unaffected by it because they are persuaded it is the thin end of the wedge of inevitable tax rises for all.
But we did have a vision of how a fairer tax system could underpin popular support for good public services. And we did make substantial inroads into the unfairness that disfigured the Britain we had inherited. Overall, as a result of Labour’s tax and benefit changes, the average income of the poorest tenth of the population rose by 12 per cent, while that of the richest tenth fell by nearly 9 per cent to pay for the changes. This stood in marked contrast to the regressive policies that preceded and succeeded us.
Our top-rate tax rise came in April 2010 – just a month before we left power. It was accompanied by a 1 per cent increase in the employee, employer and self-employed rates of National Insurance. Even before these rises, our tax changes had brought a fairer distribution of income across the United Kingdom. We not only raised more money to pay for the NHS, education, defence and security, but through tax credits transferred substantial cash support from the top to struggling lower-and middle-income households. The higher-earning 20 per cent paid £48 billion in taxes on income in the last year of the previous Conservative government, and were paying twice as much, £95 billion, in the last year under Labour. As a result of these changes the top 20 per cent who were responsible for 54 per cent of all tax payments in 1997 were paying 63 per cent in 2010, and after the top-rate tax changes fully came through, 65 per cent. Once we include tax credits the share of tax paid by the top 10 per cent had risen from 34 per cent of all taxes in 1997 to 43 per cent in 2010. Britain was a fairer country. By 2010, the effective tax rate paid by the top 10 per cent was 24 per cent, higher than for four decades and higher than under the 1974–9 Labour government.
Now the share has started to fall, making Britain more unequal again.
Even before our tax rises in 2010, Britain was one of the few countries to defy the neoliberal orthodoxy of the time. The tax system became fairer – not just between the top and the bottom, but all round. There was much still to do; but once tax credits were included, the top 40 per cent, who in 1997 accounted for 80 per cent of all taxes paid on income, were now contributing 90 per cent. But we could not reverse the rise in inequality because everywhere in the western world the pre-tax incomes of the top 1 per cent were rising so fast. However, if not reversed, the rise of inequality was stalled.
The charge of ‘taxation for taxation’s sake’ is one that had to be constantly refuted. The lesson I have learned from my tax battles – from the windfall levy to tax credits – has convinced me that on every step of the road we have to persuade the taxpayer of the rightness of the cause, to hypothecate where possible the tax increase to the service being delivered, and to demonstrate, in detail, why the public provision that the tax rise covers is more efficient and fairer than any private alternative that forces people to provide for themselves.
At the turn of the century, with some of these lessons at the front of my mind, I approached the next challenge – finding a way to refinance our cash-starved National Health Service for the new century.