Opinion: How about some real fairness in our tax system?

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.

* Chair of Manchester Gorton Liberal Democrats, a member of the NW Regional Executive and the English Council and Vice President of LGBT+ Liberal Democrats

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29 Comments

  • Eddie Sammon 1st Sep '14 - 10:45am

    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).

  • Eddie Sammon 1st Sep '14 - 10:54am

    I’ll take back the line about “harming society” and amend it to “proposals such as the one below are harming society”.

  • Eddie Sammon 1st Sep '14 - 10:55am

    It’s the dishonesty that is the harmful thing.

  • 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?

  • Eddie Sammon 1st Sep '14 - 1:51pm

    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.

  • Adam Corlett 1st Sep '14 - 1:52pm

    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.

  • Eddie Sammon 1st Sep '14 - 4:45pm

    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.

  • David Allen 1st Sep '14 - 6:26pm

    “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.

  • Graham Evans 1st Sep '14 - 8:09pm

    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).

  • Graham Evans 1st Sep '14 - 10:21pm

    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.

  • Mark Valladares Mark Valladares 1st Sep '14 - 10:48pm

    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.

  • Graham Evans 1st Sep '14 - 11:10pm

    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,!

  • Mark Valladares Mark Valladares 1st Sep '14 - 11:31pm

    @ 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?

  • Eddie Sammon 1st Sep '14 - 11:41pm

    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

  • Eddie Sammon 2nd Sep '14 - 12:10am

    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.

  • John Critchley 2nd Sep '14 - 8:10am

    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?

  • Julian Tisi 2nd Sep '14 - 10:57am

    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.

  • John Critchley 2nd Sep '14 - 11:34am

    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.

  • Graham Evans 2nd Sep '14 - 4:58pm

    @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.

  • Eddie Sammon 2nd Sep '14 - 5:15pm

    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

  • Eddie Sammon 2nd Sep '14 - 5:36pm

    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.

  • John Critchley 2nd Sep '14 - 8:32pm

    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.

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