We should not oppose some stealth taxes

The autumn statement on 17th November will probably provide reassurance for the markets, but bad news in other respects.  We don’t yet know how the unpleasant ‘medicine’ will be mixed, but it will include higher taxes (including stealth tax rises through long term freezes to personal allowances), cuts to services and to government investment, and real terms cuts to some welfare payments.

Elements of our response to the forthcoming statement are easy.  1 The Tories got us into this mess through the Truss shambles, through Brexit, and through the lack of policies to build a decent economy over many years of poor stewardship.  2 We don’t want cuts to services and to welfare.  3 We should increase levies on companies which have happened to have benefitted from the war in Ukraine.  But when it comes to any tax rises that may be proposed in the statement, we need to think carefully.  We need to balance the short term expediency of pointing out everything the government is doing which could be unpopular, against longer term considerations of how to deliver a better society.

We want better public services, a fairer distribution of resources (in particular providing a higher level of support to those on lowest incomes) and sufficient investment in tackling climate change.  This will require higher taxes than a world (favoured by many Tories) of minimal public services, more concentrated wealth, and low state investment.  If we compare income taxes and social security contributions in the UK to those in European countries which offer the services to which we aspire, these are lower in the UK, not just for the rich, but for people right across the income spectrum.   

We also know that significant components of government expenditure –  health, and, since the invasion of Ukraine, defence – are going to continually require a greater share of resources which means that if even we kept tax levels the same, other parts of public spending which we care about will be squeezed.

To state the obvious, the only tax rises that are popular are those which the large majority of the population is confident will never affect them  personally – and even then it can be touch and go.  While there are some things we can do to tax the extremely wealthy more, the amounts that can be realistically raised are small in relation to the need.  We are unlikely to campaign successfully on a platform of significant tax rises, and the same is true for everyone else – even if they wanted to.  

Given these realities, stealth taxes – in particular the freezing of income tax personal allowances, so that as earnings increase, the government gradually takes a greater share – are one of the few realistic ways of getting sustainably to the kind of society we want.

So we should think carefully whether we want to attack this particular manoeuvre within the forthcoming autumn statement or whether we are better keeping schtum on this, and training our fire elsewhere.

 

* Kevin has been a party member since June 2017, from Kingston

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26 Comments

  • Peter Davies 2nd Nov '22 - 8:09am

    I think the general thrust of this is correct. We should not oppose the principle of raising taxes. We should not be afraid to point out that we would have chosen different taxes to raise and effectively reducing the personal allowance would be one of the last choices. The two higher rate thresholds we should be reasonably happy with.

  • Laurence Cox 2nd Nov '22 - 10:30am

    We need to talk about “fairer taxes” rather than “higher taxes”. So the tax on each extra pound of income should be the same, whether that is earned income, unearned income or capital gains. If we were ready to espouse the Party’s “Citizen’s Pension” policy again (in our 2005 manifesto but dropped for 2010) then we could combine income tax and National Insurance into one tax, but in the interim an “unearned income surcharge” of the kind that this country used to have up to the 1970s would do the job.

    We also need to eliminate some of the tax breaks that only benefit the super-rich, like the additional personal allowances for unearned income and capital gains, the £20k per annum that can be stashed away in a tax-free ISA and the lack of a cap on the total amount you can hold in an ISA (unlike in a pension pot).

    No doubt, all of these would be attractive to other left-of-centre parties, but that should not stop us from loudly advocating them.

  • Tristan Ward 2nd Nov '22 - 10:54am

    A Responsible grown up approach.

  • Steve Trevethan 2nd Nov '22 - 12:38pm

    Every complex society needs taxation.
    All complex societies may stylized into three groups -the government, the very rich and the rest of us. [From Michael Hudson]
    Unless the government and the rest of us work together, the very rich will run the country for their benefit.
    That is what has happened and is increasing.
    That the wealthy gain and the not wealthy lose is known as the “Matthew Effect”.
    Taxation is essential for all complex societies for these reasons and purposes:
    1) Reclaim some of the money H. M. G has spent into society
    2) Validate/ratify the national currency
    3) Organise society
    4) More efficient and effective organisation of society
    5) Redistribution of wealth to make the society more efficient, equitable and effective
    6) Increasing interest and participation in democracy
    [From Richard Murphy]

  • Paul Holmes 2nd Nov '22 - 12:52pm

    Especially agree with what Kevin says in Paras 3 and 4.

