The politics of income tax – and why George Osborne has set traps for the SNP and Labour

The Politics Column.

“Don’t ever put up income tax, mate. Take [money] off them anyhow you please but do that and they’d rip your f***ing guts out.” This was the blunt but well-meaning advice that Paul Keating – who was prime minister during the Australian Labor Party’s 13-year stint in government – gave Tony Blair in 1995.

It was a lesson that Blair, who came of age during the decades when Labour went to the country three times promising to raise taxes and lost on each occasion, took to heart. He and his successor, Gordon Brown, raised taxes but only by stealth. Three times, New Labour went to the country vowing never to raise income tax and won every time.

It took a financial crisis to convince the party to break the rule. In April 2009, Alistair Darling introduced a new rate of tax for incomes above £150,000 of 50p in the pound. A year later, the country ripped Labour’s guts out.

There was at least one person who didn’t see it that way: Ed Miliband. He considered the imposition of the 50p rate to have been too little, too late. That New Labour had introduced it only after a financial cataclysm seemed to him a symptom of the party’s malaise. He ran for the Labour leadership arguing that the 50p rate should become permanent and went to the country in 2015 promising to increase the top rate, after George Osborne had cut it to 45p.

The country duly ripped his guts out. Last May, an outcome that had widely been described as impossible – for the Conservatives to increase both votes and seats – turned out to have been entirely possible. In 2010 Labour suffered its worst performance since 1992. Five years later, that gave way to its worst performance since 1987.

Perhaps reasoning that Scottish Labour’s guts are getting ripped out one way or another, its leader, Kezia Dugdale, is now trying the same tactics. In her campaign for the Holyrood elections on 5 May, she is promising to add a penny to income tax – an increase not just for those paying the 45p rate but for those on the 40p and even the 20p rates, too. Dugdale knows that she and her party could pay a terrible price for the policy but she believes that this is the only way to soften the blow of further austerity.

If Paul Keating’s advice has fallen out of fashion in the Scottish Labour Party, he has picked up new converts among the Nationalists. Having promised to back Ed Miliband’s increase in the top rate of tax last year, the SNP will go to the country this May pledging to keep it where it is. Nicola Sturgeon has also ruled out increases to the basic and higher rate.

It’s not just Keating that Sturgeon is channelling with the rhetoric she has used to justify her decision. It is George Osborne. The SNP First Minister argues that the 50p rate would drive higher earners elsewhere, costing her administration’s coffers not just the extra 5p that the policy would raise but the 45p that it secures now – which is exactly the same case as the Chancellor made when cutting the top rate in 2012.

Who is right? The dispiriting truth is that Sturgeon, Dugdale and Keating all are, in different ways. Scotland and England have an open border, a shared language and a shared regulatory framework. Moving south of the border to escape Scotland’s 50p rate is far easier than relocating from London to Geneva. While the top rate is at 45p in England, it must also remain so in Scotland. And that works both ways. Because of the SNP’s decision to slash air passenger duty, England must do the same, or drive Newcastle Airport to the wall.

Dugdale is also right. Higher taxes and higher borrowing are the only escape routes from Osborne’s austerity programme. Yet, as Labour strategists freely concede, her promise has hurt the party among voters. It is entirely possible that the consequence of Scottish Labour’s conversion to tax rises will be a third-place finish in the Holyrood election and an end to Dugdale’s leadership.

Whether Scotland’s finance minister sits in a devolved or a sovereign parliament, he or she will still have to write a budget with one eye on what the Chancellor does in Westminster – and vice versa. So it is not the SNP’s left-wing credentials that are under threat here: it is the question of whether you can create a social-democratic Scotland while there is a tax cutter in 11 Downing Street, regardless of whether Scotland is in the Union or out of it.

Back in Westminster, Osborne knows that Jeremy Corbyn’s Labour Party is unlikely to suggest a penny rise to the basic rate of income tax, so he has prepared another trap: daring him to say what will happen to the tax-free personal allowance.

Raising it was a flagship Lib Dem policy in 2010, the idea of an obscure activist named Elizabeth Jewkes. It was sold as a way “to take the poorest out of tax” but it has an unfortunate consequence. The biggest gains of the policy accrue not to the poorest but to the well-off; every £1,000 that escapes tax is more valuable to a higher-rate taxpayer than to someone on the minimum wage. (Those earning over £121,200 in 2015-2016 do not have a tax-free personal allowance.)

This outcome is not understood by most voters and Osborne is content to keep it that way, because the policy is popular. By the middle of this parliament, the personal allowance will be at £11,500, almost double what it was when Labour left office. By the 2020 election, it will be higher still, leaving an ever-growing hole in the Budget.

So how does Corbyn, a lifelong socialist and opponent of austerity, respond? At the next election in 2020, he will be left with an unpalatable choice: risk the anger of voters by promising a tax hike – but stick to his principled opposition to cuts – or commit to Osbornite austerity and keep taxes where they are.

George Eaton is away