The Tories’ tax problem

Cut national insurance contributions, says Liam Fox. Cut capital gains tax, says David Davis. Give tax breaks to married couples, say Stewart Jackson and others. Back wealth taxes to cut taxes on “families and employers”, says Tim Montgomerie.

There’s no shortage of Tories suggesting taxes for George Osborne to cut when he delivers his budget. Yet it’s the junior party in the coalition which is leading the debate on tax cuts – a curious situation which no doubt shocks Tories as much as it infuriates them.

The reasons the Lib Dems are leading the way on tax cuts are straightforward. First, the policy of raising the income tax personal allowance not only made it into the coalition agreement but was included as the main tax priority; inheritance tax cuts were nowhere to be seen while marriage tax breaks have to wait until after the tax threshold reaches £10,000 (and even then Lib Dems don’t have to vote in favour).

Secondly, raising the personal allowance is a policy that unites Lib Dems – socially just, politically popular and ideologically justified.

Thirdly, the Lib Dems are coming up with ways to fund the policy – ending pension reliefs for high earners, a mansion tax, extra taxes on non-doms.

All of which means Lib Dems  – both Parliamentarians and members – were ready and willing to back the leadership when they decided to push for the policy to be implemented more quickly.

Meanwhile, the Tories are all over the place on tax. Each time some less-than-ideal piece of economic data is released we get the odd Tory MP breaking ranks to say that we need to scrap the 50p tax rate immediately. Yet more sensible Tories realise that – however desirable it might be in the long term – scrapping the higher rate will do very little for economic growth in the short term.

So we hear calls from other Tories for various taxes on business and employment to be cut. Much more sensible suggestions if the objective is to help the economy, but how often are such proposals backed up by suggestions on how to fund them? In fairness to Liam Fox (above), he did suggest how to fund his ideas: even harsher cuts in public spending. Yet while this suggestion might please right-wing Tories, it’s not something that even Liam Fox can think is a realistic proposition.

Meanwhile it’s left to Tim Montgomerie to make the argument for greater taxes on wealth to fund cuts in taxes on income, but the response from Tory MPs – with their wealthy constituents – is resounding silence.

All of which leaves Tory MPs divided from the leadership, Tory MPs divided from other Tory MPs and Tory MPs divided from Tory activists.

Lack of a common cause on the issue of tax cuts is leaving the Tories wide open to being outfoxed on the issue primarily by their Lib Dem coalition partners but also by the likes of Ed Balls – however unrealistic his suggestions are on the subject. A rather curious position, but one which is going to cause few Lib Dems to lose any sleep.

* Nick Thornsby is a day editor at Lib Dem Voice.

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  • Daniel Henry 23rd Feb '12 - 3:40pm

    Yup. Pretty much sums the situation up. Our parliamentarians deserve full marks as to how they’ve handled this issue.

    We just need to see the same level of performance on other issues too.

  • I fully support moves towards raising the tax threshold as a key plank to recovery. It was deeply unpopular with the Torygraph yesterday which is normally poiting in the opposite direction to my moral compass…

    I would though like to make a case for tinkering with NI. As a Director of an SME recruitment costs are often the killer when considering taking on a new member of staff. Typically these are 15% – 25% on top of the first year employment costs. Any business in the current economic situation needs to be lean manned, often the difference between employing someone is not operational need but financial.

    Giving new posts a 1 year employers contribution holiday would allow the recruitment costs to be spread over 1 year. In schoolboy maths the government lose 12% (ish) but the new employee will still have their own NI and PAYE deducted, potentially no longer need benefits and will be spending int he economy at large.

    I know a similar approach was trialed with small business / new startups, but it’s not just new startups that create new jobs. The crux would be ensuring this is limited to 1 year for new posts, simplistically a company needs to increase it’s FTE headcount.

    Anything that actually creates new employment, rather than the Tory approach of reducing taxes on higher earners works for me.

  • I do find this sudden emphasis on tax cuts quite astonishing, considering everything we’ve been told about the necessity of swingeing spending cuts because “there is no money.”

    Three or four years ago there was a lot of debate within the party on which should have a higher priority – tax cuts or additional spending on Lib Dem priorities. Now the only priority seems to be tax cuts, despite the fact that spending has been cut so much.

  • Richard Dean 23rd Feb '12 - 6:17pm

    My first impression is that none of the three reasons given is a good reason for cutting tax.