    However, it is worth remembering that our three, successively, most successful General Elections in almost 100 years were in 1997, 2001 and 2005. In each of those election campaigns we explicitly argued for higher taxation in order to help pay for better public services. As Charles Kennedy put it in a number of media interviews at the time, “Everyone knows you don’t get owt for nowt.”

    Only after December 2007 did we become a tax cutting Party -while still arguing today for more spending on the NHS, Local Government, Benefits, Refugees, Policing and much else.

    William Wallace wrote one of his excellent articles recently on LD Voice pointing out that we spend less on these areas than equivalent Western European countries. More recently still Mervyn King, former Governor of the Bank of England, pointed out the old truism that “We can’t have Western European standards of public services with US levels of taxation.”

  • Kevin Langford 2nd Nov '22 - 1:04pm

    All your proposals for fairer taxes are sensible reforms in my view, Laurence. You probably know all the following but for it is worth I have set out some more detailed thoughts on your comments below. If I was running the treasury I would be looking seriously at all of them. Looking at it from the point of view of Lib Dem messages I would think:

    1) Among the significant effects of combining NI and income tax, which effectively increases the tax rate on various sources of income not from employment ,are an increase on the tax on those over the state pension age and an increase on the tax on those earning over £50,000 (who currently benefit from the 2% NI rate). This revenue could then either reduce taxes for everyone else, or pay for services. This is probably the right thing to do, but politically very challenging – and I cant see it being worth us taking the big political risk, unless we thought it was something we could really make happen.

    2) Some other changes to capital gains tax are party policy, and featured in our last manifesto. We could possibly take this further. If we were equalising capital gains and income tax rates, we should probably reintroduce inflation into the calculation of capital gains tax liabilities – ie go back to the position before Gordon Brown changed the rules some time ago. But this would be fairer, and raise some revenue. We should also stop resetting capital gains tax liablities to zero when people die.

    3) Let me know if I am wrong, but I would be surprised if the potential savings reforms raise much. They are also probably too niche to become a political issue in the same was as tax on non-doms is.

  • Kevin Langford 2nd Nov '22 - 1:11pm

    Paul Holmes – I think the honest owt for nowt message is right, and should be part of our messaging. I think we have to be realistic though that there are limits as to how much we can explicitly raise down this route. 1% on income tax (about £7bn) seems to work ok – but not sure whether we can push it much more than that.

    Steve Trevethan – a discussion of the strengths and weaknesses of Richard Murphy’s ideas requires a separate blog in itself!

  • Jenny Barnes 2nd Nov '22 - 1:47pm

    “sufficient investment in tackling climate change”

    What does this mean? It’s clearly impossible to move to an economy the size we have and run it completely on renewable energy. The only way to reduce our emissions is to reduce our use of fossil fuels now, rather than continuing to increase them, but maybe not as much because we have some wind turbines. Even at low electricity demand in the UK (small hours of the morning) we’re still running gas fired turbines . And there’s all those cars and flights…
    So – how do we tackle CC?

  • Peter Davies 2nd Nov '22 - 1:50pm

    “If we were equalising capital gains and income tax rates, we should probably reintroduce inflation into the calculation of capital gains tax liabilities”. The same argument would work for introducing it into the taxation of unearned income. It doesn’t matter whether a £100 bond rises to £10 and pays £5 in interest or pays £15 and stays at £100. If inflation is 10% you will be about 4.55% better off either way. This means that nominal parity results in both unearned income and capital gains being effectively taxed at a higher rate than earned income.

