Opinion: The first of the big four commitments for the front page of the manifesto

Lib Dem manifesto WordleTime and again we have been asked what four key commitments we should make in our manifesto for the next General Election.

I am of the opinion that, whilst until recently the idea that Liberal Democrats could go into a General Election campaign with the simplification of the tax regime as a cornerstone of our manifesto would have been laughable, as we near the end of our first term of Government in over 70 years that should be where we find ourselves and what’s more it should be a key commitment in our manifesto.

If we place the following five principles at the heart of our Taxation policy then it will be easy to explain, create a very simple regime, and be fair in its application.

It should not matter whether our income is from earnings, investments, intellectual rights, sale of property or anything else, the rate at which we pay tax on it should be the same and proportionate to our overall annual income.  What’s more, it should be possible to spread the payment of the tax on income from the sale of capital assets over five years, just as we can offset the tax on other income over 5 years.

National Insurance is a tax on income and at the moment the less you earn the higher a proportion of your overall income you pay.  It is high time to integrate NI with Income Tax, to pay it on all income rather than just earned income, and to apportion its payment fairly across all income bands.

Other than in exceptional circumstances of national emergency such as war, famine, flood or recession, the Government should not take from any citizen more of their earnings than they are left to spend themselves.   The top rate of tax on income should therefore never exceed 50%.

If we are to ensure that income tax is progressive then we must ensure that the thresholds for paying higher rates of tax are more evenly spaced and directly proportionate to the overall pro-rate income of men and women.

Whilst overseas investments should not be discouraged, the returns on those investments should be taxed at no less a rate than were that return being earned within the UK.  Furthermore money being moved offshore either as an investment or a saving or to avoid taxation on the investments it yields should be taxed at the top-rate of income tax prior to its movement.  In this way we would ensure that no money is being moved overseas in an attempt to avoid paying UK taxes.

The Liberal Democrats have already established the principle that the low paid should pay the least income tax, but now we must go much further and make the income tax policy of the United Kingdom fair for all our people, regardless of whether they are at the bottom or top of the income scale.

* 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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27 Comments

  • Matt (Bristol) 8th Apr '14 - 12:58pm

    “If we are to ensure that income tax is progressive then we must ensure that the thresholds for paying higher rates of tax are more evenly spaced and directly proportionate to the overall pro-rate income of men and women.”

    To raise a point of clarification – are you therefore implying differentiated tax rates for men and women?

  • “Other than in exceptional circumstances of national emergency such as war, famine, flood or recession …”

    Is the cunning insertion of flood in that list of conditions an example of Cleggesque “small print”, I wonder. You only need to couple flood with drought and you’ve got most years covered …

  • Eddie Sammon 8th Apr '14 - 1:15pm

    The principles are right – the specifics could be different. First of all if we tax all income at the same rate then company directors will pay well over 50% tax, because before the money gets into their personal bank account they have to pay corporation tax and then dividend or capital gains tax. VAT also costs company directors too, and employers National Insurance, which really should be abolished (the jobs tax).

    I don’t understand this sentence: “What’s more, it should be possible to spread the payment of the tax on income from the sale of capital assets over five years, just as we can offset the tax on other income over 5 years.” – if you could explain this better than would be great – perhaps a knowledge gap on my part.

    Yes NI and Income tax should be merged.

    I don’t know if the top-rate of tax should go above 50% even in war-time – it could reduce the overall tax take. If everyone actually paid 50% tax we would largely be fine. A lot of the so called tax avoidance by the super rich is actually just tax deferred, but this can be awful if they then move to another country. We need to stop tax deferring, largely by ramping up corporation tax and abolishing dividend and capital gains tax on company shares (just an idea).

    When it comes to overseas investments – these are pretty much taxed the same as UK investments anyway because tax is based on residence of the investor, not the investment. One thing I disagree with is any ideas for a “withholding tax”, which is a guilty unless proven innocent approach to tax avoidance, is expensive to administer and other countries could just launching taxes at UK investments in return. Your idea of taxing money at the top rate of tax before it is moved abroad sounds like a similar “guilty until proven innocent” plan and could also hit people sending money to poor countries.

    However, most importantly, I think the principles behind this article are right and right for the Lib Dems. It sounds pragmatic and fair.

  • “Time and again we have been asked what four key commitments we should make in our manifesto for the next General Election.”

    If we can’t trust Lib Dem leaders to honour “personal pledges” made in front of the camera’s and viewed by millions, why would anyone believe a manifesto commitment. You would be much more honest to say we will try and be nice, but really we will do anything to be in government.

  • Couldn’t agree more on this Iain and wrote something similar on LDV a couple of weeks back.

    https://www.libdemvoice.org/opinion-a-fair-tax-revolution-our-most-important-manifesto-commitment-38659.html

    We need a revolution in taxation, where all allowances are combined together and anything you earned is taxed in exactly the same way, whether it’s earnings from investments, gains from sales of assets, working for yourself, or working for someone else.

