On 27th August as a party of the new Liberal Democrat media strategy of Manifesto by a Thousand Statements, in the name of the party it was announced that The Liberal Democrats have set out plans to introduce a trio of wealth taxes which will help to cut the deficit whilst ensuring fairness in our tax system. I fully understand the need to wipe out the deficit, and the need for the wealthiest to bear the greatest burden in achieving that, but let us not confuse that with making our tax system fairer.
National Insurance is a tax on income. It is paid at a rate of 11% on earnings between £7,956 per year and £ 41,865 per year above which it drops to just 2%. Surely integrating NI into Income Tax, thereby raising the basic threshold to the proposed £12,500 and reducing the rate of payment substantially (we are always told that the richest 10% pay the highest burden in tax) would be a way of ensuring fairness in our tax system. This is a measure that would have a direct impact on the daily lives of the majority of our citizens, rather than just playing to the politics of envy.
Fairness could be further enhanced by having a wider set of income tax bands (let us say 0% to 50% with 10% increments) and basing the thresholds for those wider income tax bands on the aggregate national average wage for men and women. By basing the threshold on the average for men and women you instantly make equal pay for equal work personally profitable to the board of directors because an increase in pay for women to equalise it with that for men would be a low cost option for increasing their personal tax thresholds.
Further we could make all income subject to the appropriate rate of income tax, on the transfer of capital we simply deduct the purchase price from the sale price at time of transfer and tax the increase in price at the appropriate tax threshold for the year. Arrangements could of course be made to offset the threshold over 7 years and pay the income tax on transfer of capital over a number of years to give families the opportunity to retain property in the event of death.
As for the policy of limiting the tax relief on pension pots to £1m this is a fiscally illiterate gimmick. Pensions are deferred income and taxed as such making them a very good investment, indeed the only investment we have in the UK that can compete with tax havens. If we limit the pot to £1m then the balance which would generally have been invested in the UK will go instead to tax havens. We will get no tax from the interest it accrues or the annuity it no longer pays out because instead of that money helping to reduce the British fiscal deficit it will be invested offshore.
* Ian Donaldson is a member of ECE and a representative of the Party in England to FCEC.
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29 Comments
I’m angered by this article and Lib Dem Voice because I want to say politely what I really think but I also think LDV might censor it because they don’t agree with it. It needs to be said because you lot are harming society.
I think this is a dishonest article because you conflate the pay gap with “equal pay for equal work” and try to use this as a justification for taxing men more than women for the same pay – positive pay discrimination.
I don’t mind so much if someone believes in taxing men more than women for the same pay if you are going to be honest that it has nothing to do with “equal pay for equal work” and is about “equal pay regardless”.
It is a shame because you made other good points in the article, such as not double taxing pensions (another move that will be harmful to society and is unfair and arguably dishonest too).
I’ll take back the line about “harming society” and amend it to “proposals such as the one below are harming society”.
It’s the dishonesty that is the harmful thing.
What on earth has removing the limit of the tax relief on penison pots of £1 million have to do with fairness ? The average current pension pot in the UK is £30,000 ! And you want to give even bigger tax breaks to the very richest because of some bizarre belief in trickle down economics ?
The threshold for NI is not an annual threshold. It’s calculated weekly, which results in unfairness for people who don’t earn all year round: they miss out on some of their allowance. For example this might apply to seasonal workers, those coming in to work from education or unemployment, and those on zero hours contracts.
And the fairness in this Government removing the Personal Allowance progressively after £100K, making a marginal rate of 60% on incomes of £100k-£115k which then reverts to 40% is…what exactly?
No other comments on the idea of giving men a lower net income for the same gross salary as women? Promoted by saying it will make “equal pay for equal work profitable”, which is clearly nonsensical, because if it is equal work for equal pay then why isn’t it profitable enough already?
Lib Dem credibility hangs on the line when people conflate the pay gap with equal pay for equal work.
