Britain must rediscover its enterprise culture

Andy Davey cartoon
Andy Davey cartoon

Labour has a tax problem. During the election campaign, the party was only willing to own up to raising those taxes that most people don’t pay. Sir Keir Starmer was happy to state that the 6 or 7 per cent of parents who pay school fees would be hit with a VAT bill, that private equity firms would face a tougher tax regime, and that the remaining benefits of non-domiciled tax status would be scrapped.

The legendary “working people” that the Labour leader likes to wax lyrical about were promised they would avoid any pain.

The VAT raid, Labour declared, would raise £1.5 billion per year and the toughened regime for wealthy foreigners would bring in another £1 billion. This sum was said to be in addition to the £2.7 billion outgoing Tory chancellor Jeremy Hunt promised would be brought in by 2028 from his own clampdown on non-doms.

But what if these tax hikes in fact raise little or nothing? Higher school fees will mean that more parents will be forced to transfer their children to the state sector, at a cost to the taxpayer of roughly £7,690 per pupil per year. And now the Office for Budget Responsibility, whose forecasts Labour treated in Opposition as sacrosanct, are reported to be warning that the scrapping of non-dom status could bring in no extra money, or even leave the Treasury worse off.

At the end of the 2023 tax year, there were roughly 74,000 people claiming non-dom status in the UK. Contrary to the impression one might have from listening to much of the Left-wing commentariat, these people already pay a great deal to the UK exchequer – in income and capital gains tax, both on what they earn here and on funds they bring into this country. They only avoid paying UK taxes on their overseas income.

By definition, non-doms are a highly mobile group of people who can easily up sticks and move to countries that will welcome their entrepreneurialism and their investment. Even within the European Union, Italy, Portugal and Austria all have fiscal regimes designed to encourage rich foreigners to locate themselves there. Anecdotal evidence suggests that some who were working in finance in London have already moved to Milan, and many more are planning to do so.

The Treasury – and Britain as a whole – will be the poorer for it.

In 1974 American economist Arthur Laffer sketched out his famous curve, showing that raising taxes could actually reduce the total tax take. Higher marginal tax rates would act as a disincentive and the entrepreneurial would slacken their efforts, move abroad, or invest all their energies in creative schemes to avoid the worst excesses of the state’s demands.

This argument helped to underpin the 1980s tax reforms of Ronald Reagan in the United States and Margaret Thatcher over here. The debate has continued as to how far tax rates have to rise before revenues start to drop. But it seems clear that this breaking point is set to be reached in the UK not just in terms of non-doms, but of taxing the well-paid generally.

Already the highest earning 1 per cent are paying 29 per cent of all income tax – and this is after 14 years of Tory rule, which rhetorically extolled the virtues of low taxation and deregulation whilst in truth cranking up both. Starmer’s Labour has made a virtue of publicly espousing a stronger, interventionist state. The pace of the ratcheting up of the size of the state and, its necessary corollary, higher taxes will inevitably only speed up.

The Conservative Party is embarking on its annual conference this weekend. This year its main event will be the four remaining Tory leadership candidates presenting their wares to the party faithful. What the candidates must do is show that they have an alternative vision for the country, which would mark a departure not just from Starmer’s programme but from recent decades of Conservative policy.

The candidates will want to set out how they intend to reduce the levels of immigration and how robust a stance they will take on the culture wars. But even more important than these issues is that they show they understand the depth of the economic crisis facing the UK.

The current model of ever increasing levels of government spending, resulting in ever higher levels of both taxation and government debt, is broken. The prosperity that Britain clings on to is to a significant degree the heritage of Mrs Thatcher’s reforms of the 1980s.

The next Tory government must come to office with a similar zeal to return this country to a path of competitiveness, economic growth and rekindled prosperity.