    I actually think that is reasonable. If we want to reduce inequality, we need to tax income from accumulated or inherited wealth at a rate that does so. Doing so through inflation has the advantage of raising extra money when the government is in trouble as it is now.

  • Kevin Langford 2nd Nov '22 - 2:56pm

    Peter Davies, I would have agreed with you until inflation took off about 12 months ago, but, do you still think this now that we have again got meaningful and volatile inflation? I get the point that some rebalancing between income and capital gains would be reasonable, and, that for assets held for relatively short periods of time (say less than 10 years) in stable low inflation environment, keeping inflation out of the CGT calculation may do this. But if inflation is high and volatile, or, for assets which are held for a very long time, this does produce odd results, which might have undesirable effects on the economy.

    Jenny Barnes – that question on climate change is for another blog!

  • Peter Davies 2nd Nov '22 - 3:51pm

    Well hopefully we don’t have this level of inflation for long. As long as we do, someone has to take the hit. I’d rather it was those with wealth.

  • Kevin Langford 2nd Nov '22 - 6:17pm

    Fair point Peter. It is another kind of stealth tax, and consistent with the piece I wrote, we should take those where we can get them

  • Steve Trevethan 3rd Nov '22 - 8:24am

    Might our current tax set up be a scam?
    Despite the valiant efforts of Inland Revenue staff, might H M G be deliberately under-collecting taxes?
    Less tax than is appropriate is gathered because the “rich” pay at lower rates than is appropriate, there are not enough tax collectors and tax avoidance mechanisms are facilitated and used.
    The shortfall is compensated for by H M G borrowing from the under tax-paying “rich” who are then paid interest by the rest of us.
    https://www.counterpunch.org/2022/11/02/a-deficit-spending-scam-destroyed-uks-prime-minister-whos-next/

    https://www.counterpunch.org/2022/11/02/a-deficit-spending-scam-destroyed-uks-prime-minister-whos-next/

  • George Thomas 3rd Nov '22 - 8:48am

    The aim of tax should be to see everyone pay their fair share in order to achieve government we need and to curb damaging behaviour, in my opinion.

    “The top 1% of earners in the UK are responsible for the same amount of carbon dioxide emissions in a single year as the bottom 10% over more than two decades, new data has shown.” (Fiona Harvey, Guardian 01/11/22).

    Increase tax on those taking multiple flights per year, increase tax on those in cities buying ‘Chelsea tractors’, increase tax on those starting with vaping instead of using it as a way to stop smoking…use the money to invest in insulating homes, subsidizing healthier food options and improving public transport.

    They’re not stealth taxes but they are the taxes we need.

  • Nonconformistradical 3rd Nov '22 - 9:16am

    “increase tax on those in cities buying ‘Chelsea tractors’”
    If the same people have 2nd homes in the countryside they’ll probably register the vehicle at the 2nd home address.

    Does anyone actually NEED a chelsea ractor?

  • Colin Brown 3rd Nov '22 - 9:54am

    Without going into specific tax proposals, I think we could do much to change the narrative surrounding taxes. Media commentary regularly refers to the “tax burden”. But taxes should not be presented as a burden; rather, they are the subscription we pay for the privilege of living in a civilised society – a society that enables fairness and freedoms in balance.

  • David Garlick 3rd Nov '22 - 10:43am

    At last someone prepared to menton the ‘T’ word.
    I have said afew times that you get what you pay for so this article and Paul Holmes response fit the (tax) bill for me. If we are to be honest we have to make it clear that taxes will need to rise but we need to equally clear what they will pay for. For example I think that the ‘2p on Income Tax’ would be unpopualr but might be acceptable if linked to Social Care and NHS priorities. Most of the elderly (most of the conservative voters) don’t want to pay for their health care or their residential care and the message that this is the alternative might sweeten the pill. If combined with an increase in the tax free allowance it would be most beneficail to the low paid leaving the better off to pay more.

