A highlight of last week’s Spring Conference for me was Friday’s consultative Q&A session on the next manifesto. Lots of great ideas were suggested, ranging from river based power generators in flood prone areas to encouraging home work to reduce traffic congestion and CO2 emissions.
What stuck with me was David Law’s appeal for ‘manifesto themes’. There were lots of good suggestions but the majority were small scale – great ideas but difficult to tie into a strong simple theme we can get across to voters.
With this in mind I’m proposing a ‘Fair Tax Revolution’ is at the heart of our manifesto. We’ve already started this revolution with the raising of the personal tax allowance. Next parliament we need to complete this revolution by ensuring that any earnings, regardless of their source are taxed in exactly the same way. This would include:
- Earnings from dividends and investments
- Earnings from capital gains through sales of any assets
- ‘Benefits in kind’ from share options to healthcare to gym membership
All earnings and benefits from any source would be pooled together and taxed in exactly the same way as wages are today. It would mean the end to a separate capital gains tax allowance which goes unused every year by many people, staggeringly low tax rates in dividends and would make manipulating company setups to avoid paying income tax in favour of another form of tax pointless. To encourage saving for retirement pension tax relief would remain, to a maximum lifetime amount. In this simpler tax system evasion and avoidance would be much harder and calculating your tax would be straightforward – everything is taxed at the same rate.
The money earned from this change could be used for all sorts of the things (further increasing the tax threshold, scrapping national insurance, paying down the deficit) – but the point of this manifestos commitment is to rebuild the electorate’s shattered confidence in the tax system. There’s a widely held belief that if you’re rich, smart and employ the right accountant you can avoid paying the large majority of your tax altogether. Even though this government has done more to close tax loopholes than either Labour or the Tories in the last 30 years, the message is not getting through. We need a fresh start, a clean slate and a simple message to rebuild people’s belief that everyone is contributing their fair share in society, however they make their money.
* Gareth Wilson is a Videogame Director turned Liberal Democrat activist who blogs here
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12 Comments
I think this could indeed be one of our most important manifesto commitments if we got it right (though not a great vote winner, perhaps). Certainly a lot of tax avoidance and complex attempts to prevent it comes from the fact that we tax different forms of income differently, and it should be a scandal that the highest taxes are reserved for labour income.
But I don’t think the party has got the details right, and your article doesn’t give much detail. There are two main questions:
1) What should the marginal rates be? You say “all earnings and benefits from any source would be pooled together and taxed in exactly the same way as wages are today.” So does that include employee National Insurance? And, perhaps more importantly, does it include employer NI which is just another wage tax? The IFS too are very clear that we need to account for income tax, employee NI and employer NI if we are to remove the open invitations to tax avoidance.
2) Would there be any inflation allowance or similar? It doesn’t seem very fair to me that if you put £100 in the bank then you should be taxed on your interest if you’re not making any real return or even if your savings are going down in real terms. To go further and avoid disincentivising saving at all, we need an allowance equal to the risk-free rate of return – e.g. government bond yields. High marginal rates (ie including all NI) but with a slightly above-inflation rate of return allowance: that would combine our stronger economy goal (not discouraging saving) as well as that of a fairer society (taxing high returns – such as when there’s a lack of competition – at much higher rates than at present).
(You also need to account for corporation tax paid, otherwise investing in British companies is put at a big disadvantage compared to unproductive property, gold etc.)
an excellent idea which needs following through with more detail.. though I had thought that our earlier ‘unified tax and benefit system’ policy was a start in that direction, which IDs has been working on, sort of. To your list of incomes I would add inheritance tax; instead of the exchequer having an opportunist grab at the inheritance before it is distributed(prompting lots of efforts to fiddle around with ‘managing’ assets), easier to scrap inheritance tax and then tax the unearned income of the recipient on the basis of their tax circumstances.
Partial agreement with the article. First of all I agree that all sources of income should be taxed the same, but levelling all tax rates would mean some sources of income are taxed more than others. The IFS agree with me that simplicity should be sacrificed in order to prevent double taxation. If I have made a profit I have to pay corporation tax and then dividend or capital gains tax after it. We can’t tax everything at 50%, because the net effect would be higher.
http://www.ifs.org.uk/budgets/gb2008/08chap10.pdf
Very good post by Adam Corlett. He mentions the corporation tax problem and also the inflation problem, which the IFS also mention in my link. It is the real gains that need to be taxed, not the paper ones. 🙂
The problem is that for taxing all income at the same rate, the tax has to be at the same rate – and not layered. Capital gains have accrued over a period of years, and to tax them all in the year they are realized places a disproportionate burden on that year if the tax is layered and progressive. Another problem is that taxing dividends gives the same money a double haircut.
A way to be certain that all income is taxed at the same rate is to adopt THE FairTax(R), HR.25; S.122. Under THE FairTax(R), consumption is tax at the point in time when it is of utility to the person who realizes its benefits. For more information go to http://www.fairtax.org.
