Get your skates on and submit a motion to Liberal Democrat conference about wealth taxes

Nick Clegg’s recent ‘open society’ speech confirmed that increases taxes on wealth in some form is very much on the political agenda. However, the default party policy option – a mansion tax – was highly controversial in the party when it was introduced (which is rather a polite term for the rolling lesson in how to bungle a policy launch, annoy MPs, irritate party members and feed negative stories to the media all in one fell swoop).

In other words – now is a very good time for the party to be debating what form of wealth taxes it favours, especially after the opportunity was missed at the party’s autumn conference. As I wrote at the time in Tax: The missing ingredient from the Liberal Democrat conference agenda,

Conservatives by and large want to cut taxes and Liberal Democrats by and large want to increase taxes on wealth. There is therefore scope for a package which appeals to both wings of the coalition whilst also having whatever net fiscal effect that George Osborne and Danny Alexander agree is necessary.

That is just what happened last summer [2010], when raising capital gains tax – normally an anathema to most Conservatives – was packaged up with increasing the income tax allowance to produce a bundle that everyone was willing to support.

The idea of a similar repeat package is already finding favour in Conservative Party ranks, such as in the recent op-ed for The Guardian penned by ConservativeHome’s Tim Mongtomerie: “We should be increasing taxes on wealth and pollution in order to afford cuts in taxes on families and employers”.

However, amongst Liberal Democrats the question of what wealth taxes to support is deeply controversial. There is no simple consensus in the way there was over capital gains tax.

Matters have not changed since. Nick Clegg said in his ‘open society’ speech:

Eighteen months ago, speaking as a guest of Demos then too, I argued that the liberal approach to tax distinguishes between earned income, and unearned wealth. That’s why we’ve put up capital gains tax while cutting income tax for ordinary working families. And, of course, I’d like to go further in pursuit of this fiscal liberalism. Lower taxes on work and effort, a greater contribution from the wealthy: an open society approach to tax.

The political benefits of wealth taxes

As with many other liberals, Nick Clegg is strongly  motivated by the issue of fair taxation of wealth. In addition, pursuing the issue provides three neat political benefits. First, it offers a clear distinction from at least part of the Conservative Party and one on which, if done right, the Liberal Democrats will be on the popular side of the divide. Second, it raises money and so provides more scope for favoured tax cuts, averted spending cuts or even spending increases.

Third, it side-steps the internal debate in the Liberal Democrats between those who are primarily concerned about social mobility and those who are primarily concerned about social inequality. Although pretty much everyone in the party agrees the two are linked, there is a big difference of emphasis between those who believe that increasing mobility is the priority, and will anyway lead to reduced inequality, and those who want inequality reduction up front. Wealth taxes appeal to all sides in that debate.

What wealth taxes?

But, as I said at the start, what form of wealth taxes?

Property tax? But mansion tax or more bands on council tax in that case? The council tax bands case is particularly popular with many party members in Vince Cable’s own backyard in south west London, but he has not been won over by it.

Inheritance tax? As George Osborne demonstrated in 2007, it’s a remarkably unpopular tax given the number of people it catches. So what about a tax not on the giver but on the recipient, in the form of a lifetime transfers tax? The IFS’s Mirrlees tax review saw a lot of merit in such a tax – but also doubted its practicality.

Or what about returning to capital gains tax, looking to further equalise taxes on income and wealth?

Or taxing pensioners more heavily, at least the very richest? David Laws has clearly been thinking along these lines.

Or what about taxes on land, that long-standing Liberal Party policy? The nineteenth century theories could be given a twenty-first century sheen with a pro-growth and pro-green emphasis, for a land tax which pushes people to get derelict urban sites back into use can be dressed up in the language of either or both. Not to mention the successful example of the tax on increased property values that was used to part-fund the extension to the Jubilee Line in London. Tax wealth, help the environment and improve the public infrastructure. That, at least is the case for. The case against makes mansion taxes seem quite uncontroversial by comparison.

However, whichever options you prefer from the wealth tax menu, there is one simple political timing calculation: the Liberal Democrat spring conference is the time to get it debated and passed. So if wealth taxes are your thing, get motion writing for the deadline is in early January.

* Mark Pack is Party President and Co-leader of the party. He is editor of Liberal Democrat Newswire.

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35 Comments

  • LVT is the only way. It isn’t a wealth tax, of course, and shouldn’t be dsescribed a a wealth tax as it evokes the idea that the rich are being taxed because of envy. LVT is a tax on the free money given to those owning land by the hard work of others.

    Failing that, 100% index linked CGT on all property (back dated four decades). That would sort the UK’s internal imbalances at a stroke and begin the process of making the UK competetive again through equalising opportunity.

  • Well said Mark! This is an issue the public cares about and can help to reduce the gap between rich and poor. After our experience with the AV referendum I am concerned about Nick Clegg’s focus on reforming the House of Lords being a another blind alley!

