Labour has lost the Crewe by-election. Badly. Tax has been a big issue. Which is unsurprising. Labour has done very little in tax terms for the middle and working classes. It has done a great deal for the wealthiest, those who are mobile and those who use the UK as a tax haven. I’ve argued so for some time. There is still a clear willingness to pander to those who say they’ll go if he does not give them what they demand – like big business. But they’re already not paying their way.
It’s true that some of the worst policies Labour has adopted in the last year are Conservative ones. The half hearted change in the domicile rule is one, the increase in Inheritance Tax limits another. Both have backfired badly, as if dispatched by George Osborne as Trojan horses. If they were they could not have worked better.
But Osborne has little better in his armoury. We’ve heard almost nothing as yet about what he’d do. It’s the only reason why he escapes further comment.
The one, outstanding, commentator on tax in Parliament right now is the man least likely to be the next Chancellor, Vince Cable.
But what is clear is that tax is going to be a big, if not the biggest, issue of the next two years as we run up to the first general election with a real chance of a change of government for more than a decade. And if tax justice is on anyone’s agenda (and I hope it will be), and if business is on people’s agenda (and again, I hope it will be) then real change is needed to ensure a fair, effective and affordable tax system.
Several things are needed. The first is restoration of a progressive tax system. This is possible:
1) Create an ‘investment income’ charge at 11% (equivalent to NIC) on all investment income except that of pensioners and the disabled above £5,000 a year. The incentive to avoid tax by re-categorising it goes. A level playing field is created between earned and unearned income. The logic is obvious, and fair.
2) Remove the NIC cap, but only above £100,000. In other words, no employees NIC between 40% and £100,000, but reintroduce it above that. This corrects the tendency for income taxes to be regressive above £100,000 but counterbalances the real rise in income tax rates as income gets into the 40% band.
3) Withdraw allowances progressively. Have a minimum tax due on income of 32% at £100,000, 36% at £150,000 and 40% at £200,000. There is no reason to subsidise with tax reliefs those who have all the means they need to make their economic decisions against the background of the freedom high income gives. The aim is simple: 40% will mean 40% for the very wealthy.
What then? Stop some abuses. In particular on capital gains tax:
1) Realign the rate with income tax;
2) Reintroduce an indexation allowance. Do allow a lower rate of tax for business assets.
3) Require mandatory reporting of all share sales by all brokers to stop the obvious high current levels of evasion;
4) Require that all disposals by spouses of assets acquired from their partners in the previous year are declared as disposals by the original owner.
For small business, end the farce that one tax system can cover all compnaies from HSBC to Bob the Builder Limited. It can’t. At the same time end the farce that one company fits all (bar tiny amendments for PLCs). Make the taxation of small businesses transparent i.e. the owners pay on what the enterprise earns by looking through the corporate veil and attributing the profits to those who earn in proportion to their contribution of effort and capital. I’ve explained how here. The reduction in the burden of admin on small business will be enormous, the need to tax plan will be largely eliminated and the focus on business making real money will rise. No wonder accountants dislike this plan.
On Inheritance Tax, the whole thing is now so debased there is only one option, which is to get rid of it and start again with a capital receipts tax.
The domicile rule must go, of course.
The UK will need to join the Common Consolidated Corporate Tax Base if it is to have any chance of collecting tax from big business in future, and go all out to support the creation of unitary taxation on an international basis for global entities: there is no other answer in the long run if they are to be held to account. In the short run, working with Europe has to be the right way forward, and that includes reinforcement of the CFC rules.
What next? Well there’s VAT of course. The aim has to be to to reduce the rate on essential items. The obvious corollary is the introduction of a higher rate on luxuries as well. It is possible. Of course there will be some disputes along the lines of what is a biscuit. So what? It will be a price worth paying.
And tax credits, laudable as the motive is, need to be used with care. The tax system delivers better and so the aim mist be to get more people out of tax. It is possible, I think.
It’s a big and radical agenda. It’s available to whoever wants it. My hunch is that it is a real vote winner, for anyone with courage.