(How) Can Labour Make Tax Increases Politically Viable?

Part of the Policy Insight Series

Labour has ruled out increases in the four biggest revenue levers within the existing tax system through its commitments not to increase income tax, National Insurance, and VAT, and to keep the corporation tax rate at its current levels. Despite the campaign promise that working people will not bear the brunt of this burden, UCL/More in Common polling finds that people expect taxes on working people to rise.

Meanwhile, increases in the share of income accruing to capital, as well as concerns about wealth inequality, have driven economic, as well as political, attention to taxes outside the traditional levies on labour income and consumption. Increasing capital gains taxation and inheritance taxes are popular among experts – but are often expected to be unpopular with voters.

However, recent research suggests this may not be the case, at least if the choice is between increases to one tax or another, rather than between increases versus their absence. Increases to the capital gains tax rate are among the most-favoured ways to raise revenue, and raising more money by lowering the inheritance tax threshold is also more popular than the average tax increase – and more popular than reducing the higher rate threshold within the personal income tax, for instance. Meanwhile, the three major taxes on working people that Rachel Reeves has promised not to increase are among those where the public are indeed the most loath to look for extra revenue. In short, many of Labour’s possible options are indeed the best – or least worst – options in terms of tax popularity.

However, tax increases will rarely be popular if considered in isolation. The link between raising one tax and not raising another, and to maintaining investment in valuable public services, need to be a continued part of conversations around tax increases. These links may not be immediately obvious to voters, but highlighting the connections can make them so.

These framing effects may have powerful effects on the acceptability of any given tax change. There is an obvious difference between the kind of political support elicited in questions about whether tax increases are preferred to spending cuts, or which taxes should be used to raise money if the need for additional financing is a foregone conclusion, and an unconditional willingness to support tax increases.

The second lesson that recent political science research would imply for communicating  tax increases effectively in terms of public opinion is that even if instincts for progressivity – for “the broadest shoulders” to bear the largest burdens – prevail in general terms, when it comes to specific taxes, these arguments may be less powerful. In contrast, strong norms of equal treatment in taxation point to the potential power arguments based in treating similar people similarly. Framing capital gains tax increases as treating all incomes similarly, emphasizing fairness as horizontal equity, has strong normative appeal alongside its economic desirability.

Political viability is more than just raw public opinion, however. Narrower political resistance to policy proposals can drive the media agenda, and media coverage shapes popular politics. It’s important to remember here that resistance to left-wing economic positions in general is better represented among Conservative MPs than among Conservative voters. On taxation more specifically, MPs across all parties tend to be less supportive of increases to the higher personal income tax rate, and to corporation tax -- public  similar to capital gains and inheritance taxation in their progressive incidence -- than the general. Political barriers to progressive tax reforms may be mobilised from their opponents in Westminster.

This does not necessarily imply that we should be cynical about elected officials blocking popular reforms. Some of the MP-voter gap may come from better information about how taxation might work. But there are real dangers – recognised by politicians – of alienating voters through wholesale reliance on economic expertise. Some of the MP-voter gap may in fact come from politicians trying their best to represent public views, but misperceiving where the balance of opinion lies. This has yet to be tested systematically in the UK, but in general, politicians tend to overestimate the conservatism of public positions.

However, the frames set out in political discussion have broader consequences than just the initial reception of a given policy. Shifts in political rhetoric can drive, rather than simply cater to, shifts in opinion. On tax policy in particular, while highlighting the (positive!) consequences of new taxes for maintaining spending (and limiting debt) may seem to have self-serving political motivations, bringing the trade-offs more fully into the public conversation reflects a more impartial portrayal of the government’s budget problem. As highlighted by the BBC’s review of their fiscal policy coverage, “You can’t be impartial between competing demands for resources if you don’t ask whether more over here means less over there.” This is not, in general, a partisan agenda, but if Labour can believe in its tax agenda on its merits, then the party should also value investment in re-orienting the tenor of political discussion on the issue to reflect realistic evaluations by the public.

What could go wrong for a Labour government raising capital gains and inheritance taxes? A common complaint is one of double standards in policy criticism from a generically “right wing media.”  But the more specific danger for Labour is secularly low levels of trust in politics and politicians, local “malignant malaise” for the outgoing Conservatives’ perceived hypocrisy, and deep-seated norms of equal treatment in taxation priming opinion for an enormous backlash if (Labour) politicians, or their supporters, are found to have avoided paying their fair share.