Last week at conference I attended our consultation on tax policy. As the chair progressed through the paper, it was quite interesting to hear all the opinions put forward on it. I was planning to suggest some ideas for the committee to consider but unfortunately the chapters on corporation tax and financial taxes were left out, and I put my hand up too late to be called in the NIC and Income tax section. So instead, I’ve decided to put the ideas up here for debate instead.
Corporation Tax cuts for paying a Living Wage
Using corporation tax cuts to incentivise desirable business practices such as paying a living wage, having a certain amount of shares employee owned, a low ratio between the lowest and highest earner etc…
This might be tricky to apply in a way that doesn’t leave it wide open to abuse, but if we could find a way it could really help improve equality.
Advantages
- Will incentivise companies to adopt these desirable practices and will thereby make them more common.
Disadvantages
- Such tax reliefs usually lead to complicated tax codes.
- Might be difficult to prevent loopholes and abuse, e.g. a company reducing itself to upper management (so all employees above living wage, low ratio, all own stake in company) by outsourcing min wage work to a non-profit making subsidiary.
A tax neutral increase on the threshold for employer NICs
Employers currently pay 13% national insurance contributions on their employees’ wages. Some consider this to be a tax on jobs, disincentivising hiring. Others claim that it reduces the amount that employers can pay their employees, due to having to pay the tax. Currently the threshold is below £10k. What if we were to raise it to between £15k-£20k, paid for by increasing the rate by a few per cent?
Advantages
- Will make it cheaper for companies to hire and give pay rises to lower paid staff.
- This might discourage inequality.
Disadvantages
- If this raises the rate too high, it may encourage employers to relocate their higher paid jobs overseas.
A high flat tax
The flat tax is normally advocated by right wingers would basically see the richest have their tax bill cut at everyone else’s expense. But what if the flat tax was at 40%-45%? That would allow us to scrap employee NICs and raise the tax threshold much higher.
Advantages
- Would be an extremely progressive tax shift, minimising tax for the lowest paid at the expense of the highest paid.
Disadvantages
- This would leave average earners facing a marginal rate of 40-45%. While they’d still mainly benefit due to the raising of the tax threshold, such a sudden high marginal rate might seem discouraging.
No more “global” excuses over the FTT
Our party’s position over the Financial Transaction Tax is largely been “of course we’re in favour of raising money from those big bad banks, but we can’t do it alone, we need international agreement on this.”
As I’ve argued previously, we don’t need international agreement to have a successful transaction tax with stamp duty, so the same principle could be applied for the FTT. That is, if we definitely agree with the FTT. Some of our members have presented a strong case against it, but either way I’d prefer that we stop hiding behind excuses.
Those were the ideas I wanted to put forward last week, but although I didn’t get the chance there’s still time. The working group is still accepting contributions until 31st October. According to the paper you can send them to: [email protected]
Alternatively, if you’re interested in contributing to the consultations on “A Balanced Working Life” or “Transition to a Zero Carbon Economy”, you can find the contact details of page 2 of the documents.
* Daniel Henry is a member in Leicester.
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28 Comments
I’d say the cause against the FTT presented in the blog you linked isn’t a case of excuses – it’s a simple matter of fact. The FTT would make financial markets riskier, more volatile and damage non-financial companies (as well as, I believe, raising the price of financial products such as mortgages and insurance which are traded on the markets as derivatives contracts).
Flat rate tax is by definition not progressive. A progressive income tax is one where the rate of tax you pay gets progressively higher the more you earn. The reason I support progressive income tax is quite simple. It is based on the ability to pay.
Consider someone who earns less than the living wage. Is it really fair to take some of their income away if their earnings are less than the decent minimum? No. But it is fair to expect people to pay tax on anything in excess of this. The Lib Dems are raising the income tax threshold towards this level. Next, consider someone who’s income os more than £43,000 or so per year. They earn more than 90% of the population. They live comfortably compared to their peers. It is fair to ask them to pay a higher rate of tax on everything in excess of an upper threshold. They can afford to do so.
Flat rate income tax takes more money from those who are least able to afford it, even if as you suggest, you don’t cut tax for the highest paid. Progressve taxation of income in excess of the minimum is the only fair way.
Hi Tim
Just to clarify, the “excuse” I criticised was the “we have to wait for the rest of the world” when stamp duty shows that a transaction tax can be done unilaterally.
Note that the text linking to that blog called it a “strong case”, so it wasn’t the blog I’m criticising. 🙂
I just think we should look at and debate it properly and decide whether it’s good (and actually do it) or harmful (so drop it in favour of an alternative)
@ Colin
If we continued to raise the threshold and paid for it by lowering the higher rate threshold, that would be progressive, right? Taking more low earners out of tax and increasing the tax paid by higher rate earners is progressive, isn’t it?