    The fact we reserve our highest rates of tax for labour, the thing that actually contributes something to society is crackers.

  • malc, if we’re going to be fair about it, what happened was that the personal pledges got thrown under the bus to deliver as many of the four front-page commitments as possible (we got two and a half of them).

    Was it a mistake? Yes. But would it have been better to fail on every front page commitment and sustain a government to which our sole single contribution was that one issue? I don’t think so. And does it mean we shouldn’t publish a manifesto this time? No.

  • “malc, if we’re going to be fair about it, what happened was that the personal pledges got thrown under the bus to deliver as many of the four front-page commitments as possible (we got two and a half of them).”

    Or was it to deliver that referendum on electoral reform?

  • TJ:
    Perhaps you got 2 1/2 Lib Dem commitments through, but to achieve that you also allowed an awful lot of Tory policies through. On balance I would say it wasn’t worth it.

  • Eddie Sammon 8th Apr '14 - 1:50pm

    Gareth, I’ve already explained to you that labour isn’t really taxed the highest. It is not through spite that capital gains and dividends are taxed lower, it is because they are paid after corporation tax, so there is hardly a difference between the marginal tax rates of labour and capital. Regards.

  • Malc, so which alternative scenario was there that didn’t involve a lot of Tory (or Labour) policies getting through?

  • Eddie Sammon 8th Apr '14 - 2:14pm

    There is also no personal allowance when it comes to corporation tax. The idea that the tax system is full of holes and low rates for the rich is a Guardian myth. What there is is a lot of is tax deferring, but most of the time this is ultimately paid, which is what the left wing media outlets don’t tell you. Granted, the right wing media outlets will play down the effects of the welfare cuts, so that’s why you’ve got to read both, or find some good neutral sources.

  • @Joe Otten
    The alternative was a minority Conservative government

  • Iain,

    very well said. We need to be careful to avoid double taxation and unintended restrictions on the movement of capital – but broadly in agreement with the thrust of your argument.

  • Malcolm Todd 8th Apr '14 - 4:10pm

    Voter
    “@Joe Otten
    The alternative was a minority Conservative government”

    Joe actually asked, “which alternative scenario was there that didn’t involve a lot of Tory (or Labour) policies getting through?” (emphasis added)
    So I don’t think your proferred alternative really meets the bill.

    You could say that you then would favour voting against anything the Conservative government came up with that you didn’t like, i.e. do no deals at all. But frankly, that’s really just a way of saying that you’d have rejected inter-party cooperation and forced an early general election. Please note, that this isn’t a version of the “and then we would have had a Tory majority government” argument. But since you evidently recognise that a government that didn’t include the Tories was effectively impossible after the last election (and arguably it would have been the most anti-democratic outcome), then to refuse to either join or cooperate with the Tories in government is tantamount to rejecting the result of the last election and demanding a fresh one.

  • Malcolm Todd 8th Apr '14 - 4:12pm

    Eddie Sammon
    Could you explain what you mean by “tax deferring” and how it differs from tax avoidance? (No snark involved — I really don’t know much about high-end taxation and I’d be interested in a For Dummies version.)

  • @Malcolm Todd
    Your argument seems to be that the Conservatives will not play ball, so you have to adopt bad tory policies. A minority government that takes each issue on its merits is still a possibility to my mind. If the Conservatives refused to act sensibly and forced another election, it would be up to the voters to punish them for that.

  • Eddie Sammon 8th Apr '14 - 6:24pm

    Lol, yes, no problem Malcolm. I’m rusty on tax advice, but to give an example of what I call “tax deferring”, which the media call “tax avoidance” is when a company director reinvests company profits or builds up cash reserves for business purposes, rather than paying a dividend.

    If the person did the same activity self-employed they would have to pay up to 45% income tax up front (plus 2% NI), but doing it with a limited company they can pay 20% corporation tax in year one and defer the additional 24.48% dividend tax another year (a total of 44.48% – similar to Income Tax). The problem is the media will often just use the 20% figure. It is partly accurate, but more taxes will be payable in the future.

    Although in isolation ramping up corporation tax and abolishing dividends and capital gains tax sounds good, in practice it would frighten overseas investors, because dividend and capital taxes wouldn’t also be abolished in their countries. I suppose this is why we have to be tax competitive and work with other countries. It was only an idea. We could argue internationally for such a structure.

  • @ Eddie Sammon

    I know we’ve discussed this a few times, but I’m still confused. For example, if I as an individual sell an asset like a second home I pay 18-28% capital gains depending on the size of the gain, minus my personal capital gains allowance. I don’t pay corporation tax as I’m not a company.

    How is this equivalent to the 20%-45% income tax rate on labour?

