High earners set to be hit by new taxes

Allister Heath

FOR those bankers who had become a tad complacent, I have some news for you: the Tories are still not ruling out a windfall tax on banks if their behaviour doesn’t conform to what is expected of them on pay and lending. I asked Mark Hoban, a key member of George Osborne’s shadow treasury team, whether there was any change to that policy – outlined at the Tory Party conference – and yesterday he was adamant that it remains intact. What this really means in practice is unclear; one other senior Tory told me last night that he thought such an option very unlikely once a general election is out of the way.

But this leads to an even more pressing question: what will Labour do at the pre-Budget report next week, and how will it affect London’s business community? Here are a few thoughts. The government could launch its own raid on banking profits, which would have overwhelming public support and wrong-foot the Tories. There is some talk that it could hike inheritance tax on estates over £1.5m to 50 or even 60 per cent (from 40 per cent today); again, this would damage the Tories. They want to abolish the tax on estates under £1m but are scared stiff of sticking up for the better off.

Another one to watch is capital gains tax, currently a flat 18 per cent and much lower than the new top rate of tax, which will be worth 51.5 per cent from next year including national insurance contributions. The gap between the two rates is seen as too high by Labour as well as Tory strategists; again, hiking capital gains tax could be another way to play the class war card. And if he really wants to go for broke, Alistair Darling could lower the threshold a which the new income tax kicks in to just £100,000.

The government’s message would be that the City and the rich are being asked to pay to plug the massive budget deficit. The Tories would be stuck: would they stand up for their erstwhile belief in supply-side economics and make the economic and moral case for low taxation; or would they decide that they might as well go along with all of this, at least for a couple of years? I suspect that it would be a case of the latter. They supported the attacks on the non-doms and are expected to retain the top rate of tax for at least two years, even though they accept it will raise very little money (and could even lead to an actual drop in revenues).

In practice, all of these taxes would barely make a dent to the deficit; the (at best) minor benefits to the exchequer would be far smaller than the devastating cost to the economy in terms of reduced incentives. Coming after an avalanche of laws and new taxes which have dramatically reduced London’s attractiveness, such policies could prove to be a tipping point for foreign investors. There is growing evidence that even the current tax system is chasing away talent and job-creators; further punitive attacks would be devastating.

But it is clear that the pressure on both parties to adopt populist measures is growing. A poll released last night reveals that David Cameron’s leadership approval score has fallen from +36 to just +21 in the space of a month. Meanwhile, Gordon Brown’s prime, ministerial approval figure has risen slightly, from -55 to -46, over the same period of time. From Labour’s perspective, this is an astonishing development: a possibility, however faint, that victory could yet be snatched from the jaws of defeat. A populist pre-Budget report it will be.