Is Rachel Reeves hiding her real tax plans?

The shadow chancellor is being careful to keep her options open on capital gains and new council tax bands.

The Conservative manifesto, launched yesterday, was fantastical in two senses. First, it depends on incredible calculations. As Paul Johnson of the Institute for Fiscal Studies noted, it combines definite costs (£17bn of tax cuts, £6bn more for defence) with highly uncertain savings (a £12bn reduction in the disability benefit bill). But second, there is no prospect of the Tories forming the next government. This was pure political simulation.

For that reason, the most significant campaign event yesterday was Rachel Reeves’ press conference at Savoy Place in central London. The shadow chancellor presented journalists with a dossier alleging that the Conservatives’ plans would add £4,800 to a typical mortgage by raising interest rates.

But it was Reeves’ own policies that were rightly the focus of the Q&A that followed. The shadow chancellor declined repeated opportunities to rule out an increase in capital gains tax, merely stating that Labour had “no plans” to raise it. This is a classic political formulation: George Osborne said the same about the VAT rise that eventually followed the 2010 election. Reeves could have used this moment to end the speculation over tax rises – yesterday’s FT front page warned of “investment fears” – but she did not.

Labour has ruled out increases in income tax, National Insurance, VAT and corporation tax in the next parliament. But Reeves has chosen not to extend this pledge to capital gains tax or to rule out new council tax bands. There are sound fiscal reasons for this and, tellingly, Reeves is sympathetic to both ideas.

In her 2018 pamphlet “The Everyday Economy”, written as a free-thinking backbencher, she argued: “Council tax, based on 1991 valuations, is at the very least long overdue a re-evaluation and revision of existing bands.” Reeves also noted: “Capital gains tax could be reformed, halving the annual allowance, having it paid at income tax rates.” (The top rate of capital gains is 28 per cent while income is taxed up to 45 per cent.) This was not mere positioning; Reeves sincerely believed in both policies and in shifting taxation from work towards wealth. (The pamphlet also noted that “a land tax could help raise tax more fairly”.)

Why not add these measures to Labour’s existing tax rises? (On non-doms, private schools and private equity executives.) Well, if you were planning an increase in capital gains tax, the last thing you would do is tell everyone in advance (prompting a rush to sell assets). As for council tax, Reeves has a strong political incentive to avoid a debate on property taxation during a general election campaign (she will recall the trouble that Labour’s “mansion tax” caused in 2015).

On tax, there are two big facts to remember: one structural, one cyclical. First, although the tax take is at a 75-year high (36.5 per cent of GDP), the UK remains a low-tax country by European standards. As a new Resolution Foundation document notes, the tax-to-GDP ratio is four percentage points higher in Germany and 11 points higher in France. The next Labour government will include plenty of social democrats who regard higher taxes not only as necessary but as desirable.

Second, as the Resolution Foundation also points out, post-election tax rises are the norm. Over the previous eight general elections, net tax rises have followed in all cases except for 2017, with an average increase of £21bn a year. There are natural political reasons for this. Memories of the last government – and “the mess it left” – are freshest. Early policy priorities – investing in public services in Labour’s case – need to be funded.

Will Reeves uphold this tradition? For now, the shadow chancellor is being very careful to keep her options open.

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