Brown Takes From the Poor

Wall Street Journal
Friday, April 25, 2008

This was another bad week for Gordon Brown. Not even a year in office, the Prime Minister has already been in the soup for mishandling a banking crisis and for chickening out on early elections and an EU Constitution referendum. Now the Tories are taunting the Labour leader – who had made fighting poverty his No. 1 issue – as a tax oppressor of the poor. The charge has stuck and stung.

Mr. Brown was forced Wednesday by backbenchers in his own party to mollify more than five million low-wage earners and pensioners who have seen their income taxes double to 20% this month. Even worse for a Labour leader, the tax hikes, which he passed last year when he was still Chancellor of the Exchequer but which came into force only this month, coincided with tax cuts for the middle class.

Raising taxes for one income group to finance tax cuts for another was not only bad electoral policy for Labour, which famously has favored redistribution of another kind. More significantly, it betrays a lack of understanding of how lower marginal taxes can encourage growth and tax revenues. Raising the minimum tax is certainly not a good way to move people from welfare to work.

Flooded with angry letters from voters ahead of local elections on May 1, party members pleaded with Mr. Brown to reconsider the tax plan. He caved as MPs in revolt threatened to vote down the budget. And so the government came up with the following fudge: Lower income earners will still have to pay the higher taxes but the government will look into ways to compensate them later through direct payments, tax credits and perhaps higher minimum wages. The Prime Minister taketh away, the Prime Minister giveth.

This means that the government first collects the taxes only to ask people to fill out complicated forms to reclaim their money later, and has bureaucrats oversee this pointless revenue flow from and to taxpayers. Goodness knows how Mr. Brown will try to raise the hundreds of millions in revenues to fund this bureaucratic make-work and the taxpayer compensations.

The government has already suggested a higher minimum wage as one way of doing it. This misguided idea would amount to a tax on employers that they'd have to pay directly to employees to make up for their lost income as a result of the tax hike. That is unless the higher wages force them to reduce their workforce, which would make the whole affair even more expensive because the state would then have to pay unemployment benefits.

Such a muddled outcome would be par for the course for Mr. Brown's economic policy as Chancellor over the previous decade. During this time, Mr. Brown has increased spending to pay for public services that have become more costly but not necessarily better.

As the nearby chart shows, in his first two years as Chancellor, Mr. Brown kept Labour's election promise to follow the prudent budget guidelines of his Conservative predecessor. In the 1999-2000 budget year, he reduced public spending as a ratio of GDP to 37% from 40.6% in 1996-1997. But then fiscal discipline went out the window. In the 2007-2008 budget year that just ended, public spending ate up a whopping 41.7% of the nation's GDP. Mr. Brown filled the state coffers largely through a range of stealth or indirect taxes on tobacco, alcohol, energy and other items. He was usually careful not to raise direct taxes – until now.

Mr. Brown's tax hike and subsequent U-turn led to a tumultuous debate in parliament Wednesday. What it lacked in customary wit, it made up for with some fine venom. "Do you have any idea what a pathetic figure you cut today?" Tory leader David Cameron challenged the Prime Minister. "The Labour Party have finally worked out that they've got a loser, not a leader," Mr. Cameron charged.

"I don't think I have been pushed about at all," the Prime Minister feebly pleaded. Actually, there has been some severe pushing. But Mr. Brown's floundering on the tax issue is not what will concern voters the most. More likely, they will be questioning the economic judgment that got Mr. Brown into this mess in the first place.