    A very major problem now is unemployment, particulatly youth unemploymet. Using Steve’s schoo maths, I cakculate that a tax reduction of 700 pounds a year for 30 mlllion taxpayers would cost 21 billion annually, an amount which could alternatively provide the investment needed to get 2.1 million people back into work, particularly if the consequent reductions in welfare are factored in.

    Some possible justifications for the tax cut that I can see would be:

    1. that people are starving or otherwise desperate – essentially what Nick said in the broadcast, or
    2. that people will spend the 21 billion, so kickstarting the economy in a way that encourages investment that is greater than 21 billion. Is this realistic, if people are so much in debt that any extra income just goes into paying back the debt?

  • jenny barnes 23rd Feb '12 - 6:37pm

    jedibeeftrix ” many consider it to be a damned illiberal imposition on any private citizen to tax at a level of 50p of earnings.”
    no, you mean pay. Very few people truly EARN over say 100k; many get paid more than that. A very progressive tax system could reasonably go up to 90% on the basis that what people are paid wildly exceeds what they earn. Economists call it “rent”

  • I want the 10K but an NI reduction too at some point. As one of Labour’s stealth taxes increases at a time when employment was relatively full, that’s no longer the case. Its also capped so we’re not tax cutting the ultra rich, and it makes our exports a bit cheaper. If dropping the rate is unaffordable I’d support the idea of under 21s being exempt from NI. That gives them a small advantage in the workplace at a time in their working life when they are relatively inexperienced, but also reflects the fact that they are taking less out in terms of healthcare.

  • Daniel Henry 24th Feb '12 - 4:35pm

    I thought her 90% idea was a bit excessive but I thought Jenny’s distinction between “earned” and “paid” is an important one.

    I see the 50p rate as an imperfect method to balance unfair renumeration. Those earning over £150k aren’t exactly suffering here.

  • Quite a lot of spin here. The conservatives don’t have consensus about which taxes to cut because there’s no ideological opposition to any tax cut, where as many Lib Dems do have ideological opposition to various tax cuts. That focuses Lib Dem policy on tax cuts, where as the Conservatives are left essentially debating which tax cuts should come first. Of course it doesn’t help that Osborne is the man who should be leading the conservatives on this issue, but is unable to because he’s actually trying to balance the budget.

    Liam Fox is right on National Insurance, it would make Britain more attractive to foreign companies and make hiring people cheaper for companies already here. Other tax cuts seems to be about “stimulating demand” which is a very Labourish way of thinking. At one point everyone talked about rebalancing our economy, but that’s been silently dropped as recession has loomed again and people are tempted by Keynesian stimulus, and its “hair of the dog” cure.

  • Richard Swales 25th Feb '12 - 3:25pm

    I agree that raising the threshold to 10K is more important to than the marriage tax breaks, but when that vote does come around, Lib Dems should vote in favour. Here’s why:
    Married Couple A both earning 20K (total 40K) pay a certain amount in tax.
    Unmarried Man and Woman B, both earning 20K (total 40K) pay the same amount as couple A.
    Married Couple C, one at home, one earning 40K (total 40K) pay more tax than couple A, as there is some higher rate taxand the woman’s tax allowance is wasted.
    Unmarried Man and Woman D, one at home, one earning 40K (total 40K) pay the same tax as couple C (som more than couple A), but the partner at home is elligible for various benefits that the “housewife” in Couple C can’t get.

    My view is that in an ideal world, all 4 of the couples should end up with the same take home pay.

    My understanding is that the aim of the “married tax allowance” that is actually proposed is not a freebee for all married couples (so couples A and B will still be equally positioned), but simply to allow people like couple C to share their tax allowances and thereby pay the same tax rate as couples A and B.

  • Nick Craven-Smith 28th Feb '12 - 3:09pm

    I could not agree more with the comment from Richard Swales, transferable tax allowances are very important. I say transferable and not married couple as that is the crux of the issue. A lot of Lib Dems are anti married couple tax break when put like that but I wonder what the answer would be if the question was phrased the other way and asked are they for increasing taxes on families with a stay at home partners. going into 2012 a couple earning 21,500 each and 3 children will get £5000 net household income than a single income family earning £43,000 after the child benefit cut and the lost tax allowance. The system needs to be fair and equivalent for all family types, not geared to penalise single earner married couples, and the argument should not be portrayed as giving a benefit to married couple over others which it quite clearly is not. The proposed increase to £10000 threshold and more will further marginalise the single earner family.

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