Higher-rate tax and Danny Alexander’s time-limited dead body

This was the couldn’t-be-clearer headline in the Mirror today, atop an interview with Lib Dem chief secretary to the treasury Danny Alexander:

danny alexander mirror headline

Defiant Danny Alexander today opened up a fresh rift within the Coalition Government by vowing to block Tory plans for yet another tax cut for the rich. … His comments will enrage Conservative MPs who are pushing to slash the rate from 45p ahead of next year’s General Election. It comes just days after David Cameron refused, on three occasions, to rule out cutting tax. But in an exclusive interview with the Mirror, Mr Alexander insists he will not allow any such financial relief for the wealthy. He says: “The top rate of tax has been an issue of late. Labour wants to take it back up to 50p, I think the 45p rate is the right place to be. I wouldn’t go to cutting below 45p – that would happen over my dead body. It’s better to say we are going to stick where we are.”

Couldn’t be clearer? Maybe, maybe not… Here’s the well-sourced Isabel Hardman:

A source close to the Chief Secretary to the Treasury tells me: ‘What he’s saying is over my dead body in this Parliament [my emphasis – ST]. He’s very explicit in the language he uses.’

So that’s “over my dead body” for another 15 months, then.

It’s an odd hostage to fortune. After all, it’s an open secret that Nick Clegg and Danny were willing to let the Tories cut the top-rate of tax to 40p in return for the introduction of a mansion tax. George Osborne was signed-up; it was David Cameron who vetoed the deal. Personally I’d be open to such a deal – switching from taxes levied on income to taxes levied on wealth is a long-standing liberal goal. So quite why Danny would choose to make such a categoric pledge (ah, that word again: we should’ve learned) on an issue he’s known to be flexible on – and rightly so – is beyond me.

* 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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31 Comments

  • “Personally I’d be open to such a deal – switching from taxes levied on income to taxes levied on wealth is a long-standing liberal goal.”

    I’m tempted to agree with this statement. However, my issue is that, politically, this would be terrible. We are still paying the price of cutting it to 45p.

  • What does it say about the state of politics when so much time is wasted on a tax that hardly anybody pays and whose rate, whether 40% or 50%, makes no discernible difference to revenues?

  • FormerLibDem 5th Feb '14 - 9:23pm

    But Danny Alexander has already supported a 5p cut in the top rate (and so did most other Lib Dem MP’s – to their great discredit) in 2012. If he really wants the rich to pay their fair share, why did he support the reduction from 50p-45p?

  • @John
    Agree, but would add that not only does it make no discernible difference to revenues it also makes no discernible difference to the governments ability to fund the welfare and benefits system. I suspect the same would be true if the rate were to return to 98%…

  • jedibeeftrix 5th Feb '14 - 10:57pm

    “If he really wants the rich to pay their fair share, why did he support the reduction from 50p-45p?”

    because it was a daft tax that raised little money?

  • Nobody knows how much the 50p rate would raise if it was implemented over an extended period. Those that claim confidently that it would bring in little money usually base their opinion on one highly speculative Treasury report that was published before we even had the first full year of data. A cynic might suspect that the 50p rate was strangled at birth precisely so we would never get enough data on which to make a rational judgement. Meanwhile we are expected to believe that the few hundred million we might save from the bedroom tax , benefit cap, restrictions to housing benefit etc, – a sum which is apparently ‘little money’ when we are talking about taxing the rich – is enormously important in reducing the deficit.

  • Simon Shaw
    And even better these ‘more effective measures’ haven’t raised a murmur of protest from the rich and their apologists, in contrast to the long-running and vociferous campaign against the 50 pence rate. It’s almost as if replacing an unavoidable PAYE based tax which initial Treasury estimates suggested would bring in 3 billion a year with a £500 million package of avoidable taxes was somehow what the rich wanted.

  • Eddie Sammon 6th Feb '14 - 3:20am

    An index linked pension of £30,000 per year costs about a million quid. Do we actually believe in getting people financially independent, or should we all work until we die to support those on welfare?

  • Eddie Sammon 6th Feb '14 - 3:22am

    I’m not talking about annuities either, before someone tries to be smart about that.

  • Eddie Sammon 6th Feb '14 - 3:29am

    It’s not fair for people who are still financially insecure to pay 45% tax. What’s the solution? Insurance products? What happens if they go bust?

  • Eddie Sammon 6th Feb '14 - 3:41am

    Tax the super rich instead or reduce property rights for them. It’s like we still live in a feudal system.

  • Eddie Sammon 6th Feb '14 - 4:04am

    Sorry about the late night rant, I got angered with the level of middle class taxes.

