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.
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You’re forgetting one very important tax reform, one which NuLab & Cons have signally failed to address: Council Tax. Unfortunately the LibDem’s are still favouring replacement with extra income tax, which is surely not something which you would support. This is a bit of a mystery to me since Chris Huhne is a keen supporter of land value taxation (or Site Value Rating) and Vince Cable only yesterday evening spoke at a Professional Land Reform Group meeting. Property taxes have to be part of the tax system because they can/should reflect wealth and are the most unavoidable of taxes.
The Labour Land Campaign’s manifesto, which is posted on http://www.labourland.org, demonstrates quite clearly how annual land value taxation can replace Council Tax, National Non-Domestic Rates and Stamp Duty Land Tax in a progressive and efficient way. The bottom of the land price cycle (c 2010) is the ideal time to introduce LVT. Moving the rate upwards a replacement of Income Tax at the standard rate could eventually be achieved, together with correction of the dysfunctional land market.
A bit of a mixed bag here Richard although more with which I agree than not.
I certainly accept the principle of your suggestions for a more progressive approach to taxation and your suggestions re ‘abuses’. To my mind no one has provided a good policy reason for reducing CGT to a flat 18% even for short-term gains. It all but begs advisers to recommend how income can be converted to capital gains so as to reduce the tax thereon from 40% to 18%.
I find it impossible to disagree with the pricinples underpinning this paper but there are 2 political points I suggest need to be added.
1 The fundamental principle of fairness in taxation, that all who derive income from activities in this country must be subject to the same rules – and unable to avoid these rules by virtue of their wealth and presumed power – must drive any rethink. In my opinion, this would have huge popular support.
2 However, even if such principles kicked off a major rethink, popular support would very quickly be lost unless the worst tax avoiders were seen to have their taxation privileges reined in before moving on to other “softer” targets such as the self-employed. The highest profile abuses of the current system must be tackled first.
On the detail, I question your conclusion that adding an 11% surcharge to investment income would discourage the taking of investment income rather than earnings from small limited companies. Forgive me for saying so but this suggestion has a hint of Gordon Brown tinkering about it. Although it would bridge a gap, it would not compensate for the loss of employer’s NICs, thereby leaving an incentive, albeit a smaller one, to continue current practice.
Why cannot tax and NI be consolidatedm with hypothecation of appropriate proportions for health services and state pensions – this is after all what happens with NICs at the moment – to address concerns about financing those 2 key issues? Having one tax rather than two would surely greatly simplify designing a more just system.
I couldn’t agree more with what you say on inheritance tax. As a single parent with 2 kids, I find it absurd that they get less than a single child with 2 parents in a similar financial positiob to me, not only by virtue of there being 2 of them but also by virtue of my being single. A capital receipts tax, with an individual allowance per recipient, would be far more rational, although I suspect there would be a wind band of opinion on what the individual allowance should be!
Keep up the great work!
Richard–as always, lots of sound stuff here. A few points…
1. Why have NIC at all ? Any link between “National Insurance” and pension and other benefits has long been lost. It seems like just an income tax complication. Removing NIC would go some way to clearing up the differences between earned and investment income.
2. How would a “capital receipts” tax work ? I think one has to be careful not to remove incentives for saving. The ability to pass on what one has saved to one’s children/spouse is a significant incentive to save.
3. The current taxation regime has many distortions which you highlight. But I suspect that the overall level of taxation is about as high as is politically acceptable and any overhaul should not be seen as a backdoor method of increasing the tax burden.
4. It’s a separate issue but what are your thoughts on the funding of political parties ? Rightly or wrongly, taxation and MP’s expenses will be increasingly linked by much of the press…
Please keep up the good work. Tax justice should be a matter for us all, whatever our political persuasion.
Patrick
Quick answers:
1) NIC is a fact of tax life, almost the world over. It spreads the tax base, and ensures people like pensioners are not liable. That is its benefit.
2) Re capital receipts, the aim is to have a lifetime allowance for receipts (indexed over time) and all receipts in excess of that are taxed. Obviously, it’s a little more complex than that in reality!
3) I do not agree. Tax may be at its limit now because there is a perception of government waste. That has arisen almost entirely because of the dogma driven desire to introduce ‘choice; and ‘competition’ into public services when the former is not possible due to geographic and resource constraints and the latter undesirable because it simply creates vast amounts of admin, and ignores the fact that big business does not compete (see supermarkets and the fact that they appear to price fix, as one example). If an honest public service, based on the notion of public service not quais public gain were introduced then I think that as in the Nordic states the capacity for taxation would not have been reached. The tax we pay would also go further, now.
4) I approve of state funding of political parties. And MPs expenses being on the public record. I do not approve of fixed allowances.
Richard