  • Phillip Bennion 3rd Nov '22 - 11:33am

    A refreshingly realistic discussion eschewing any populist temptation. I hope our spokespersons in Parliament take a constructive approach to bringing the budget closer to a balance. Sarah Olney gave us an excellent rundown on our lack of prospects for major spending increases at a recent FPC meeting, so I am optimistic that we will remain sensible. Everyone is taking some pain as a result of Putin’s war, so the inevitable tax rises need to be broad based but progressive. The very poorest in society need protection, but the comfortable majority will need to pay a bit more.

  • Joanna Kenny 3rd Nov '22 - 1:25pm

    Slightly off topic but what about local Council Tax. Back in the dim distant path, I think I remember Lib Dems had a policy of basing local taxation on Income Tax not property values. Has that policy, something that made me join the Libdems, been binned

  • Most economists (but not those involved in money markets) are saying the government should not be cutting spending or increasing taxes. This is because they either believe the UK economy is in recession or is just about to go into recession. The only reason I can see for a tax increase on a minority of working people is to get them to contribute something to the energy price cap freeze which should be re-instated to two years.

    We as a party should oppose the stealth tax that Kevin Langford states is fine – ‘the freezing of income tax personal allowances’ and also freezing the national insurance thresholds as they are the same level as the income tax personal allowance. There are two reasons for doing this (maybe three). Firstly freezing these allowances and thresholds brings the poorest in society back into paying income tax and national insurance, secondly when in government it was our policy to increase the income tax personal allowances to remove the poorest in society from paying taxes and we should be consistent with that policy. And thirdly if you wish there to be a meaningful level of UBI then increasing these allowances and thresholds automatically increase the level that can be financed from them if we abolish them and replace them with a UBI of equal value. Also we would want the UBI once introduced increased in line with inflation and it would be inconsistent to want this while we had supported freezing the allowance and threshold so they didn’t increase by inflation.

  • Equalising rates on income tax and cgt would be bad for the economy and not fair. The clue is in the name. Capital gains tax is not an annual income. Most profits are derived over many years. You’re comparing apples and pears.

  • Peter Davies 3rd Nov '22 - 3:32pm

    Apples and pears are actually quite similar. Most unearned income comes from investment vehicles that wrap around the real assets that produce growth dividends or interest. If you choose one that reinvests the dividends or interest then it will rise in value. You can sell a few units a year to get the same income as you would have got directly and you will have the same value of assets left but you will pay CGT instead of income tax.

  • Peter Davies 3rd Nov '22 - 3:36pm

    “increase tax on those in cities buying ‘Chelsea tractors’”
    In Chelsea, they should have to pay the daily congestion charge even if they live there.

  • Phil Beesley 3rd Nov '22 - 5:21pm

    “increase tax on those in cities buying ‘Chelsea tractors’”

    If people can afford the status car, they’ll pay the status tax. Sales of particular models would fall a little but it would just be a transfer to other high status cars.

    Current levels of taxation or fuel costs do not change behaviour very much of those who have money. How long is it since the Suez crisis or the 1970s petrol shortages? Both events created a demand for small, economical cars which was sort of useful, but the nifty little cars increased the numbers on the road when fuel prices reduced. And, after griping a lot, people just get used to paying more for petrol.

    The most serious problems with Chelsea Tractors are external to the driver. The laws of physics still apply, no matter how clever design engineers might be. Many cars are too wide and too long and too heavy.

  • Laurence Cox 4th Nov '22 - 1:57pm

    @Kevin Langford

    “Fairer taxes, not just higher taxes” is a good campaigning slogan and any one of our campaigning PPCs could use the Harold Wilson metaphor “The pound in your pocket” to say “the pound in your pocket buys the same whether you earned it by working, or as unearned income in rents or share dividends, or as capital gains by selling something you have owned for several years. We believe it should be taxed the same.” That is all you need for a sound-bite. Stop trying to overthink it and just concentrate on what will get through to the average voter.

  • David Evans 4th Nov '22 - 3:02pm

    Laurence, may I take your idea and suggest “Fair Taxes not High Taxes” would be even more to the point.

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