On pensions, we do need to be more careful in recognising that they are deferred income and that we shouldn’t tax money both going into pensions and coming out. But there are various other tax breaks for pensions, and this new policy is an easy way to tax the super-wealthy. You raise a good question of where people will put their money once they reach the £1m limit, but I’m not so pessimistic.
I agree that we should tax capital at the same rate as earned income, including all National Insurance. But we also need a rate of return allowance, e.g. 3% per year, that would be untaxed. You need to allow for inflation, at least.
So should we also have lower corporation tax rates for female directors and shareholders? Introducing gender discrimination into the tax system is no minor change and the silence about this proposal is shocking.
“By basing the (income tax band) threshold on the average for men and women you instantly make equal pay for equal work personally profitable to the board of directors because an increase in pay for women to equalise it with that for men would be a low cost option for increasing their personal tax thresholds.”
Pardon?
Eddie Sammon, I suggest you stop worrying about men being taxed more for the same pay because (a) the article didn’t propose that, and (b) what it did propose wouldn’t in fact incentivise any board of directors to increase pay for women.
As something of a Roundhead I think that fundamental weakness of the British population is our propensity to spend rather than save. This is coupled with our willingness to finance current spending through borrowing in the belief that at some time in the future we will change our spots and start saving to pay off our debts. This flaw in our nature exists both at an individual level as well as at a national governmental level. If we are going to introduce higher capital gains taxes then to avoid penalising those who do choose to save rather than spend, we should greatly extend the tax reliefs currently available through ISAs, and in particular the rate at which any capital gains tax is paid should be dependent on the numbers of years over which the gain has been made and allow for inflation (as was once the case before Brown and the Coalition embarked on so-called simplification of the system).
bang up interest rates then…
In fact high interest rates are usually associated with high inflation so the actual value of the savings seldom increases in real terms. I’m afraid that if you want to see a real return on your savings you have to invest in real assets whose value is linked to the economic growth of the country. At an individual level that does mean investing in equities or at least a product which correlates with the value of equities. But of course this is more risky, and if the risk pays off you’re going to be clobbered with CGT, but if it doesn’t you get no tax relief.
Whilst I am unconvinced by the argument that charging higher rates of tax on the rich is actually progressive, we do need to move away from a tax code that offers incentives only really available to the wealthy.
I would rather cut tax rates than grant investment reliefs, for example, raise thresholds rather than exempt savings from taxation. And, whilst Graham makes a good point about the propensity to spend rather than save, I would rather make it harder for people to walk away from their debts thus encouraging them to live within their means, then give relief to savers which offers no real help to those who are currently struggling to make ends meet.
It’s difficult to see how we can make it harder for people to walk away from their debts, other than bringing back debtors prisons! Moreover while I accept that there are many people genuinely struggling to make ends meet, apparently most British people think that they have a basic right to go a way on holiday for at least two weeks each year, sometimes more often, and prioritise such expenditure over paying the mortgage, or their electricity and gas bills. When I was a kid, we regarded a day at Barry Island as treat,!
@ Graham,
Actually, limited companies offer a means for people to run up debts and then walk away from them, and the restrictions on bankrupts have been reduced in recent years. But I wasn’t aware that most people think that a holiday is a basic right – might you be willing to provide such evidence in support of that assertion?
Mark might be onto something. I emailed the business department about leveraged buy-outs last week, about how people shouldn’t be able to buy healthy companies, saddle them with debt, get all the rewards if it goes well and just walk away if it goes bust. However, perhaps the problem is limited liability when it comes to loans full stop. If you take out a loan then perhaps it should always be secured on personal assets.
Regards
Hmm, I suppose creditors should price in the fact that people might just walk away from their debt, but when corporate banks seem to be backed by the central bank then there does seem to be a bit of an anti-responsibility culture going on.
It’s slightly off topic, but I’ve been alarmed by some of the reckless activity I’ve read about and it is connected to savings versus debt.
Thanks for all the feedback, I appreciate that others have already answered some of the points raised in the original article, but I feel that the level of response warrants my responding to all of the points I can.
