Thursday, July 12, 2007

LibDem Tax Proposals Make the Rich Pips Squeak

The primary role of any political party is to tell people what you will do in government and then how you will pay for it. About a year ago, the LibDems issued their tax proposals, which included a two pence cut in income tax. Although the proposals were revenue neutral they made quite a good attempt at selling the whole package as a tax cut. I wrote about the proposals HERE. I said...
Taxcutting is like supporting a football team. You have to believe in it within your soul. It's part of your political being. Unfortunately for most Liberal Democrats raising taxes is part of their political gene makeup and most voters know that. They remember the 1p on income tax "for education". They remember the spending commitments that would have bankrupted the country. They remember the
50p income tax rate. So although the LibDems will want to concentrate on the
headline of "2p off income tax" (are they suggesting 2p in the Pound off the
education budget?) it's the other measures which ought to be examined in minute
detail, as they will dramatically increase the tax burden on the middle classes
- just the sort of people the LibDems need to keep hold of (and attract) if they
are to repel the Cameroonian advances.

Today, the LibDems have announced yet another round of tax proposals, which include an apparently mouthwatering 4p cut in income tax (on top of their original 2p proposal, which was adopted by Gordon Brown in his March budget). But again, this is a revenue neutral package. They say that any household earning less than £68,000 will benefit. Let's take a closer look...

The main proposal is a 4p income tax cut to be paid for by "green taxes on cars and flights and the ending of £13.5bn of tax breaks for high earners would fund the cuts". As yet I have been unable to find any detail on what these tax breaks for high earners consist of. Sir Menzies Campbell said: "Tax cuts for the majority will be paid for by the wealthy minority." This is the politics of envy. As Lincoln said, you don't make the poor rich by making the rich poor. Many of the people Ming wants to tax until the pips squeak are the wealth generators of this country. They provide the jobs which pay for the benefits he wishes to increase. Let's look at some of the other measures...
Reaffirming the party's commitment to replacing the council tax with a "local income tax"
I'm unclear whether this move has been included in their calculation that any household earning less than £68,000 will be better off. This was a clear vote loser for the LibDems in the south of England last time and many LibDem activists are nervous about retaining it as a policy.
Removing "tax loopholes exploited by the super-rich"
Like what?
Reducing stamp duty paid on properties worth less than £500,000
And what about those over £500,000? It is licensed robbery for the Treasury to take a 4% cut.
Raising the starting threshold for inheritance tax to £500,000
A welcome start, but most LibDems I know would like IHT to be increased rather than cut
Return business rates to local control
This is a difficult one. In theory I agree with this and if you believe in localism you ought to be firmly in favour. And yet, and yet, I know the damage business rates can do to small businesses. Whatever its faults, the UBR has provided a degree of stability.
Simplify the tax code to remove more than 500 pages of regulations
All in favour of that
Bringing money made on UK property by people who are not resident in the UK, within capital gains tax
I'm not really qualified to comment on this, but my gut feeling is that it sets a dangerous precedent.

This is an interesting set of proposals, but on first sight at least, it doesn't provide the information needed to make a rational judgement. The full paper can be read HERE. Perhaps someone could point me to the section which details the £13.5 billion of tax breaks for the wealthy which will be abolished, because I am damned if I can find it.


Chris Paul said...

Great to have a top economist and tax expert rather than some ideologue analysing these proposals. Lib Dem tax proposals don't really matter do they? They are never going to do them to us are they? Irrelevant. They do show what a bunch of yo-yoing flibberty gibbets they are.

Anonymous said...


I expect it's removing things like:

1) higher rate relief on pension contributions
2) higher rate relief on charitable contributions
3) removing upper earnings limit on NI contributions

The first two get added into tax codes under self assessment, the last increases the effective tax rate (tax + NI) to 51% from 41% as opposed to 33% for basic rate taxpayers

Not sure which combination of the above the minger has included

Anonymous said...

Iain, I think you are being too kind to these people.

The revenue comes in all sorts of ways (stealth taxes).

Here are some that I spotted.

-A gift within 15 years of death (currently it is 7 years) would still be subject to inheritance tax. That is a staggering suggestion. How do you keep track of the gifts made in the last 15 years? The yield would be mountainous. It is a totally ludicrous suggestion.

-Cutting 600 pages of tax legislation is bought by bringing in a general anti avoidance rule. That basically means that tax law would be whatever the Inland Revenue says it is. You would kiss goodbye to any democratic control over the tax system. Again, a totally ludicrous policy.