  • “Or what about returning to capital gains tax” – we still have CGT!! There are sensible ways to reform it, but it is not a wealth tax, but a tax on gains.

    Work I have been doing at CentreForum shows that pensioners typically pay between 50% and 100% less in taxes on incomes than people of working age on the same incomes. It is hard to see the justification for this.

  • Adam Corlett 27th Dec '11 - 12:47pm

    Fully agree, Mark.

    I think we need to be making the case for property and other tax reforms not just in Westminster – we might not achieve anything – but publicly, using our pulpit to make the case against council tax, for example, way ahead of 2015. And one thing missing from your article – and the public debate – is the connection between property taxes and real-estate bubbles / house prices which we’ve learned the hard way can cause immense damage via debt, land speculation and misdirection of investment and spending. I think any motion should mention that, and the trade-off between stable taxes and stable property prices.

    Extra council tax bands would be good but I worry they would actually delay more substantial reform – i.e. completely replacing council tax (which has many other issues) with the Mirrlees suggestion Stephen mentioned, or (maybe longer-term) ‘pure’ LVT. Replacing business rates should be a serious aim for this Parliament.

    On non-wage income, Mirrlees said: “Tax capital income and capital gains above the rate-of-return allowance [another of their proposals] at the same rate schedule as earned income (including employee and employer NICs), with reduced rates for dividends and capital gains on shares to reflect corporation tax already paid”.

    And there’s definitely work to be done on the various pension tax reliefs.

  • Matthew Huntbach 27th Dec '11 - 5:23pm

    The rise in land (and hence property) prices is perhaps the major contributor the mess our country is in. The idea that owning land is a better investment than anything else has diverted funds away from investment in enterprise. People at the bottom of the housing ladder have been forced to borrow far more than is sensible because of fear that if they don’t they will forever be cut off from decent housing, those at the top (it is easy to forget that all money paid for housing comes out somewhere else) have made huge sums of money, almost untaxed, and come to think this can go on forever – but it can’t, it’s almost a pure Ponzi scheme, it must crack and what we have now is it doing just that. Another issue is so many good brains are sucked into the administration of all this, rather than into more productive work – this country is starved of decent scientists and engineers because the “finance” industry takes the best, often to do socially useless things. So here we are, living on credit because of this, those who have done well out of it have done so art the expense of those who cannot afford to pay it back – the real nightmare starts when interest rates go up. And this is not to take into account also the social disaster of housing being distributed in a way that almost guarantees the best of it goes to those in least need.

    The solution has to be to pull back from all this, through forms of land tax and property tax. I agree it’s worth arguing over the detail, but also that it’s going to be VERY hard to sell it, because those who profit from it most have the loudest voices in society, those who would benefit from turning it back tend not even to realise the issue. I get so angry when I see these stupid messages “Stop the cuts” without any thought as to HOW. If those saying “Stop the cuts” were to be as vocal on calling for what is needed to do it – land and property taxes – the political case for it might eventually get through. Suppose that alongside every “Stop the cuts” banner there was a “tax the land” banner. Then we would be getting somewhere, and I might have some respect for all those protestors – I have NO respect for anyone who says “Stop the cuts” but has no answer to the question”OK, so how would you pay for it?”. Vague “tax the rich” without the details is not enough, and without the details it’s easy for those who would be affected by any realistic “wealth” taxation to suppose “rich” doesn’t mean them.

    Well, here we LibDems are, derided by the “left”, yet we are the ones seriously thinking through realistic ways out of the mess this country is in, while they have nothing productive to say. I know I’ve been nasty to Nick Clegg, but if he can take this further I might feel better about him – at least on this issue I can say “I agree with Nick”.

  • Matthew Huntbach 27th Dec '11 - 5:43pm

    A land tax would need to be balanced by a loan or deferment scheme to counter the argument about the little old lady with no income living in a house in a place where land values have shot up since she moved there decades ago. The loan would need to be secured on her property and paid from her estate after her death, the guarantee must be there that no-one gets thrown out of their home through this. But then we get the sentimental argument against inheritance taxes – I have always thought inheritance taxes the most benign, but have always found when I argue the case for them I’m almost alone. I suspect a land tax paid for in many cases from the estate on death would be treated in a similar way. All this is why we need those who aren’t directly seeking votes to prepare the grounds for it – just as the grounds were prepared for the extreme right-wing economics of the Conservative Party by think tanks “thinking the impossible”.

