The Tories’ and Labour’s collective tax omnishambles

Labour is against reducing the 50p top-rate tax to 45p for those earning more than £150,000. What could be clearer? As it happens, quite a lot could be clearer.

First, the omnishambles…

Given how widely predicted George Osborne’s decision to reduce the top-rate was you would have thought Labour would have anticipated it and worked out their line. They failed to — as Mark Pack noted here, Labour’s Shadow Business Secretary Chuka Umunna contradicted himself within 24 hours, while Shadow Chancellor Ed Balls declined to declare his hand.

When Labour did eventually work out its official position — they are opposed to the reduction in the top-rate — the party then had the perfect opportunity to vote against the measure. Except they failed to, instead abstaining by mistake after a “screw-up”, according to a leaked internal Labour email.

And so to today, when Labour moves its own amendment to the Budget. Surely by now Labour would have got its ducks in a row? Not so much. As my LibDemVoice colleague Caron Lindsay has pointed out here, after a procedural muddle, Labour managed to table an amendment which would have abolished the 45p top tax-rate… meaning that, if it had passed, the highest rate of tax would revert to the 40p rate that applied during 12 years and 11 months out of Labour’s 13 years in power.

That’s right, Labour wanted to go further than the Tories in cutting taxes for the highest-earners. But only by mistake. Which makes it better, apparently. I can’t help feeling that somehow this tax omnishambles exhibits Labour’s revealed preferences.

And now the serious point…

The Lib Dem line ahead of the Coalition budget was to continue to back the 50p rate. Personally, I’m not theological on this issue. As I wrote after the budget, the most important question as the country cuts the deficit is a practical one: ‘How much money is it raising?’ The Treasury argued, albeit without much robust evidence, that reducing the top-rate would have little impact on revenue-raising. However, as George Osborne is discovering, that’s a tougher argument to make if you’re simultaneously levying additional taxes on grannies, pasties and charities. My conclusion last month still stands, I think:

For the Lib Dems, of course, the 50p rate is largely a side-show. It is very clearly the main Tory measure in the Budget: it wouldn’t have been a Lib Dem priority, but in Coalition you compromise, and there are many Lib Dem wins which outweigh it.

And it was the biggest of those wins that Nick Clegg rightly sought to re-focus attention on in his BBC Radio 4 Today Programme interview this morning:

I attach a great deal of significance to the fact that the centrepiece change in the budget — and I acknowledge it has been perhaps somewhat lost by recent coverage about the budget since it was announced — but the centrepiece remains the huge change in the personal income tax system which will benefit over 20 million basic rate taxpayers to the tune of several hundred pounds. It will take by next April over two million people on low pay out of paying income tax altogether, mainly from the lifting of the income tax allowance and, you know, I think you have small changes in budgets which can be controversial or not and then you have big changes in budgets which in my view can be judged whether they are significant on whether we believe that future governments are going to change them or not. My feeling is that what we’re doing on the allowance is one of the biggest, boldest and most radical changes in the personal tax system in a very long time.

Taking two million of the lowest-paid out of tax altogether, cutting the taxes of 20 million basic-rate taxpayers — rewarding work, not taxing it. Tax-cuts for the millions not the millionaires as the party has pointed out. We know it’s not a Tory priority: they prioritise the wealthy. We know it’s not a Labour priority: let’s not forget Gordon Brown’s 10p tax debacle. It is a Lib Dem priority — and it’s happening only because the Lib Dems are in government.

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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  • Daniel Henry 18th Apr '12 - 9:32pm

    We’ve made some mistakes of our own in this coalition but Labour never fail to make us look good in comparison.

    Do they feel so sorry for leaving us with a difficult job that they’re decided to give us a second parliamentary term to deal with it? Our perhaps all the coalition MPs have formed a union and have successfully lobbied Ed to preserve their jobs?

  • Alex Sabine 19th Apr '12 - 2:45am

    A little schadenfreude over Labour’s shambolic Parliamentary manoeuvring on 45p tax is understandable, given their cries of coalition incompetence over the various budget measures that have been unravelling in the past few weeks, and their general abuse of the Lib Dems.

    However, the idea that the Lib Dems are blameless in all this is simply partisan wishful thinking. The party claimed that it was Nick Clegg’s (albeit rather last-minute) advocacy of a tycoon tax that forced George Osborne to go further than he originally intended in limiting tax reliefs.

    Yet it is this aspect of the budget in particular that seems to have sparked the biggest furore because of the effect on charities and universities. So now we have the rather bizarre spectacle of Vince Cable fretting publicly about these effects while Nick Clegg defends the “simple principle” at stake of a guaranteed minimum rate of tax.

    Even though I favour sweeping away (and not merely capping) the vast majority of tax privileges, I would concede that the relief available for philanthropic giving is probably one of the most defensible ones. In any case, if you were going to limit or remove it, you would need to make a much wider argument about broadening the tax base so as to enable lower rates all round and more equitably shared burdens. As I said in a comment on another post, governments need to prepare the ground for these sorts of changes and present them as a coherent whole, as for example Nigel Lawson did when reforming corporation tax radically in 1984 and aligning income tax and CGT in 1988.