-I assume that their earlier proposal to abolish CGT taper relief still stands. This too will be a significant revenue raiser. We would be back to full taxation of paper capital gains-for the first time since 1982.

-The proposal to recast Air passenger Duty so that it applies to flights rather than passengers might make some sense but they are looking to quadruple the yield from the tax. I trhink APD already brings in well over £1bn annually so this could be a significant revenue raiser.

Overall this is basic envy politics. Prepsterous.

Anonymous said...

Robin Hood politics!

Anonymous said...

Nice timing for Southall.Makes high tax Dave look a bit sick.

Joe Taylor said...

This review is so predictable I could have written it myself.

I would love to have seen what you'd have written if Cameron had announced the exact same policies... fact, I think I'll stick about for a bit and see which ones he nicks. That ought to be fun. ;-)

Seriously - take the blue glasses off!

Joe Taylor said...

Feel I should moderate my last comment slightly because you did at least say nice things about these:

Return business rates to local control

Simplify the tax code to remove more than 500 pages of regulations

Still, it's worth thinking about what your response would have been if this had been a Conservative policy announcement...

Daily Referendum said...

So the Lib Dems master stroke is to propose a 4p cut in income tax, what a complete and utter load of b*ll*cks. It would be fantastic if what you got was what it said on the tin, but you don't. They plan to pay for this tax cut by - yes you guessed it: taxing us in other ways! Do they think that the public are stupid enough not to realise that they will being given a tax cut with one hand, while the other takes it away? Not only that, but it will cost the country extra to implement these new taxes.

Anonymous said...

Only July the 12th and the silly season's already started...

Anonymous said...

The only real way to cut taxes is to reduce expenditure - very simple. I suspect none of the main parties (so called Conservatives included) have the stomach for this, so please don't anyone expect to be any less robbed after the next election.

Anonymous said...

Should we actually ignore any talk of tax plans, and only listed to what parties say they will do about spending?

Lord Blagger said...

Removing tax relief - actually tax deferral since you pay when you retire - will result in some pensioners paying 55% tax

Tim said...

What a shame that the minority they're targeting controls the majority of the media.

[Psst! Iain! I have a bridge I'd like to sell you. A snip at a mere £1,234.]

Anonymous said...

A great way to encourage saving for retirement-remove the tax incentive when saved and still tax it when drawn.Only a total moron could come up with it.Where does Ming find them?It is a rare talent.

Anonymous said...

great news Iain, dave on C4 news he supports tax breaks for same sex partnerships, that £20.00 a week is as good as in your hand!

Anonymous said...


So they scrap the Council Tax and introduce a revised version of the Poll Tax.

And sometime down the line they reintroduce the Council Tax as a Land Value Tax.

Yep Ming The Meaningless has spent too much time with Lurch!

Tapestry said...

upper earnings limit on national insurance, anonymous?

That went a long time ago courtesy of one Gordon Brown.

Pre-1997, income tax was 40%, and Nat Insurance was not a tax, but a way to buy a state pension fo each individual. Then you needed to pay £100,000 to deliver £60,000 into the pocket. The £100,000 total was offsettable against Corporation Tax at 30% so the total net tax paid was £10,000 on £100,000, once into the higher levels of pay.

Brown removed the upper earnings limit on NIns, and made it into another income tax in all but name, so that you now pay income tax at 40% plus employee's NI at 11% plus emloyer's at 13% plus 1%, so effectively tax went from 40% to 65%. To put £60,000 in the pocket now, you need to pay not £100,000 but £170,000.

The £170,000 is offsetable against Corporation Tax at 30% saving £51,000 there, but as you now pay £110,000 tax as listed out above, the net tax paid has risen from £10,000 to £59,000 - a 6-fold increase.

If Lib Dems add another 10% to income tax taking the total from 65% to 75%, to put £60,000 in the pocket, would then cost a staggering £240,000. This would be offsetable and so would save £72,000 of Corporation Tax. But as £180,000 of other taxes would be payable, the net taxtake would now be not £59,000 but £108,000 - a near 11 fold increase in the taxes on high levels of pay since 1997.

The rates as they are are already driving companies and individuals overseas - and these the most productive individuals our society possesses. The torrent of people leaving would become a flood. Britain is already into highly inefficient levels of tax rates.

This is just nuts, but of course Lib Dems like policies that are nuts.

Anonymous said...

