In a series of essays that CentreForum will be releasing over the next few months in anticipation of the book, The Challenges Facing Contemporary Liberalism: 2015 -2025, published today is the paper “Bold liberal tax reforms for a stronger economy and fairer society” by Adam Corlett, which can be read here. It is the third in the series; the first, On Blasphemy by Maajid Nawaz, can be read here, and the second, an essay by Tim Farron, Neil Stockley and Duncan Brack on green growth and climate change, can be read here.
Adam’s paper examines the tax system and identifies six key challenges facing any incoming government post-May 2015: simplifying income taxes; taxing investment intelligently; fixing corporate tax biases; reforming inheritance tax; taxing real estate; and making consumption taxes fair.
As Adam correctly identifies, income tax gets the lion’s share of the political discussion – yet only accounts for 17% of taxes paid by the poorer half of society. He suggests that National Insurance and PAYE be merged into one easy to understand tax on all sources of income. Some of the other big problems and liberal solutions discussed include tackling the tax system’s bias towards debt over equity; replacing business rates with a tax on rental value of the land; and universal tax rebates. Council tax is also targeted as being in dire need of long overdue reform.
Throughout the paper, Adam stresses the need to balance a strong economy with a fairer society, a society in which “wealth, luck and rent-seeking are not favoured over hard work and enterprise.” The need to create a fairer country does not necessitate being anti-enterprise – rather, if things are done correctly, the two aims should merge.
CentreForum will be releasing further papers in anticipation of the book (to be released after the general election), including David Boyle’s “How to save public service choice for liberalism” and my paper on liberal interventionism. Stay tuned.
‘The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.
* Nick Tyrone is a liberal writer. He blogs at nicktyrone.com and is an associate director at CentreForum.
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20 Comments
We need strong action tackling the estimated £120 billion lost to Britain through tax avoidance and evasion: a robust, general anti-avoidance rule which includes serious financial or other penalties for those found to have broken the law. Some suggestions are:-.
•Restoration of corporation tax to between 30 per cent and 40 per cent, linked to restoration of a form of advance corporation tax to reduce the incentive for corporations to pursue tax avoidance strategies and windfall taxes on corporations’ recent super-profits.
•Introduction of new 60 per cent rate of tax for earned income over £60,000 a year, and a 70 per cent rate for unearned income over £60,000 a year – put Rifkind in his place?.
•Reintroduction of a state earnings related pension scheme (SERPS), incorporating all private pensions schemes.
• abolition of all current property taxes and replacement with a land value tax (LVT), with the aim of shifting the burden of taxation away from earned income and reducing the scope for tax evasion. This would return to society the value of land that society itself creates and help tackle the evident social injustice generated by the concentration of land ownership in the hands of a small elite. – a long-held Liberal Party proposal.
•Tackling the growing gap between rich and poor with the introduction of an annual wealth tax of 2 per cent and ending “non-resident” and “non-domiciled” exemption from British income and wealth taxes; and steps to prevent capital flight by implementation of robust exchange controls.
•Reforming current environmental taxation — , with the introduction of standardised carbon tariffs on imports.
•Support for a financial transaction tax (Tobin tax) on trade in currencies to give Britain greater control of its economic policy and introduction of a financial activities tax (a levy on banks’ profits and remuneration packages)..
Pursue bank criminality by ending the pretence that corporations are “legal persons” and going for the guilty (rigging LIBOR, FOREX and money-laundering, tax avoidance etc.) with the full force of criminal law.
That way we might really hope to ‘make a difference’ by challenging public tacit acceptance of Establishment claims, rather than just trying to keep a few MP’s feeding from the Parliamentary trough, which increasingly looks like a failed enterprise as well as a base one.
Excellent article and I would be keen to see a lot of this become party policy. The principles are interesting and it would also be useful to see some modelling of the detail of the practice. My biggest area of concern would be the prebate, firstly based on affordability and secondly because of the impact on incentives to work. As pointed out, the Green party policy has been attacked for this. Andrew Neil gave Natalie Bennett a real battering on their citizen’s income policy.