Firstly I have re-read my original post and I still can not see where the idea of different tax rates for men and women is even hinted at, let alone proposed. It is certainly not what was meant and I will therefore presume it arose from a mis-reading of my original post and not address it further. What I did propose was that we use the measure of the average national earnings or men and women as the base for calculating the tax thresholds, integrate NI into Income Tax and have a broader spectrum of tax rates. The reason I propose that this would encourage raising pay for women doing the same job to equal that of men is that the equalisation of women’s pay would raise the overall average pay more quickly than an across the board increase and therefore if tax thresholds are linked to national income you are raising the tax thresholds across the board (including those for the boards of directors).
The only way to make the tax rate on the rich progressive is to directly link it to the tax rate on the poor, and the only way you can sensibly do that is to link all tax on income to the average wages. By merging NI and Income Tax you immediately put up to £ 600 of NI relief back into the pockets of the lowest paid in the country due to the increase in the payment threshold. Personally I would go a step further and link the National Minimum Wage to the National Average Wage for Men and Women, thereby ensuring that the lowest pay is never less than half of the national average pay. Coincidentally this would put the lowest pay just above the poverty threshold and mean that nobody in work should need state benefits other than related to excessive housing costs, raising children or enablement benefits for people living with disabilities.
The reason I suggest a top rate of Income Tax of 50% is that this is a 3% increase on what is currently being paid (47%) by the highest earners but that 3% goes directly from the wealthiest tax payers to the poorest (by way of the integration of NI and Income Tax). Until the deficit is fully paid down I would suggest that this would be a fair tax rate, particularly as I am also proposing that all income (including income from sale or inheritance of capital assets) should be included in this. I am quite happy to modify my original proposal in this respect to say that the purchase or original inheritance price should be adjusted to take account of inflation over the period of ownership.
Whilst on the subject of inflation I would point out that it is steady economic growth that makes an investment attractive and that as high interest rates are invariably linked to high inflation all they actually serve to do is to mask the real rate of growth. When this coalition government came to office manufacturing was around 8% of GNP whereas four years on it is over 20% of GNP. There is still a long way to go and we need a lot of investment to get there, which brings us to the question of why we need those big pension investments.
Money invested in UK pension funds is generally recycled into investment in UK Business and the interest that it accrues is taxed. Once the pensioner begins to draw the pension we get the tax back against the deferred pay and the full amount of tax we would have received if they had paid up front is recouped after about 15 years of retirement. Of course if the pensioner dies before the 15 years are up the balance of the fund continues to be invested whilst the new contributions may temporarily reduce to redress any actuarial imbalance. The reduction in contributions is of course reflected in an increase in up-front revenue to the exchequer.
My observation re pension pots therefore has nothing to do with trickle down economics and everything to do with steering investment policies that are suited to the needs of the UK economy. If you remove the best incentive to invest in the UK economy then that money will travel abroad. Pensions Funds are one of the largest investors in UK industry and the investments paid into pension funds are about much more than how much the pensioner receives at the end of the day, they are also about keeping investment in the country in the meantime.
Of course the important thing that Governments need to understand is that to most citizens pensions are deferred pay. We don’t take that bit of our pay now; we invest it to help us live comfortably when we retire rather than living hand to mouth on benefits. Encouraging people to invest in pensions not only drives economic investment in our industries; it also helps reduce the social security bill of the nation. When talking of social security we have to be aware that the biggest group of recipients of benefits in this country are pensioners.
The Lib Dems are already committed to ending the link between contributions and pension. From this year all new pensioners receive the same basic pension regardless of contribution and it is our ambition to extend that in time to all pensioners, as the policy becomes affordable. The reality is that all this actually does is reduce red tape as pensioners who receive below that basic level end up having to claim other benefits to make up the gap. By integrating NI into Income Tax we can remove the similar inefficiencies that exist in the significantly smaller amount that is paid in out of work benefits.