  • The reason why we accepted a cut in the 50p rate was that, in exchange, we got a massive reduction in pension tax relief for high earners. This not only means the rich pay more overall, but it also means an extra policy pledge from our manifesto is delivered in return for something that our manifesto did not oppose. It’s odd how people who are the first to point out comprises we have to make on manifesto commitments, suddenly forget about it when it comes to following a policy they didn’t know about or disagreed with.

  • So basically Danny Alexander vetoing it until the next election, whilst the tories are planning their budgets based on winning an election they will probably lose!
    Am I the only person that Westminster politics pointlessly convoluted and a little deceptive?

  • Simon

    I think you can see the point being made perfectly well. What has changed between Danny Alexander’s support for lowering the top rate previously, and his current stance of being so opposed to lowering the top rate that he’d rather die than see it lowered (which surely should win some kind of prize for ludicrous political hyperbole)?

    If he’s acknowledging the ‘Laffer curve’ argument is nonsense that’s something (though Stephen Tall seems to think otherwise). If it was a good bargain before to agree to a top-rate cut in return for more efficient ways of getting money from the rich, why wouldn’t the same be true in the next 15 months?

    It seems to me the only thing that’s changed is that we’re a couple of years closer to a general election, and the leadership thinks it’s time for the Lib Dems to say things that make them sound less like Tories (with bonus points for picking an argument with Michael Gove). If that’s the explanation, I’d suggest that it may not be a good idea to treat the electorate like a shoal of educationally subnormal goldfish.

  • @Eddie – re: rant
    Excused – I appreciate how you feel – I get the same over some issues and forget to self-moderate!

    I take it that you were working on a retirement age of 60 and treated the state pension as a bonus – a wise basis for long-term financial planning, given how much the state pension has changed over the last 30 years.

    I suspect that many (probably failed GCSE math?) just don’t understand how pensions work for those not in receipt of government/state funded pensions. My estimates indicate that if you want a pension that stands a chance of reflects your later life income, you need to be saving an amount equal to 23~25% of your annual pensionable income, from when you start work. you also need to save this in a recognised pension fund, as any savings outside of a pension fund the government will take into consideration when calculating benefits – something you need to take into consideration particularly if you’re male, as the male over 50 rates of unemployement are relatively high – in the mid/late 90’s the rate was 1 in 3.

    So laying these things out you soon begin to understand why someone earning say £50~70K isn’t actually that much better off than someone in a low paid job and in receipt of benefits.

  • “So laying these things out you soon begin to understand why someone earning say £50~70K isn’t actually that much better off than someone in a low paid job and in receipt of benefits.”

    Forgive me if I don’t rush down to Lidl and shake a tin in aid of pension contributions for those on £50k+.

  • Eddie Sammon 6th Feb '14 - 6:02pm

    Hi Roland,

    I was working based on a 3% real yield and yep: no state pension. I used to be a financial planner (will go back to it soon) and the vast majority of the public do not realise how much pensions costs. It’s not greed to want to become independent and build a moderate pension pot. If the government’s plan is for the vast majority to rely on the state then I think the plan is flawed. The west in general is living far beyond our means.

  • BTW if you are suggesting that the ‘Laffer curve’ is nonsense then I think you are wrong.

    By “the ‘Laffer curve’ argument” I mean specifically the argument that the 50p rate raised less than the 45p rate for this reason.

  • Simon

    “I think you are essentially correct …”

    Thanks. I shall be printing that out to keep for posterity.

  • Passing through 6th Feb '14 - 7:35pm

    “BTW if you are suggesting that the ‘Laffer curve’ is nonsense then I think you are wrong. Of course the Laffer Curve doesn’t say that 45% top rate raises more than 50%, it is merely there is some optimum top rate, above which less rather than more is brought in.”

    While this is trivially true, the Laffer Curve fails to give any indication of where this optimum top rate actually is which renders it useless as a guideline for whether taxes should be cut or raised. This means any argument which goes “taxes should be cut because of the Laffer Curve” contains a serious logical flaw and is fundamentally dishonest and self-serving.

    Now consider the possibility that if we somehow managed to calculate that the optimum tax rate was actually in the region of 90% (which is probably more likely than 40%) how many Lafferites do you reckon would then advocate raising taxes to that level?

  • Mick Taylor 6th Feb '14 - 8:11pm

    No-one in the Liberal Democrats needs lesson in how to tax the rich from the Labour Party, who had 13 years to raise taxes on the very rich and close loopholes and did nothing about it until 1 month before they lost office – and still didn’t close tax loopholes. Whilst at the same time their leader used his position as Prime Minister to make himself exceedingly wealthy (and he’s still doing it) beyond what almost any of us would even dream of aspiring to.

  • Chris 6th Feb ’14 – 3:31pm
    Forgive me if I don’t rush down to Lidl and shake a tin in aid of pension contributions for those on £50k+.