Question, is it proposed that the prebate would be independent of changes to the benefit system? Not sure it could be implemented in isolation
Isn’t the key overall problem with UK taxation that it doesn’t raise enough money to cover the decent quality public services that people expect? 35- 37% of GDP is not enough to offer the things that the British public expects, e.g. high quality healthcare, pensions, defence, investment in infrastructure and green energy, good schools etc.
People are constantly disappointed by the fact that our services don’t match up to the best in Europe or worldwide, yet they won’t vote for any taxes to pay for them. Hence the ruses like PFI etc. and excess borrowing at the height of the economic cycle indulged in by Labour.
It is not just the way money is raised, but the overall amount that is the problem.
@Michael – leaving aside the fact that no credible source suggest we lose £120bn through avoidance and evasion surely the vast increases in tax you are proposing would increase, not decrease avoidance and evasion?
Closing a present tax evasion loophole especially involving correctly or not perceived British Overseas Territories’ “Tax Havens…” subject to enacting Danny Alexander proposed legislation… in the vein that EU – UK of GB and Northern Ireland Passport holding pedophiles are presently subject to prosecution on setting foot in the UK for their overseas crimes… similarly, all EU – UK of GB and Northern Ireland Passport holding persons providing “tax evasion facilities to British legal entities” need be subject to Her Majesty’s Revenue & Customs’ scrutiny and criminal prosecution in the United Kingdom no matter what jurisdiction the alleged offence is deemed to have occurred…
Errr
“He suggests that National Insurance and PAYE be merged into one easy to understand tax on all sources of income”
Are you sure they don’t say that NI and Income tax be merged? As National Insurance and Income Tax are taxes and PAYE is a method of tax collection.
@Michael Parsons
That is the most left wing tax wish list I have seen for some time! It would take us back to the 1970s..
Michael
How about a translation:
strong action tackling the estimated £[totally made up number]bn lost to Britain through tax avoidance and evasion:
1) Tax increase on capital (known to suffer significant dead weight cost)
2) Increased tax on Income (known to suffer significant dead weight cost)
3) Nationalisation of employees pensions giving a chancellor the opportunity to splurge while expecting private sector and some private sector employees to assue that a future government won’t just screw them…
4) Implement an LVT (a good idea)… to move the burden on away from earned income (at it’s new higher rates?)
5) Wealth tax causing massive capital flight and stopping private investment in the UK. Implementing capital controls after all capital has left and implementing exchange controls forcing the UK out of the EU and making it harder for Businesses to Trade or citizens togo on holiday.
6) Import tarifts, well we have by now left the EU and collapsed the economy so no effect as we won’t be importing anyway,
7) Implementing a FTT, not sure how this applies in a country with FX and capital controls as no one is now doing business in the UK anyway.
8) Pursue criminals for criminal activity, (not bad assuming they are still in the UK to prosecute)
Perhaps I can add one more: the last person to leave Britain turns out the lights?
Phillip Rolle
With the added humour that very little on the list was in any way related to tax avoidnace or evasion.
Tax avoidance isn’t illegal, that would be tax evasion. In fact, the government actively encourages many forms of tax avoidance, from saving for your pension to ISAs. I’m not sure whether it is government policy that people eat sandwiches outside of sandwich shops and not at a table, but anyone who has ever chosen to do so because it is cheaper is engaging in tax avoidance. Tax avoidance is in fact a valuable tool for governments to influence the behaviour of tax payers. In fact the proposals mentioned here include some of the same (e.g higher tax on unearned income than earned, which I’m sure the accountants could exploit quite happily)
Now, where the government *doesn’t” intend to influence behaviour but has accidentally opened a loophole, the loophole should be closed as soon as possible- but we shouldn’t make it a crime to exploit it.