The Lib Dem proposal to include financial literacy in the citizenship training that people should get through the education system is also important as it will enable future generations to understand how to control and improve their household finances. The massive shift to personal borrowing has been crippling our nation since the Thatcher Government unleashed it by making lending money easier. However I would contend that the fact that we are rising so slowly out of the flat-lined years demonstrates that a lot of people are rebalancing personal finances and paying off existing debts and credit cards rather than taking on more debts. There is also available to people a national scheme which enables unmanageable debts to be written down/off. The biggest problem here is the loan sharks, and the payday loan companies, and the best way to tackle these is by expanding the role of credit unions.
Finally, turning to the banking system, the simple truth is that if you base your economy on double accounting, betting on futures, hedge-funds and poker games then eventually your economy will collapse. Ours economy is now recovering and we have the luxury of using the coming months to decide how we want that recovered economy to look. Personally I want to see an economy based much more on production and industry so that we can create a stronger economy and a fairer society enabling everyone to get on in life.
Iain
Regarding your proposals for tax and NI I think you’re pretty much spot on, and much better than increasing the personal allowance further (except by infation).
Taking current figures (income tax + NI): someone earning £12,000 has a (high) marginal rate of 32%. Someone on £150,000 has a marginal rate of only 47%. This seems crazy to me.
To reduce the rates for the lower paid inevitably means a higher tax burden on the better off but it need not be much, would be much fairer to everyone than at present, and I think encourage people to feel that they were keeping more of their hard earned income.
I also believe that ALL income, however derived, should be taxed at these new rates. There are currently so many advantages for the well of that should be looked at.
There’s another point that I would like to make here though. Over the past couple of years I have come to the conclusion that it may be better to tax the household rather than individuals, the household being the most important unit when considering disposable income This would, I think, mean going to a US or French annual tax return but I’m told this is a cheaper way of collecting in tax. Benefits are already considered on the basis of households, so why shouldn’t tax be?
3 points:
1) Merging NI and Income tax – good idea.
2) Having a wider set of income tax bands (let us say 0% to 50% with 10% increments) – don’t agree, because it will complicate the tax system and when you do that you lose income. It becomes easier to avoid tax.
3) Limiting pension pot tax relief to £1m – this is a very good and progressive policy IMO. The reality is that some rich people use their pension pots to avoid tax that would otherwise have been paid. As a result most pension tax relief benefit goes to the top few % of earners. And even now, a pension pot doesn’t have to be invested in the UK. A UK-based fund isn’t the same as a UK investment.
Julian Tisi
I don’t understand your second comment. Can I assume that by ‘losing income’ you mean the Government? Why would that be the case? Other countries seem to be able to do it. How does it increase tax avoidance? Surely it’s all down to how the regulations are created – i.e not thousands of pages of tax rules full of exceptions and holes, but that’s another huge subject for debate!
Julian Tisi
You need to provide a rational basis for reducing the Pension Lifetime Allowance. Remember there was a logic behind Labour’s rational for setting it at £1.5m when introduced in 2006. If this cap was linked to inflation, it would be circa £1.95m rather than £1.25m … The effects of the reductions already made (by the Coalition) has been to further erode peoples pensions pots, although it will probably be a decade before we are able to quantify the real damage.
Whilst you may not have sympathy for the people who are impacted by such changes, you should remember these are the people who paid more taxes than they received in benefits and who through their hard work and good fortune are likely to not make too many demands upon the state in their old age.
Additionally, we can look back at previous raids on pensions and question whether the £118bn taken from Pension Funds since Gordon Brown’s raid in 1997, really was worth destroying an industry that employed many people, who typically earned average incomes…
With respect to Iain’s original question, surely the answer is that for a tax system to be fair, everyone has to contribute equally according to their means. The problems arise because the tax system requires a monetary contribution, which as we know presents a problem with those who have little money and hence seemingly places disproportionate demands on one half of the population but not on the other.
I suggest that if we are to waiver the monetary contribution from the poorer members of society and demand a higher monetary contribution from those well off then we need to ask for alternative contributions in lieu. An obvious alternative is some form of formally accounted for community service – something the courts have much experience of.