So if we kept doing this until the raising of the no tax threshold and the lowering of the higher rate threshold finally met, we’d no longer have a “lower rate” tax, just a single “higher rate”, or now flat tax, but with the vast majority of low paid workers taken or of tax (and NI) altogether.
Does that make sense?
Absolutely agree about employer NICs. Why are we stating that employers must pay a minimum wage and even campaigning that this isn’t high enough to be a ‘living wage’, whilst also taxing this wage on both the employee and employer side?
There may be a case for going further, but surely an employer NICs threshold equivalent to the minimum wage should be the target for now. This would tie in to our inevitable minimum wage personal allowance policy and mean – if we can tackle employee NICs as well – that we could have a single, sensible threshold for these income taxes.
The priority should be to simplify and clarify the tax system.
It should be possible to define every individual’s tax responsibilities on two sides of A4, a copy of which should be put through everyone’s door each year.
Eventually, this should be condensed to 1 side of A4.
Three watchwords for tax policy: Simple, Clear, Efficient.
Agreed.probook.
Obviously simplicity is a good thing but is it really a matter of either/or?
@Daniel,
The scenario you describe is a large band with no tax and a single upper tax band. This is not a flat rate tax as classically described and is barely a progressive tax, but if you want to make a convincing case for it, go right ahead. I prefer the 3 band system for the reasons I’ve outlined.
On corporation tax, companies would still have to pay that wage, so financially the companies would be no better off unless the tax cut paid for the entire difference between living and minimum wages.
On FTT, people argue that the global agreement is needed because otherwise international companies could quickly move their share registrations to a different jurisdiction without the FTT, so that in particular trade in the City of London suddenly would dry up if it became cheaper to trade in Milan, for example. Is this argument not correct?
Daniel,
some ideas worth looking at there. This is a broad and complex area that needs, in my view, an integrated approach and I would echo Probook’s comments – “Three watchwords for tax policy: Simple, Clear, Efficient.”
I attended an Alter meeting last night where there were presentations by Tony Viclers on Land Value Tax, Citizens dividend by Lembit Opik and full reserve banking by Ben Dyson of positive money.
I was able to put forward a suggested proposal for consideration as Libdem tax and welfare policy as follows:
1. Combining of basic rate income tax and employee national insurance into a flat rate of 32% on all sources of income. (Corporation tax would be applied at same rate and dividend income (including UK dividends to non-residents) would have no tax credit and suffer a 32% witholding tax, but gross dividend payments would be an allowable deduction for corporation tax purposes).
2. Amendment of the targeted personal allowance of £10,000 to a tax credit of £3200 for all over 16 year olds (£1600 for children under 16)
3. Replacement of jobseekers allowamce, income support, child tax credits (i.e. the coming universal credit) as well as child benefit and educational maintenance allowance with the citizems income. negative income tax of £3200 per year. Pensioners would pay the flat rate of 32% but receive the citizens income (CI) on top of the flat rate pension. A pensioner receiving a state pension of £140 per week would have tax deducted of £45 but receive CI of £62. This additional net payment would replace winter fuel payments and other universal pensioner benefits.
4. Replacement of higher rate income tax (paid by 15% of top earners) with land value tax on the top 15% by value of personal land holdings at a rate equivalent to the tax revenues generated from higher rate income tax.
5. Banking reform to include reassertion of state control over the money creation process with a view to clawing back part of the implicit £100 billion taxpayer suibsidsy to the banking and shadow bankng sector. This may well be achieved by the introduction of a financial transaction tax, to replace stamp duty on shares, as currently being proposed by the European commission.
I plan to submit the proposals to the tax policy group for consideration during the course of this month.
Tax systems have been around for a long time and I would think that some principles have emerged from the experiences of implementing them.
Simple is good, but life is complex and varied, and tax systems need to address this
Clear is good too. Meaning easy to understand? If this is different to simple, it presumably means that we need clear definitions and to spend money on presentation?
Efficient is good. Meaning avoidance of internal inconsistencies? Collected easily?
A4 would be good, but many people’s tax today could probably be written on the back of a small envelope. The complexity of HMRC forms is basically to cater for the fact that people with very different tax criteria use the same form. I would say that a tax system might also need to be
Fair – by which I mean progressive, with those who can least afford it are taxed least etc
Generally accepted – otherwise more people will be incentivized to fiddle
Effective – achieving its varied objectives, and with gross receipts hopefully reaching what is expected
Predictable – so that everyone can plan. This also means it needs to change only slowly and with adequate warning
Policeable – so that dodgers can be identified and caught easily and miscarriages of justice are minimized
Competitive – so that jobs, investment etc are not driven abroad
Geographically sensitive – so that local taxes are less in less affluent areas
Consistent with strategic objectives – for the environment, for the structure of companies, etc
EU and Euro-friendly – to ease future changes re the EU and the Euro, and to avoid challenges in European courts
Transparent – don’t some countries now publish everyone’s tax returns online?
we must surely be able to improve on a system that requires over 11,000 pages to explain:
http://www.lexisnexis.co.uk/store/uk/Tolleys-Tax-Guide/product
Joe – that sounds about right but some additional points.