It's a tad lazy on my part, but there's a quote from the West Wing that ties in with this perfectly. Something along the lines of:

"I'm so sick of people telling me I have to pay my way. When I was working as a lawyer I was on 400k a year - I paid for myself and 17 other people. But the fire trucks didn't come to my house 17 times faster, and my garbage wasn't collected 17 times more regularly."

The simple truth is that if you tax people more, and they can afford to do so, they will move abroad, or more their money. Don't push 'em...

Anonymous said...

I'm not going to read it but anon 8.36 has spotted 15 years IHT liability on gifts.

As someone who has just spent rather a long time winding up a relative's estate because of the 7 year provision, I would predict that a 15 year provision would make such an endeavour infeasible.

Advertising Sellout said...

Bang on, Iain. I've assumed that the Lib Dems have calcluated the £68k figure based on the replacement of CT with an LIT; my back-of-a-fag-packet maths does seem to bear this out. Who decided £68k is 'rich' anyway?

Having said that, the lack of detail in the report means that I wouldn't be the slightest bit surprised that there's a further tax band of 50% on earnings over £60k hidden in there somewhere.

My blog (plug, plug) has its own inimitable take on proceedings...

Johnny Norfolk said...

Everone is critisising the Lib/Dems, but where are there any conservative proposals to compare with.

Oh yes 7p on a pint of beer.

Anonymous said...

smacks of a panic measure by the LDs to try and stop their support ebbing away.The media has quite rightly foccused on Briown/Cameron over the last few months andthe LDs have been pushed into their real position in British politics; a meaningless repository for tatical voters, idiots and people who like the colour yellow...

Tapestry said...

I should have added that (if the 50% band is imposed, and it will require £240,000 gross to get £60,000 into the pocket), if the recipient can arrange to leave the UK for over 9 months a year and receive the £240,000 as a dividend, the tax payable is only £72,000, so instead of £60,000 in his pocket, the recipient would get £168,000.

For such a person the incentive to go and live overseas would be a tax saving of £2000 a week (45% of £240,000).

They already save £1600 a week in tax by going abroad. It is usually far cheaper to live abroad as well, so that the same money buys a lot more value, and more can be saved and invested.

And you wonder why high earners are going overseas in droves.

Anonymous said...

Didn't the LD proposals state that they were revenue neutral, meaning that they are adjusting how tax is taken rather than increasing it?

Given that the tax system currently is grossly complicated and unfair on low/ medium earners shouldn't these proposals be welcomed as a breath of fresh air? Much more so than '7p on a pint of beer' or flirtation with flat taxes.

Anonymous said...

Capital gains tax on UK property for foreigners is a good idea. Under most tax treaties to which the UK is a party, the right to tax income and gains from property falls to the country in which the property sits, but we have decided that we only tax the gains of persons who are resident or ordinarily resident. We tax the income from UK property, so why not tax the gains like other countries? While we are about it, why not tax the income at the full corporation tax rate rather than tax it as income under the income tax rules at the basic rate (4% lower under the Lib Dem proposals)?

I think many people would be surprised by how many "offshore" investments in property are made by companies controlled less than a million miles from the West End of London, funded not by foreign capital so much as by highly geared loans from RBS and the Bank of Scotland.

If you think the 10% tax rate on capital gains in private equity is lower than justified, that is nothing compared to the effective tax rates of many UK property investors.

And if you think they pay 4% stamp duty on their purchases and sales ........

Tim J said...

500 pages of the tax code? Woo hoo! Of course, given that it stands at something over 12,000 pages at present, this is perhaps a little cosmetic.

Anyway - which 500 pages? Isn't that a little like saying 'we're going to repeal six laws' but not saying which?

Tapestry said...

Low earners might be young and their earnings could rise. Or their children or grandchildren could become high earners.

High earners too can lose their jobs or businesses through unforeseen events. Money can be lost as easily as made. We are are all low earners and we are all high earners at one time or another.

It is not up to governments to level the playing field. Taxes have an efficient level at which they generate the most money. If they are set too high, taxpayers put effort into avoiding them, and they put less effort into earning. Taxes set too high net less and less.

Who gains when tax is raised inefficiently? Not the poorer members of society who depend on government spending.

Taxes should be set at rates which encourage people to get on and build their businesses, increase their earnings and pay taxes as they are reasonable. Confiscatory taxes such as income/national insurance tax at 75% are self defeating. Lib Dems and Labour don't understand that - or are they in fact trying to use taxes to stop people becoming wealthy and independent from the state? They don't believe in independence of mind, but in controlling everyone.

That's why the economy grows under Conservative governments. They understand that people have to be independent from government to build their own economic futures, from which all members of society benefit.