@Mark
I have to admit that I was over egging the cake a little in claiming that people put spending on holidays higher than paying the mortgage. However, I can cite two reports which make the point that people are quite happy to take on debt in order to finance holidays, and now regard holidays as a necessity rather than a luxury. The first report ( ttp://www.debtlegal.co.uk/news/risk-debt-holiday-overspending/ ) seems to be mainly based on the ONS and an AA Financial Services survey. The second report (http://www.dailymail.co.uk/travel/article-2470078/Britons-view-holidays-essentials-optional-extras.html ) is based on an ABTA survey. While I have a degree of sympathy for people who, for instance, take out HP debt when setting up home for the first time, or need to take on debt to buy a car to get to work, etc., as the first report points out, “the temptation” – I would say willingness – “to spend unnecessarily” leaves “individuals trapped in a cycle of debt dependence”. And this is Britain painted large.
Hi Iain, I’m sorry for over-reacting to your article, but I did read it 5-10 times before I posted and the only conclusion I could come to was that it was hinting at different tax thresholds for men as compared to women.
I still don’t understand how basing thresholds on the average earnings for men and women will encourage more equal pay. Is more equal pay even a good thing? Surely we should only have more equal pay if women produce the same amount in the workplace. We don’t have equal pay for female footballers because not as many people watch them. We need to have a meritocracy and not just equal pay for the sake of it.
The Thatcher government didn’t unleash personal borrowing. Once she brought a credit card offer into the House’s of Parliament to make fun of Labour promoting personal debt. She increased interest rates and was definitely not interested in a debt based society, as today’s economic policies promote.
There is a role for credit unions, but there is also a role for payday loan companies.
Your last paragraph about the economy being based on poker games is nonsense. Speculation makes prices more accurate, picks up failing companies and bursts bubbles before they get too big. It also has negatives, but it’s not simply a giant poker game. People say they care about climate change and at the same time want to dramatically reduce the financial sector and replace it with manufacturing. The idea that we can have an economy based on green manufacturing is a bit utopian.
I think limits are needed on pension funds, but it is not higher rate tax relief that is the problem (as others have said), but the way the lifetime allowance is based on fund size rather than contribution history. However, it would be very complicated to change this because contributions go back decades and you would then have to factor inflation in. Perhaps the cap on the overall fund size, as we have at the moment, is the best way to do it.
To people who say £1,000,000 is a big pension fund – it will only guarantee you an income of around £30,000 per year, so not massively different to public sector and MP’s pensions.
Regards
Sorry, just one amendment: me using the word nonsense was unfair, I know the UK’s finance sector has a lot of problems and these used to be very big indeed. I refused to work for most banks for a period of time because of the way they treated their customers, but I think this is improving.
I wasn’t doing it out of socialist principles, it was because treating customers so bad didn’t make economic sense either. So I know there are problems with the finance sector, but it does good too and as I said: it is improving.
Roland
I hope I don’t understand your post:
……then we need to ask for alternative contributions in lieu….etc…..
Could you please explain further what your proposition is?
John,
Yes I was being rather handwavy and vague! 🙂
Basically I was taking:
1. The idea of national service.
2. The courts approach, where people are effectively fined n hours of community service.
3. What charities etc. do when accounting for volunteer contributions (time and money) when bidding for matched funding.
4. The idea of tax freedom day, where effectively you work for so many days each year just to pay the tax man.
5. What works on the small scale in communities, where people with little money help out and those with money dig a little deeper into their pockets, so that all members of the village can participate in village events.
and trying to arrive at some form of community service formula that encouraged or required the devotion of time in lieu of tax money whilst not preventing people from working to earn money. Ie. someone on a low income and working ‘full-time’ should not be required to work additional hours (as per a court ordered community service) or forfeit paid work hours.
Whilst I would agree that time doesn’t negate the need for tax revenues, the appropriate use of such time could help to reduce the amount of taxes needed. I agree it is, like personal taxation a potential minefield but I was thinking whether we are being a little too narrow in our expectations and demands on our membership of UK society.