Value added is something we should avoid taxing as far as possible partly because it’s a ‘good’ we need more of and partly because for many sectors of the economy – small builders and the like – it is almost impossible to stay in business and remain honest such are the competitive pressures. That is exactly the wrong way round. I have no doubt that, were this a Conservative priority, they would be banging on about how it’s a ‘jobs tax’ an ‘our future tax’, and so on. Why are we so hopeless at messaging in this way? I confess I don’t know how the income could be replaced (taxing ‘bads’ like pollution perhaps) but we could at least establish a direction of travel
I would like to see capital allowances increased to 100% permanently, particularly for SMEs making the basis of taxation approximate to the operating surplus generated by the business. This would mean that small but ambitious firms would have more retained cash for investment – crucial given the notorious difficulty they have raising funds. It would represent a one-off hit to the Treasury but more than paid back in future years from increased economic activity – surely a better investment of public funds than handing them to bankers to hoard.
I hope the working group will hear from someone making the significant and valid case against land value tax.
@jedibeeftrix. Have you exaggerated on Tolley’s Tax Guide? The website you link to says it has 45 chapters, which would be consistent with 1,100 pages – which is 10 times less than you claim. A lot, yes, but a paperback novel these days typically seems to have 600 pages or so, about the same as the Health and Social Care Bill, and Vince Cable’s PhD thesis. Given the wide range of taxes and taxable entities, and the fact that this book attempts to explain rather than simply list the taxes, 1,100 pages does not seem wholly unreasonable.
Richard, to answer your various points:
1) Although the corp tax cut wouldn’t be enough to replace the increase of wages for a living wage, it would still provide an incentive. It would reward companies that “did the right thing”, making it that little bit easier for them. Hopefully it would be a welcome addition to other rewards to treating workers well, such as a better quality workforce, and would help increase the competitivity of companies that took this route.
2) You’re right that’s the common argument against the FTT, but stamp duty proves that it is wrong. Stamp duty is a transaction tax on sales on British property. Any transaction involving a sale of British property needs to pay the tax to be valid – this is the same whether the person/institution making the sale is British, American, Asian, etc…
In the same way, if the FTT placed on transactions linked to Uk (or EU) assets, then it would be the same rules for banks everywhere, and UK banks would not be put at a disadvantage.
3) And a significant and valid case against the land value tax? Does such a thing exist? :p
I confess I’m still a fan of the Negative Income Tax concept – http://en.wikipedia.org/wiki/Negative_income_tax. Removes all high marginal rates for the low earners while providing a progressive, clear and understandable system that could hopefully be combined with a rationalisation to get the tax code down to a more human size.
And while I’m glad to reduce tax on the low-paid, I wish we hadn’t done so by raising the tax threshold and being so loud about it as LibDem policy. Same problem as why Labour binned the 10p rate – sounds great on paper but primarily benefits people who are over the threshold and can get full value from the cut, rather than the poorest who can only get partial value so ends up as a very, very badly targeted way of giving help to the lowest paid.
Joe, I’ve seen your position before.
Did I see you stand up and make a similar case at the consultation at conference?
If not then it was someone with very similar views to yours. 🙂
I definitely love the idea of a Citizen’s Income/Dividend – the big question is how it is paid for.
Sounds like the biggest loser would be parents, losing the child tax credits with little to replace it.
Btw, £3200 is less than current JSA (closer to £3650), but I guess people will find it easier to top up with part time work…
Would love to see a copy of your submission to the working group.
Yes, a significant and valid case against the land value tax does exist. But re-starting the debate here on LDV is like lighting the blue touch paper! Hopefully the working group will be sensible and won’t recommend LVT. But if they are tempted to do so, they will hopefully want to at least know what the arguments against it are. Otherwise the group might look foolish when the inevitable questioning starts.
On Corporation Tax cuts to incentivise a living wage
Tinkering with the tax system for this sort of Nudge idea is always tempting – but this is how we end up with a tax code that is a zillion pages long! It’s also always subject to unitended consequences and I can see three.
Firstly it will give a CT cut to companies who already employ no-one below the living wage level. I’m assuming there are at least some – eg I wonder how many people big law firms like Clifford Chance employ below that level.
Secondly it will only really incentivise companies with a fairly small number of below living wage employees. Basically if the cost of increasing the salaries of a large number of people is greater than any CT cut then what does the firm have to gain?
Finally there are a lot of companies who don’t reach the threshold for Corporation Tax.