    The sentimental argument is that such a scheme means the little old lady no longer has something to hand over to her children. Well, it seems to me that her children have a vested interest in helping pay the taxes if they need the property. And if they don’t? Well, why is it we seem to think in this country it’s fair for someone to get a property worth hundreds of thousands they don’t need without paying tax on it, but those who do need it but have to get a mortgage to pay for it must pay for it out of taxed income and work long hard and damaging hours to pay for it? Why do we think it best to have a system where families with young children are squeezed into misery because of high house prices, while those who no longer have a need for family housing should get more of it? Are we unable to see the links between this and juvenile delinquency? Are we unable to see the concreting over of our land in a vain attempt to “meet need” will never stop all the while holding into housing you don’t really need pays off better than any other investment?

  • Simon McGrath 27th Dec '11 - 6:02pm

    The trouble is that if we start new taxes at low levels and high thresholds they will inevtitably get the rates put up and the thresholds down. Instead of replacing some taxes with wealth taxes we will simply have added yet further to the tax burden.

  • Richard Swales 27th Dec '11 - 7:28pm

    Totally needs to be done. We say the 40 and 50 percent income tax rates are a tax on the “rich”, but The Sunday Times rich list is based on wealth not income. Rich meaning high-income not high-wealth is a misdefinition which is massively disadvantageous to young people working 5 days a week and still paying off mortgages and raising families compared to old people living in their paid-off houses who don’t need to work full-time but are often richer on the normal definition of “rich”.

  • Malcolm Todd 27th Dec '11 - 7:53pm

    Matthew — you’re not quite alone! I’ve always thought inheritance taxes the fairest of all: taxing people who by definition have no need for the money any more… But given the traction gained by the Express’s ridiculous campaign against “death taxes” a couple of years ago, I have little hope that we’ll ever be in the majority on this one. (Not that that’s a reason not to try.)

  • If you’re going back to land taxes, you have to make sure they are kept proportionate ie commensurate with the existing council tax bands. Otherwise you will just get avoidance, leading to property splitting etc.

    And why not use tax to tackle high pay? A ban on public sector salaries higher than the Prime Minister (almost £150k). And a rebuttable presumption that salary packages including bonuses (whether to employees or consultants) over £150k are NOT wholly, necessarily and exclusively for the purposes of an employer’s business. In other words the excess over £150k is not normally tax-deductible for businesses.

  • Dane, I know you are anti EU, but now is the time to come home to the Liberal Democrats and push for a Universal Inheritance policy – the Morrishite Liberal Party had less than twenty people at its “assembly” it’s going nowhere fast.

  • Matthew, I think you are being inordinately unfair to the thousands opposing cuts. Yes, of course, if you are a professional, or even an amateur poitician, you must have viable alternative ways of dealing with any situation, but tax IS a complex issue, and it is reasonable for ordinary people in society to protest against things that are clearly wrong in their world without having a detailed critique in mind. For me personally I have always believed the UK deficit situation to have been exaggerated for ideologicalreasons, so don’t think the level of economic changes were justified anyway. And I agree with the previous poster that there seems little wrong with emphasising taxing higher incomes. And yes, “unearned” wealth on gains should be taxed at similar rates to income – anything else is unfair and inefficient.

  • “And yes, “unearned” wealth on gains should be taxed at similar rates to income – anything else is unfair and inefficient.”

    And should this apply to primary dwellings?

  • Malcolm Todd 29th Dec '11 - 1:25pm

    “And should this apply to primary dwellings?”

    But of course it should. It’s tempting to think that politically it would never be possible to abolish the exemption on CGT for primary dwellings; but that’s what people used to say in the 1980s about mortgage interest tax relief. It’ll never be popular, I dare say; but it could be done.

  • Andrew Duffield 29th Dec '11 - 3:27pm

    Unearned wealth should, ultimately, be taxed at 100%. Anything less amounts to private theft.
    Earned wealth, conversely. should be 100% free from tax. Anything more is theft by the state.

  • Andrew D – maybe tongue in cheek, but still sounds quite an extreme statement!

  • I would just like to point out as a Londoner that unless they are thought out very carefully there is massive potential for regional unfairness in any such proposals, since in many areas of London a small terraced house can take you well into IHT territory. Any such wealth taxes are likely to impinge massively on the capital, even on those with comparatively modest lifestyles. Given that the cost of living means that many of us already fall into the higher rate tax band even though we are in no way rich in London terms, due to the much higher cost of living, it would compound an existing regional unfairness in the system.

    A second point: presentation and clarity are key. The Evening Standard is even now printing deliberate misinformation about the Mansion Tax, just a week or two ago describing it as a tax on properties over £1m, rather than the real figure of £2m. In London, this equates to a four bedroom terraced house in many areas and would mean electoral suicide in many of our London constituencies. Any tax should be simple, carefully thought out and easy to present without any room for misinformation on the part of our opponents. In the case of AV, failure to follow these rules proved a fatal weakness.

  • “In London, this equates to a four bedroom terraced house in many areas”

    For clarity:

    “In London, £1m equates to a four bedroom terraced house in many areas”

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