On the dawn of the Brown era in British politics, I fear the Tories may be in even worse shape than many people think. Last week, I rang George Osborne’s office to find out whether official Tory policy on the tax treatment of private equity had changed at all in the light of several months of ferocious public debate. Until that point, Osborne’s only contribution had been a toe-curlingly obsequious speech to the buyout barons’ annual dinner, in which he said he saw nothing wrong with the way private equity was taxed and that they had nothing to fear from him. That struck me as odd, since I knew he’d seen an article I had written a few weeks earlier that first exposed private equity’s special tax deal with the Treasury. In the light of all that had happened since, I wondered, had he decided to nuance his fulsome support for the industry?
It seemed he had. His spokesman blustered about it all being very difficult, about the need to tread carefully and avoid throwing the private-equity baby out with its tax-free bathwater, and that the party’s whole policy on tax was still under review. But a day or so later, Osborne popped up on the Today programme to announce that, yes, there was a case for reviewing the way private-equity partners’ carried interest – or profit share – is taxed. “If it looks like income, it should be taxed like income,” he said.
Better the sinner repenteth, you might think. But Osborne’s 11th-hour conversion to the unfairness of the buyout tax break was disastrously handled and raises doubts about the Tories’ ability to mount a credible challenge to Gordon Brown. For a start, the U-turn came far too late in the day to look like anything other than a cynical attempt to jump onto a populist bandwagon, driven by trade unions motivated by envy. Indeed, some of the modern Tory party’s fiercest critics have already seized upon it as a stick to beat the leadership. “It smacked of more on-the-hoof policy-making aimed not at enhancing Tory principles, but at grabbing votes in any way possible,” fumed Simon Heffer in The Daily Telegraph.
Heffer may be right about the on-the-hoof policy-making, but he is wrong that attacking the tax breaks for private equity is at odds with Tory principles. This issue was God-given to Osborne and the Tories, had they cared to make something of it. What gave this matter particular resonance was that it was not only the unions who were angry about the tax breaks. It tapped into a growing sense that the UK tax system has become seriously unbalanced, that after ten years of Gordon Brown’s tinkering, too many people are getting away with not paying their fair share – and that the middle classes are being left to foot the bill.
In my experience, nowhere is this more keenly felt than in the City – one constituency that Osborne needs to win back for the Tories if the party is to have a shot at office. It was disgruntled City people who first alerted me to the way the carried interest tax break worked. And it is City people who have now broadened the debate to include Britain’s arcane non-domicile rules, whereby rich foreigners based in London only have to pay tax on UK earnings and are exempt from capital-gains tax, inheritance tax and tax on their income from the rest of the world. Not only do City people know how the scams work, they resent the way their foreign colleagues are able to price them out of Belgravia and Notting Hill.
The Tories used to understand these frustrations. Osborne himself struck a chord with many people in the country, not just the City, when he became shadow chancellor with his call for “flatter, simpler, fairer” taxes. He even commissioned a report on the tax system from former cabinet minister Michael Forsyth, who then spent a year identifying in impressive detail many of the problems with the tax system, including the way in which taper relief was skewing risk-taking in the economy, and suggesting ways in which it could be reformed.
But instead of welcoming this report, the Tory leadership effectively buried it. Forsyth’s crime was to call for £21bn of tax cuts – a drop in the ocean in the overall scheme of things, but still far too much for the timid Cameron team to contemplate. Since then, Osborne has commissioned a second report from accountants PricewaterhouseCoopers into Forsyth’s recommendations and effectively hidden behind it ever since.
I suspect Cameron and Osborne will regret this timidity. Tax used to be one of the Tories main cards. But now a national debate is raging, the party has nothing to say. That’s left the field open for Brown and his new chancellor to steal their political clothes, as they have done so often before. You can be sure Brown and his team are aware of the weaknesses of their tax system. And they will be aware that a fairer, flatter tax system could actually increase tax revenues. Osborne knows this too. But his failure to make this issue his own, to lead the debate on tax rather than shy away from it, has left Brown free to invade the Tories’ vacant territory. It could be the very territory on which the next election is won or lost.
Simon Nixon is executive editor of Breakingviews.com