  • Eddie Sammon 8th Apr '14 - 6:54pm

    Hi Gareth, my problem is only with company shares and investment funds, not assets such as second homes. With company shares and investment funds the returns are taxed at corporation tax or income tax at 20% and then dividends or capital gains tax on top, depending whether the company pays a dividend.

    Last time I checked the IFS agreed with levelling Capital Gains Tax with Income Tax, but not for company shares or investment funds. They also qualify their recommendation by also recommending an inflation allowance, because at the moment the lower CGT rate on assets such as second homes and shares is justified by their being no allowance for inflation.

  • Andrew Suffield 8th Apr '14 - 7:21pm

    Has this proposal been costed? I’ve never seen somebody analyse whether we can really fix all the “low income” taxes without pushing tax levels over 50%. It’s complicated enough that I’m not really sure whether this is a thing that can be done or not.

  • Adam Corlett 8th Apr '14 - 9:27pm

    I think the idea that “the top rate of tax on income should therefore never exceed 50%” is fairly mad. For one, why is it the marginal rate that matters rather than whether or not the state takes half of your total income? And does the amount the state gives back to top earners in eg universal benefits or essential services irrelevant? And such a rule – which we arguably have in practice – just means that tax is collected in less transparent and often less progressive ways, by putting up payroll taxes, or special graduate taxes, or VAT etc.

    @Eddie (& Gareth): “Gareth, I’ve already explained to you that labour isn’t really taxed the highest. It is not through spite that capital gains and dividends are taxed lower, it is because they are paid after corporation tax, so there is hardly a difference between the marginal tax rates of labour and capital.” Are you ignoring National Insurance (including employer NI)? Wages are taxed at considerably higher rates than dividends, capital gains, rental income or self-employment.

  • Eddie Sammon 8th Apr '14 - 9:58pm

    Adam, I am including employees NI tax as a labour tax, but I am including employers’ NI as a capital tax (although it hits a bit of both, like many taxes). I am including employers’ NI as a capital tax because it is a cost of investing into staff.

    As I have said, once you add corporation tax and dividend tax you get to nearly 45% anyway, plus there is employers NI, so overall I disagree that there is a considerable difference. This is mainly semantics though, it just depends whether you think employers NI is a labour or a capital tax and there are arguments for both.

    There are also public services funded by regulatory fees, green taxes and industry levies, which act like capital taxes too. We can tweak here and there, but I would not be in favour of a big increase on capital taxation.

    Regards

  • Peter Davies 8th Apr '14 - 10:08pm

    The highest marginal rates are still in the areas where taxes and benefit withdrawal interact. Universal Credit, NI and tax can easily overlap giving rates over 80%. the rates that UC is replacing are worse. NI and withdrawal of council tax relief and Universal Credit is worse but rare. Child benefit withdrawal combined with 40% income tax and 2% NI and the 60% rate between 100 and 120 k are bad too but less damaging because most people paying them expect to get though the band in the near future. It’s weird how important the ‘top’ rate of 45% is to both left and right.

  • Little Jackie Paper 8th Apr '14 - 10:20pm

    Adam Corlett – I agree that the net effect of what we have is that taxes have ended up being taken in various other ways. But doesn’t this point to a wider question of inequality and top pay for a few vanishing into the distance? Whether one thinks this is a good thing or not is another question. I simply say that inequality is a factor in tax policy, and it permeates society in other ways too, most notably the sweet deal large parts of the boomer generation got on housing.

  • As an economist and party member, I like what you say including to abolishing NI (an employment tax). Part of the concomitant simplification – with fairness – must be a more differentiated range of tax rates. Right now we lurch from 0%, to 20%, 40% before crashing to 45%. We should probably start at 10% (a solidarity rate for the lower income (but inly after the minimum wage threshold), raise the threshold for 40% significantly (which is a confiscatory rate). Right now the neglected middle income are taxed at rates close to those of the the super-rich, but most lack the clever tax games to avoid paying tax in the way that the super-rich do. However any tax policy must look carefully at the marginal tax rate … this is the rate that affects behaviour.

  • Tony Rowan-Wicks 9th Apr '14 - 4:30pm

    Guys, to me this looks like a back-room discussion by people who will work out what be believe and how to put it into practice. What we need next is a simple voting sound-bite – such as Labour does- like – the rich must pay higher taxes than the poor. Keep it simple, as that is what people vote about. Let us know when you have made the important decision for the Manifesto [that is the thread isn’t it?]

  • Chris Holman 10th Apr '14 - 12:43pm

    I totally disagree with merging NI into Income tax. Currently employees have to pay NI no matter how clever their accountants are at maximising their Tax Avoidance. I the two were merged there would effectively be Tax Relief on the NI payments as well as the Income Tax element.. A better rationalisation of the Tax system would be to scrap the weird system of calculation NI payments for earnings above a certain level & extend the 10% rate of NI to all income above the threshold.

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