Newmania said...

IT is of course likely that the Liberal Party will not be able to sustain a policy of tax cutting and certain that it will not be as it seems
On the other hand the fact that they are seeking to represent themselves as sensitive to tax payers at all is interesting. WE are approaching a time when the "Progressive Party’s" soi disant , are likely to combine against the natural Conservative Majority in England
I see it as vital that the Conservative Party has an open door for Liberal Liberals who will otherwise be voting for the labour Party. There are lots of good ideas coming out of the Liberal Party on housing and crime and , unlike the Labour Party , at least they have some notion that Public spending , is tax payers money , not a magic everlasting drinking horn.
Parts of the Liberal Party are not all bad and the headlines are at least most encouraging. Tapestry has pulled it to pieces I see, but I would like to see direct taxes moved to indirect ones and combined with simplicity as a principle.

Doesn`t anyone see anything good about this at all ? It shows that Conservatives are not alone in worrying about wealth creation and the right of the individual to be independent . When Ming has to admit that all his Party are doing no more than working for Gordon Brown those elements will not be pleased and I would like to se him nailed about what the Libs would do after an election before it happens.

Tapestry said...

Newmania, the way to generate more tax revenue should be to get the economy to grow, not to raise rates of tax on any sector, or use fiscal drag to increase rates.

By raising taxes on the most productive sector - high earners - the economy's growth is blunted, and tax revenues will be lower. I know we like many Lib Dem policies on crime and localism, but on money they are really at the basket case stage.

Brown has made use of fiscal drag by intentionally underestimating inflation rates by moving to the CPI (2.5%) from the RPI(4.5%) and even the RPI ignores asset price inflation.

If asset prices are included in an inflation calculation, inflation is probably nearer to 10% these last few years - equal to the growth in the money supply, which has also been about 10% a year.

That's why IHT is now a feared tax by house owners for example, and so many people cannot afford a house. To have kept pace with real inflation since 1997, the tax free threshold should be nearer £10,000 a year, not £4000. Gordon's biggest stealth tax of all has been to continually lie about inflation.

Anonymous said...

Funny how barely anyone contributing to this discussion has actually bothered to see how they will raise the money to pay for the 4p cut. Press reports this morning are pretty clear that it is green taxes (aviation and VED), a single rate of pension contribution relief, and abolishing CGT taper relief (thereby going back to the system under Lawson). If 2 million households lose as the Telegraph reports that means 23m gain! I'd love it if Osborne produced something like this.

Anonymous said...


I generally disagree with your comments (being a red and all) but i think your spot on on the Lib tax policy. There unfunded headline grabbers.

No-one seems to point out that income tax is pretty constant and easily predicted, if you cut it by £16bn you need to replace it, to prevent massive inflation. But tax on airlines is not constant and if we have another Sept 11th, or fuel protest and tax take drops, there will be a massive hole in the public finances!

Also, if you are "green", you tax to stop people doing things like flying etc. But if consumption drops so will the tax take and there will be a hole again. If consumption stays the same, it isn't doing the environment any good.

I think we will stick with economic stability and the predictability a 20p rate of income tax brings!

Newmania said...

Stealthy the sense that everyone has noticed Tappers ..

For true stealth what about using interest rates as a safety valve for printing money and getting government spending financed by Mortgage payers.

Tapestry said...

Anon, if 2 million househlds lose and 23 million gain, the 2 million will not just sit there. The numbers leaving Britain each year are already around 250,000. A large proportion of these are high earners who own substantial assets.

Around 25% of Britons are considering moving overseas. Your 2 million households would soon be down to 1 million. Then you would have to find someone else to drive out of the country. Why not just cut taxes across the board, raise thresholds and get the economy growing? Or don't you like the diea of a successful economy?

Anonymous said...

There should be lower rates of income, capital gains and inheritance taxes but everyone should pay them. The system is creaking because the very rich and particularly foreign domicilliaries are making an insufficient contribution. With the extraordinary levels of house price inflation at the top end of the market it might actually be beneficial to the economy if some of the very rich did clear off. It is the people in the middle who are the productive units in society and they are the ones who should be tempted not to leave. As always the Tories and New Labour ignore these people and obsess about what is in the interest of big business (and often foreign big business).

Anonymous said...

"The system is creaking because the very rich and particularly foreign domicilliaries are making an insufficient contribution"

The system is creaking because Gordon Brown is spunking away £600 billion a year and not getting anything like value for money. You could probably cut government expenditure by half and still get the same outcomes or better if you cut out the waste, but that will never happen. Government has no incentive to cut waste, because they can never go out of business.