I wonder if linking this to Employers NI might make more sense. There is an obvious direct link and it would apply across the board. Though I’m not totally happy with an idea that makes NI even more complex to administer!
There isn’t a threshold for corporation tax per se. Every company that makes a profit pays something, though smaller companies pay less. A nice feature is that a company that makes a loss one year can carry the loss forward and offset it against profits later, so paying less tax later than it would otherwise do. See http://www.hmrc.gov.uk/ct/index.htm
Daniel,
I did make the case for an integrated approach to tax and benefit reform at the tax consultation in Brighton. The submission to the tax working group is just a one page summary at this stage in line with what I have posted above. If there is positive feedback from the group, I will prepare a more detailed report on the elements of interest.
There is more detailed discussion of the topics in earlier articles on this site as follows:
Tax and benefit reform
Citizens Income
Mansion tax
Land Value tax Richard Dean presents the arguments against LVT in the comments on this exhaustive thread.
It’s also worth pointing out that the corporation tax system already contains an incentive for companies to employ people, in the sense that Daniel Henry uses the word in his point 1).
A small company pays about 20% tax on profits. Suppose profits one year are £20,000. The company would pay £4,000 in tax. But the company could alternatively take on one new staff member, say at a salary of £20,000. If that staff member did nothing at all, profits would recduce to zero, and so the tax bill would reduce to zero.
So in effect.the company gets a £4,000 tax break as a reward for hiring that one new staff member. And anything that the new staff member does to improve things is an added benefit to the company!
Joe – yes I do, though those arguments could likely be presented in a clearer way by someone more knowledgeable than me, and with more extensive evidential support.
I believe that the tax system should be fair and benefit those on low to middle incomes. I am strongly opposed to a flat rate of tax. I might be old fashioned but I still believe that the Tax System should be Progressive, Efficient, Clear and Simple. Thats PECS for short!
The devil they say is in the detail. For that reason I too would like tax to be made simpler as unintended consequences (and loopholes) are the inevitable result of complexity. But we must also remember not to neglect the forest while examining the leaves.
Consider the direction of travel of tax policy since 1979 when the post-war ‘Butskellite’ consensus collapsed and Thatcher was elected. It has been to reduce tax on high earnings and on wealth progressively, mainly on the justification of wider economic benefits but also on grounds of ‘fairness’ (but using a Tory definition of ‘fair’).
Hence top income tax rates, capital gains and inheritance taxes are favourite targets. Coincidentally (or perhaps not!) loopholes, already a feature of a too-complex code, abound and are exploited under the radar of public opinion. Osborne is happy to talk tough on tax but proposes only the limpest possible general anti-avoidance rule. HMRC is apparently recruiting 100 more tax inspectors in a drive on tax dodgers but more than 10 times as many have already been cut since the election. This suggests either incompetence on a scale to match the DfT or an altogether darker strategy.
Longer term, starving the state of funds means big cuts are necessary to ‘save’ us from deficit hell – or so we are told. Ultimately, if we do not assert the right of the state to tax and give HMRC the legislation and staffing to do so then we are pre-conceeding big cuts to welfare and even greater inequality, (Note there is a quite separate argumentabout the efficiency of state spending. We must address that too or we start by shooting ourselves in one foot).
If Tory thinking on tax was right we should by now be in the sunlit uplands. That we are not suggests that their arguments are essentially bogus and derive mainly from the self-interest of their financial backers. An alternative view starts with the idea that wealth beyond a reasonable level (I suggest enough to secure a comfortable retirement) is equivalent to ‘economic rent’ on productive activities. The higher such rent the lower productive activity will be (by standard economic theory). Over three decades of neoliberalism have got us to the point where the productive economy is being crushed by rents – largely, but not entirely, in the form of debt.
This creates a great political divide; Liberals are on one side, Conservatives on the other.
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing” So said Jean Baptiste Colbert (French Minister of Finance under King Louis XIV of France. 1619-1683).
We have had rates of taxation of 98% under Callaghan in the seventies, Land Development tax, capital transfer tax;Nigel Lawson’s laffer curve reforms to being top rates down to 40%,;Gordon Brown’s stealth taxes reducing income tax but increasing national insurance, raids on pension funds, landfill tax, insurance premiun tax, airline passenger duty; and Osborne’s VAT increases, reduction of higher rate tax thresholds and benefit cuts to offeset the benefit of the increase in personal allowance. All the while, tax receipts as a % of GDP barely budge from a limited range of 36% to 38%.
It is high time we restructure our tax collection base with the kind of economic efficiencies Mirrlees spells out in his in-depth review taking precedence over the political machinations of individual chancellors wary of causing too much hissing from their backers.
It is unrealistic to expect cross-party consensus on such an approach. It is howver, only the Libdems that are sufficiently free of the influence of vested interests to bring these much needed reforms about.