    Chris is of course forgiven. I cannot remember what proportion of the working population gets more than £50k a year — can anyone remind me?
    I would recommend a fact check to Roland who thinks that “someone earning say £50~70K isn’t actually that much better off than someone in a low paid job and in receipt of benefits.” . How can he be so out of touch with the real world?

  • Eddie Sammon 6th Feb '14 - 8:54pm

    Chris, we’ve had people arguing to increase taxes on the “top 10%” of earners for years, but what they are forgetting is that one their off balance sheet public sector pension is included that they are actually the rich ones (at least before this government clamped down on them).

    As I said: a truce should be called between the middle and working class by focusing on the super rich.

  • @Chris & John
    “Forgive me if I don’t rush down to Lidl and shake a tin in aid of pension contributions for those on £50k+.”

    Chris, you are forgiven, but if you do go down to Lidl, I’m sure the staff would appreciate your custom!

    I was using the £50~70K bracket, primarily as a few years back when the benefits cap was being discussed here on LDV, a example was being given of a London household consisting of two adults with two children, where only one adult worked. Without the benefits cap, their total net income was very similar to that obtainable from a salary in this range. Obviously, once you dig below the surface there are differences because the person earning £50+K generally has more work related benefits and has control over all of their net income (and some of the tax they pay) whereas someone on a low income only has control over their much smaller earned income and hence is able to derive less benefit from their total income. So yes in raw numbers there isn’t much difference, but that difference enables greater leverage to be applied that makes the difference that much greater.

  • “I was using the £50~70K bracket, primarily as a few years back when the benefits cap was being discussed here on LDV, a example was being given of a London household consisting of two adults with two children, where only one adult worked. Without the benefits cap, their total net income was very similar to that obtainable from a salary in this range.”

    Well, the benefits cap affected only something like 0.25% of households, so you are talking about very exceptional cases there. And even then, I fail to see how £26,000 could be “very similar” to the net income from a salary of £50-70,000, even if the bulk of it wasn’t housing benefit that was going straight to the landlord.

    Perhaps some of the gap can be closed if you assume they will be paying enough pension contributions to continue receiving £50-70,000 after retirement. But then we’d better take a longer view of how much better off they are than the low-paid. To my mind the answer is that after retirement someone receiving £50-70,000 a year would be considerably better off than someone receiving £5,727.80.

  • Chris, I agree the net income from £26,000 is very different to the net income from a £50~70k salary. However, and I agree this is an assumption which does carry many caveats, if we take into consideration the benefits a family earning £26k can obtain, the raw monetary gap narrows and in some cases (such as the one cited) can become negligible.

    However, as I pointed out the real difference is fundamentally due to the salary and the control the individual has over how it is spent. Someone on £26k can only really organise their life around that income, just because they are receiving say £1,000 pcm in housing benefit doesn’t mean that they can go into the market and use that money improve their situation, because the housing benefit will be re-assessed so that the family does not financially ‘gain’, whereas someone with a £50k salary can leverage their salary and use their discretion on how they spend that notional £1,000 pcm. hence it is through this freedom and discretion that the differences really become manifest and overtime can become pronounced.

    A thought experiment would be once someone has been assessed, the benefits package becomes effectively a second salary, which gets reduced as total earned income increases rather than as circumstances change (such as moving from renting to mortgaged), thereby enabling someone to plan their life around this higher level of income. This experiment starts to take us down the road of a citizen’s income…

    The longer view is what Eddie’s original rant was about. Do we really want someone earning £50~70K who is largely a net contributor to the Treasury, become at retirement a dependent on the state?

    It would be nice to be able to save sufficient to be able to draw the same pension as one’s gross salary, however this isn’t the reality for the vast majority, private sector final salary schemes were typically targeted at paying out 40/60, so someone earning £45k at retirement could after 40 years of service (with one employer) hope to receive a (taxable) pension of £30k pa. (depending on the scheme this may or may not include their state pension). Today with the effective closure of final salary schemes, that person would be well advised to save £11,250 pa (25%) out of that £45k salary if they would like to retire with a similar level of income as they would of obtained from the final salary scheme.

    As you point out this is is considerably more than someone just in receipt of the basic state pension and will bar them from receiving many benefits. Which returns us to Eddie’s question: Do we actually believe in getting people financially independent? Or should someone earning £50k+ not bother with a pension and expect the state to look after them?

    As has been discussed previously about pensions tax relief, it is sensible for the state to encourage a reasonable level of pension provision, so that those who do do well are able to continue to be financially independent into their retirement and still make a small contribution to the Treasury. Likewise it is also sensible for the government to put an upper limit on the support it will give; those who do exceptionally well can be expected to make their own arrangements for an exceptionally comfortable retirement.

    So in summary Chris, I’m not saying you are wrong, just that if we want a significant proportion of the population to be financially independent of government we need to make due allowance so that they can become financially independent.

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