We need tax cuts, not a redistribution of the current tax burden. We need to cut the size of the state. For a start, why not get rid of DEFRA, DTI, Departments of Health and Education, just get rid of them. Give people vouchers for health care and education if needs be, but get rid of the dead hand of the state.

Gordon Brown's solution: spend £20 billion on ID cards. God help us all!

Anonymous said...

Although a single anecdote does not data make... our household income is currently about £68,000 gross. We are planning to leave the country, because we've had enough at being told just how 'rich' and 'fortunate' we are.

Tim Worstall said...

"Bringing money made on UK property by people who are not resident in the UK, within capital gains tax"

Asinine. Non residents don't pay CGT at all.

Anonymous said...

our household income is currently about £68,000 gross. We are planning to leave the country, because we've had enough at being told just how 'rich' and 'fortunate' we are.

Amusingly, this mean that if you were a tube driver, married to another tube driver, you would be, according the the Lib Dems "too rich" and eligible for top rate tax.

They really are a waste of [expletive deleted to satisfy Iain] space

Anonymous said...

Tapestry is slightly wrong about the upper limit on National Insurance contributions. Brown removed the upper limit for employer contributions only (12.8% paid on all salary paid out), not on employee contributions. He did remove it on the 1% he added to both employee and employer contributions as part of his 2002 £8bn tax raid.

If the LDs were to remove the upper limit on employee NI contributions, then anybody earning more than around £38,000 would have a marginal rate of 51%. This would bring in about £5bn of the £13.5 they claim will come from closing loopholes.

If they did this, then to leave you with an extra £100 in your pocket, you would have to be paid £204 and your emplyer would need an extra £26 on top for the NI they pay. It is a spurious arguement to say that the business gets a tax benefit from paying this out as salary, it is still an increase in the businesses costs and reduced tax bill or not, if the business is owned by a pension fund, then the profits are reduced and the returns on yours an my pension investment is reduced.

So, as usual, pretty depressing, dismal and damaging stuff from the golden shower.

Anonymous said...

Tim Worstall: "Asinine. Non residents don't pay CGT at all."

Not particularly asinine, I think they are simply saying they would amend the scope of CGT so that it would apply to non-residents with respect to interests in land, just as Schedule A Income Tax currently applies to any rental profits that a non-resident makes from that same interest in land.

This is long overdue and would bring the UK into line with other countries. Taking away the benefit is not likely to cause a great number of foreign property investors to cash out of the UK. Most of that money comes here for other reasons (diversification or a relatively safe haven). But there are an awful lot of UK "controlled" funds that invest in UK property through offshore vehicles in order to avoid the CGT charge. Believe me. I know who they are.

bgprior said...

As yet I have been unable to find any detail on what these tax breaks for high earners consist of.

The main one is the removal of taper relief on capital gains. I think one of the reasons they may have chosen this moment to update their tax proposals may be to take advantage of the current criticism of private equity, who take particular advantage of this mechanism to minimise their tax bills (as Jeff Randall explained recently).

But there are two problems:

1. This is an indiscriminate way of tackling this exploitation of the tax system, that will have knock-on effects beyond private equity, on more general incentives to invest (not normally something to be discouraged), and

2. The private equity story may well be reaching its peak, and changes to global economic conditions may substantially undermine the model (see last week's Economist), which means the LibDems would be relying on revenue from a shrinking pie (which they were helping to shrink even faster) in order to balance their budget.

All the same, this isn't a bad effort (e.g. using revenue from environmental taxes to reduce tax on employment is a pretty good strategy) and better than anything the Tories have so far produced.

Tapestry said...

thanks for correction john moss. complex stuff. So the current top rate of income tax is really 54% then -(40% income tax plus 14% Nat Ins) and Lib Dems would increase that to 64%.

A high earner with an income of £240,000 from a company would save £1600 a week by emigrating..still a big incentive to leave the country.

Anonymous said...

Like it or not it is the relatively inequalities in the tax burden that are the main problem and not the overall burden of tax. A substantial factor in the house price bubble is caused by the fact that the principal private residence exemption for cgt makes housing an on-shore tax shelter and this is a benefit that disproportionately accrues to those who are rich in assets. The people who work and earn and are the real engine of the economy and are taxed too highly on their income.

Inheritance tax is unfair not because it is set at too low a level (which it is - but only due to house price inflation) but because for the rich it is entirely optional.