“There’s a widely held belief that if you’re rich, smart and employ the right accountant you can avoid paying the large majority of your tax altogether”
Then why add to the misunderstanding with your article?
Share options, gym membership and healthcare are all taxed though PAYE at the moment.
There is already a lifetime limit on pensions savings (it is being reduced this year)
Capital Gains is not the same as income – taking it as if is will simply a) tax inflation b) encourage people not to cash in their gains.
“Earnings from capital gains through sales of any assets”
Not on main residences. This would be a horribly unfair and unaffordable tax for those of us who are simply moving home in areas like London. Stamp duty is already bad enough and one reason why I’m pretty much glued to the spot where I currently live – the transaction costs are just too high to make it worthwhile.
Thank you for the comments above gents. I’ll do my best to respond to the points above but even with an Economics degree and years of following this sort of stuff I’m no tax expert – and neither are the vast majority of the electorate! That’s what the post is about – there’s a belief out there that the rich and informed can pay much less tax than ‘normal’ people – and in many cases (not all) this belief is correct. I want an end to people deliberately going self employed to then pay themselves in shares and dividends. I want an end to companies and schemes being set up for the sole and only reason to avoid paying tax. How we get to this I’ll leave to the policy experts and the HMRC, its the principle I think the electorate are interested in – Adam is absolutely right that the scandal is we reserve our highest rates of tax for labour income, the one income source where real work is actually done!
@ James – I take the point about capital gains not the same as ‘income’ – but to the vast majority of people it kind of is. Whether you ‘make your money’ from working for someone, working for yourself, buying and selling houses or investing in the stock market, the fair thing to do with the rewards from these activities is to tax them equally.
@Adam – Specifically on NI its a very strange tax in this day and age and really should be merged or scrapped altogether. I know this is a widely held belief in the party. Perhaps this would be part of the long term goal of the Fair Tax initiative
@ Adam / Eddie – On inflation good point absolutely, only genuine gains from assets should be taxed, so some accounting of inflation would ideally take place.
@ James – I understand the point on dividends, but the current system is incredibly complicated and I’m no expert. What I do know is friends of mine take advantage of their company setup to pay themselves in shares and dividends avoiding some of the tax they’d pay if they paid the money as a wage . We need to fix this loophole in whatever way is fair and easy to implement. Specifically on the fairtax.org initiative, I don’t believe dropping all taxes in favour of sales tax is progressive enough (I know they have ideas for prebates to counter some of this). For me richer people should pay more tax as a proportion of their income, not just in absolute terms. Many people of course would disagree with this.
@Peter – Inheritance tax is a really emotive one. I’m not sure on this one as in one way the tax has already been paid by the parents, but in another way its a windfall to the children. To be totally honest I don’t know what to think on that one, which is fairer? It would certainly help with wealth inequality if we taxed inheritance more heavily.
@ RC – My personal preference would be to scrap stamp duty in favour of some form of capital gains tax. In this way we could move the tax from the people that can afford it least (the buyers) to the people who can afford it most (the sellers). I know this will not be popular with those who have become very wealthy by owning a house in London, but equally attracting no tax whatsoever when making a profit of hundreds of thousands on an asset just seems wrong to me.
Finally just on this, the Fair Tax Revolution would be a work in progress completed over many years or even parliaments, consisting of a number of policies implemented in sequence. Its a long term commitment to rebalancing the tax system, in whatever way we can agree with our coalition partners.
“Inheritance tax is a really emotive one.”
If the goal here is fairness, I have a suggestion: inheritance tax at 100%. People talk a lot about “social mobility”, but frankly, so long as you have some people inheriting a lot and others inheriting nothing, it’s all a lot of hot air. Inheritance massively amplifies inequality from generation to generation. I think it’s impossible to reconcile the concept of inheritance with any notion of “equality of opportunity”.
Capital gains tax on profits from the sale of assets is never a simple task as including it as income in the one year of disposal.
That asset, property or shares, for example may been held for a number of years, and those years should be allowed as within those allowances to which the asset is held and to take account of inflation.
If you want to tackle an unfair tax then you must start with the council tax: It is far too high, especially for those on part time work, often earning less than the tax threshold and for the retired who have built up small savings over the years for what they hope will be an improved standard of living in their later life.
Most people I speak to tell me the council tax system is unfair and want to vote for a party committed to change it to a fairer system: such as local income tax preset.
“Most people I speak to tell me the council tax system is unfair and want to vote for a party committed to change it to a fairer system: such as local income tax preset.”
The problem I’ve always had with local income tax is that there are a great many people (e.g. tradesmen) who find it very easy to evade paying income tax, and a local income tax would give those people even more of a free ride. Not to mention those with a lot of wealth but not much income.
Why do we consider it fair that there is an anomalous 60% marginal tax rate between 100K and 110K (arising from the abolition of the Personal Allowance) which then reverts to 45p above that level?