Jeremy Corbyn and John McDonnell have radical plans for Britain’s future. They often talk about transforming the country, and McDonnell is unapologetic in describing his vision as socialism. Confronted with any accusations of extremism, they and their supporters are however quick to present their plans as nothing more than mainstream European social democratism – they often express admiration for Scandinavian levels of income equality and welfare benefits. To achieve their Scandinavian inspired dream, they want to impose a new tax on the rich, defined as those earning more than £80,000. 95% of taxpayers, they claimed in their 2017 election manifesto, would see ‘no tax rises, no hikes in VAT and no changes in national insurance contributions’. This ‘something-for-nothing’ offer to the vast majority proved an easy sell in the general election campaign, but objections were heard from some quarters, casting doubt on the ‘costed’ nature of the proposals. The truth, of course, is that Scandinavian levels of expenditure requires Scandinavian levels of taxation.
The OECD calculates the so-called tax-wedge, defined as the ratio between the amount of taxes paid by an average single worker (a single person at 100% of average earnings) without children and the corresponding total labour cost for the employer, measured in percentage of labour cost. In other words, it measures the total tax rate paid including all employer contributions etc. (or, in the words of the OECD ‘the extent to which tax on labour income discourages employment’) – see chart.
Source: OECD
Though there is obviously more to the picture, countries with higher public spending unsurprisingly place a higher tax burden on the average worker. What may surprise is that though Scandinavia ranks at the top of the table for government spending, they rank slightly lower on total tax wedge. But taxation is not restricted to earned income. Denmark, Sweden and Norway charge VAT at 25% (Finland is at 24%). Denmark even charges the 25% VAT on food items. A hike in VAT fits poorly with a progressive tax agenda and was indeed ruled out in the Labour manifesto.
The extend of Labours cherry-picking of Scandinavian policies goes far beyond just simple tax- and spend measures. From private involvement in the delivery of public services to labour market regulation and free trade, Scandinavia enact policies that the socialists in the Labour leadership will find it hard to swallow. Of course, even if a Corbyn government introduced Scandinavian levels of taxation and spending and copied other idiosyncrasies of their legislation, Britain is not Scandinavia. Social cohesion, high levels of trust and ethics based on a Lutheran tradition are hallmarks of Scandinavian culture; a society is more than a politically engineered unit.
Finally, Corbyn and his henchmen should be careful what they wish for. The Scandinavian countries have spent the last several decades slipping down the rankings of the richest countries in the world, and are arguably owing their relative success to a past with a different political regime of lower taxes and smaller government, before the massive build-out of the Scandinavian welfare state (for more on the problems with and misconceptions about the Scandinavian model, see here).
Under Jeremy Corbyn, Labour has radical plans. But by cherry-picking policies they like and turning a blind eye to those they disagree with, Labour is attempting to create an illusion of being social democrats in a European mould, whereas the truth is that they are radical leftists with a very sketchy grasp of economics. It should be obvious that Scandinavian levels of government spending cannot be bestowed upon the Brits free of charge. Taxes on the average worker (or borrowing) will have to go up substantially to pay for the party, but an electorate crying out for change has proven receptible to a naïve, disingenuous or even deliberately misleading programme. They would do well to heed the words of the American journalist Franklin P. Jones: ‘When you get something for nothing, you just haven’t been billed for it yet’.