David Frum

02.19.13

Capitalism for the People

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Two years ago, Harry Mount made an arresting observation about the famous English class structure:

The English elite isn’t really English any more. When the Sunday Times launched its rich list in 1988, just 11 of the wealthiest 100 were from abroad. In recent years, nearly half of them have been. Walk around the City — or Mayfair, natural habitat of the hedge fund — and you enter a new gilded Babel, where international bankers scoop up their billions in English, the international language. Britain now has a Wimbledon economy: we provide the charming venue, and foreigners come over to enjoy themselves on Centre Court. …

Staggering new fortunes — far greater than those built by medieval English aristocrats, or Victorian English tycoons — have been accumulated across the world in recent decades. The collapse of the Soviet Union produced commodities and utilities empires in the 1990s. In India and China, the booming new market economies have spawned a fresh generation of billionaires.

But these countries don’t have the right infrastructure for the super-rich: the racecourses, football pitches and tennis courts that host the most famous sporting events in the world, the Palladian country houses, the garden operas, the ancient private schools. England has all these things. And it also has the sort of secure political and economic structure that means the billionaires of Egypt and the troubled Middle East are pouring their billions into Britain. Sixty per cent of homes in London worth over £2.5 million are now owned by foreigners.

Of course, it isn't just the Palladian country houses that attract the global super-rich to Britain. There are some very nice houses on the North Shore of Long Island too. The global super-rich come to Britain because British tax law bears very lightly on what the British call "non-doms": people who make their home in Britain for part of the year without being legally domiciled there. They can avoid almost all UK tax on their non-UK income.

A Russian oligarch can own a London home, enjoy the protection of British law, and yet contribute little or nothing to the upkeep of the society that shelters him.

Is this reasonable?

In Monday's Times (of London), Tim Montgomerie of ConservativeHome UK argued: "no." On that argument, he builds a fascinatingly bold case for a renewed "capitalism for the people" - a Toryism that recovers the creative radicalism of the Thatcher years, and then reapplies that spirit to contemporary conditions.

Last week [Labor leader] Ed Miliband joined [PM David Cameron's Liberal coalition partner] Nick Clegg in proposing a mansion tax so that the people who live in London’s parallel universe — many of whom come from overseas and pay little in the way of income taxes — might make a greater contribution. It was a perfectly reasonable intervention but, in a sign that the Conservative Party still hasn’t understood why it can’t win elections, many Tory MPs reacted with fury. Such a tax was, they complained, unfair on the person in a £2 million home who didn’t have the necessary £20,000 to spare. It is a posture unlikely to elicit much sympathy from the mother whose total annual income is only £20,000 and who can barely afford to heat her home or feed her family.

In opposing some kind of mansion tax Conservatives aren’t defending the free market. They are defending people who have benefited from one of the world’s most rigged markets. London’s property prices are partly a product of a draconian planning system and partly the capital’s success at winning a lion’s share of major infrastructure investments from Crossrail to the Olympics.

In making his intervention Mr Miliband has watched and learnt from Barack Obama. Thirty years ago a politician who promised to increase taxes on the rich would have lost an election but now, even in the land of the American Dream, redistribution is fashionable. Today the job of a pro-capitalist party isn’t to defend the super-rich unquestioningly but to ensure that extra taxes are proportionate, administratively straightforward and not economically counterproductive in the way that Gordon Brown’s 50p tax rate was.

A centre-right party will accept a modest increase in property taxes in return for a reduction in income taxes but it will demand other changes, too. It will say that rebalancing the tax system is only one of a number of much larger switches of policy that the country needs to make. These will include a switch away from inflated and cocooned public sector salaries in order to relieve the tax burden on private sector workers. It will mean stricter caps on housing benefit in return for much greater investment in housebuilding. It will shift more 14-year-olds from academic to technical forms of education. It will switch from subsidising rich pensioners to investing in early intervention in disadvantaged families’ lives. A modern conservatism will, in other words, have big ambitions to rebalance society and the economy. It will respond to the crisis of capitalism; it won’t hide away from it. It will ally itself to the rising class; not to the vested interests. To those earning income; not to those sitting on unearned wealth.