Those who propose a wealth tax seem to think that all wealth is inherited and none is accumulated by simply saving out of taxed income. And yet at an individual level we should be encouraging people to save more. While there is much talk of the benefits of making work pay, both financially and in terms of individual self esteem, there is little talk of the benefits of saving as opposed to consumption. I know that at a macro-economic level life is more complicated, but here I simply want to concentrate on the micro-economic level, the individual. While pension saving and ISAs provide some incentive for saving, in general our general tax and benefits system penalises those on modest incomes who save rather than consume, and now the proponents of a wealth tax want to further discourage thrift. If we really are serious in wanting to provide a level playing field for all at the start of life, it is inherited wealth which should be targeted, but somehow I can’t see that happening.
Adam seems to have reduced his enthusiasm for ending the fair debt interest relief provision that we currently have, but he still wants to cut it. The part in the report is too long to quote, but it is under “Business” on page 2.
I’m also disappointed that Vince Cable wants to tackle this. As I have said several times: interest is an expense, dividends are not, so one should be wholly allowable and the other shouldn’t.
Eddie, repeating it doesn’t advance the argument. Equity and loan are both forms of capital financing, paid for in dividends and interest respectively. Tax dividends but not interest and you encourage loan financing at the expense of equity, and you have more overleveraged and unresilient business, and lower tax revenues, than you would have treating them equally.
Joe, I don’t appreciate being spoken to like that. Debt is riskier than equity so what you want will not create a level playing field, but tip the scales in favour of equity.
I have made a fair point and should not be told not to “repeat the argument” when others are allowed to repeat theirs on the subject.
“Council tax is also targeted as being long overdue for reform”. Well, yes, and part of the evidence of how inadequate David Miliband would have been as Prime Minister was his failure to achieve even modest reform when presented with the Lyons report but no doubt sat on by a defensive Gordon Brown. But the main thing that needs reforming about local government funding is not revaluation, but freeing local authorities to raise far more of their own revenue, as in most other European countries. He who pays the piper calls the tune.
Eddie, why should the tax system compensate for the intrinsically different risk profiles of debt and equity? Anyway, debt is less risky than equity. Shareholders get wiped out before creditors, and rightly so.
Hi Joe, interest received should be taxed the same as dividends received (broadly), but the article talks about equalising interest paid with dividends received and that is where I disagree.
Regards
Philip Thomas – “Tax avoidance isn’t illegal, that would be tax evasion.”
It may not be quite as straight forward as that, Philip. To quote a former member of the General Ant-Abuse Rule Panel, John Barnett (from a letter to the Times),
” The law recognizes four categories. Tax mitigation (or planning) is doing something parliament clearly intended or encouraged (for instance, investing in an Isa). Tax avoidance is something legal but which Parliament did not contemplate. Tax abuse is – according to the General Anti-Abuse Rule (GAAR) [the panel for which the author was a member] – tax avoidance which ‘cannot reasonably be considered to be reasonable’. Tax evasion is criminal.”
It is useful that Parliament defined Tax Abuse.
In the section on property taxation, there is a quite significant point missed.
By applying higher annual charges to property through a reformed council tax and abolition of stamp duty on property transactions, homeowners with surplus bedrooms would be encouraged to downsize but without the current barrier of a huge tax payable on the purchase of a new property.
This will move to free up some of the estimated 25 million unoccupied bedrooms in the country – thereby alleviating the housing shortage and reducing the need for additional housing.
Capital flights, dead weight etc?
(a) Liberalism should no longer use these Gladstonian economic S/D policies to evade the crying need for an active fiscal policy promoting growth and jobs direct;
(b) unless the ‘too big to exist’ banks are broken up into smaller ones there is little chance of democratic control over the privatised power of money-creation and its lobby: Liberals need o face up to the need to prosecute HSBC etc for any plausibly alleged wrong-doing
(c) no-one is facing up to the fact that unless the State controls outward exchange flows all talk of fairer tax is just hot air.
Time to rally to the People’s Cause!