    In this case, by contrast, Nick Clegg seemed to dream this one up based on stories he’s read in the paper about Mitt Romney paying a low rate of tax (since almost all his income was from investments and these are taxed at a lower rate than earned income) and, having lost the argument on the mansion tax, thought a variant of the US ‘alternative minimum tax’ – repackaged as a ‘tycoon tax’ for British consumption – would make a fitting substitute. He convinced George Osborne of it (who needed political cover to cut the 50p rate having failed to persuade David Cameron of the mansion tax, which by then Osborne was apparently prepared to go for), floated it publicly once he had secured Osborne’s assurance that it would actually be in the budget (thus confounding those who said it was pie in the sky), and it duly made it into the budget. (The Treasury never needs much convincing that tax reliefs should be made less generous, since its institutional view is that the British people have done nothing to deserve either relief from taxation or public expenditure!)

    On the specific point about charity tax relief, one reason why an uncapped relief might be deemed justifiable is that it’s pretty obvious that someone who is giving a large chunk of their money away to charity is not motivated by the desire to avoid tax since, by definition, they are forfeiting ALL of that money rather than just the part of it that would have gone to the taxman if they had spent or invested it.

    If, as the government claims, some of these recipients of their largesse aren’t really charities or good causes, then that is an argument for tightening the definition of eligible charities rather than limiting the amount that can be given? If they really are bogus, then why is it acceptable that generous tax relief should continue to be available?

    Admittedly, if wealthy people who give a lot to charity do so from altruistic motives then one would hope that limiting the tax relief available won’t have too harmful an effect on donations. But the point is that the tax relief maximises the potential level of donations and ensures that the amount given goes as far as possible, ie delivering maximum benefit to the charity rather than some being creamed off by the taxman.

    Of course, even under the current plans generous tax relief will remain. But the curious effect is that the people who will be affected will be those among the rich who give exceptionally large slices of their income away (more than 25%), ie the *most generous* of rich benefactors and the charities they support.

    Overall, the changes to tax reliefs and the VAT base in the budget were insufficiently radical in some ways – leaving far too many tax privileges in the system which lack a strong justification – while hitting (presumably) unintended targets, without undertaking the kind of wholesale simplification that might have given the exercise some intellectual and policy coherence.

    The unfortunate effect has been to obscure the strong general arguments for restricting and removing reliefs and deductions, one of which is broadly that advanced by Nick: that they largely benefit the better off by reducing their average tax rate far below the statutory rates, while they are of much more limited benefit to those with less discretion over how to allocate (and indeed receive) their income.

    Note that this effect can arise because of behaviour that is not only legal, but actively encouraged by governments; it is simply that ‘tax expenditures’ of this kind are of more value to the better off. Of course some wealthy people also reduce their tax bills by exploiting (unintended) loopholes, but the proliferation of reliefs and privileges itself creates the opportunities to game the system (Ken Livingstone style).

    However, I’m not sure the solution is to specify in law (US-style) a minimum rate of tax, or seek to achieve this through a generalised cap on reliefs at a certain proportion of income. Or at least, if this is to be the chosen method then the cap on charity relief will have to stay.

    A better route would be to abolish a wide range of reliefs altogether, align the rates of tax on different sources of personal and corporate income, and thereby – as the IFS and Mirrlees review have argued – create a strong presumption in favour of tax neutrality, with any departures explicitly justified. This would automatically reduce dramatically the opportunities for avoidance and enable a more progressive tax system overall despite lower marginal rates (one of the better examples of this approach was the bipartisan 1986 Tax Reform Act in the US, though much of its good work has subsequently been undone).

  • Matthew Huntbach 19th Apr '12 - 4:40pm

    Yet it is this aspect of the budget in particular that seems to have sparked the biggest furore because of the effect on charities and universities.

    Shouldn’t universities be free to think for themselves, free of interference telling them what they should teach and what they should research?

    Is it not, therefore, a matter of some concern if universities are dependent on charitable giving by wealthy people? Might we not suspect that that charitable giving would be more forthcoming to those universities whose teaching and research is oriented in favour of notions such as it is good for rich people to get richer, and withheld from universities whose teaching and research is oriented to the idea that it is better for society to be made more equal by placing limits on rich people?

    Now here we see the flaw in this argument when we are made to weep for these poor charities who are denied their state handouts to top-up rich people’s donations. Charities are not and cannot be entirely neutral. The word covers a great variety of things, and of course the propagandists of the rich are hiding those charities which might not have much universal support and putting all in terms of those charities we might agree are doing good things.

    OK, well how many LibDems are happy that state money is going to fund what they would call anti-gay propaganda? Donations to the Catholic Church are gift aided, so subsidised by state top-ups. Last month the Catholic Church told all its priests to read a letter at mass putting the case against gay marriage. So the costs of that letter were to a large extent supported by state top-up.

    Of course, there are other charities putting out material the other way. So my point is charities are not necessarily entirely neutral things we all wold love just by virtue of their being charities. If we are to have tax relief in charitable donations, I believe it is entirely just that it should be capped at a fairly low rate of donation so that what is given out truly does reflect mass popular support and is not skewed to the tastes of a small number of people who are in the fortunate position to be able to give large donations.

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