The Liberal Democrat challenges for 2012: Wealth taxation

To mark the start of 2012, we’re running a series of posts over consecutive days on the main challenges for the Liberal Democrats in 2012. I’ve already written about the four priorities for the party’s new Chief Executive, Tim Gordon, but as the Liberal Democrats are more than just the one man whilst he has four, this series sets out six for the party.

To re-cap:

As with many other liberals, Nick Clegg is strongly  motivated by the issue of fair taxation of wealth. In addition, pursuing the issue provides three neat political benefits. First, it offers a clear distinction from at least part of the Conservative Party and one on which, if done right, the Liberal Democrats will be on the popular side of the divide. Second, it raises money and so provides more scope for favoured tax cuts, averted spending cuts or even spending increases.

Third, it side-steps the internal debate in the Liberal Democrats between those who are primarily concerned about social mobility and those who are primarily concerned about social inequality. Although pretty much everyone in the party agrees the two are linked, there is a big difference of emphasis between those who believe that increasing mobility is the priority, and will anyway lead to reduced inequality, and those who want inequality reduction up front. Wealth taxes appeal to all sides in that debate.

Moreover, the country’s tight financial situation may even be a help, for it places an extra premium on finding a source of extra revenue in order to pay for your own preferred piece of extra spending or tax cutting. That makes increased wealth taxation more attractive than in times when there has not been the same overall financial pressure.

There are, however, two problems to be overcome: what sort of wealth taxation (an issue on which there is not a clear consensus within the party) and can enough Conservatives be persuaded to support it in order to make it a reality?

You can read the full set of challenges as they are published on Lib Dem Voice here.

* Mark Pack is a member of the Federal Board and editor of Liberal Democrat Newswire.

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9 Comments

  • Jonathan Price 6th Jan '12 - 8:59am

    A wealth tax would be highly unpopular here as it has been in France and would lead to all sorts of new avoidance activity, which would tie HMRC staff in knots trying to deal with it. A much better idea would be a simplification of the existing tax code combined with a general anti-avoidance rule. Why not get wealthy individuals and businesses to pay what they are supposed to under the current rules?

    A good place to start would be the replacement of Dave Hartnett as head of HMRC. He has lost all credibility because of his sweetheart deals with Goldman Sachs and others and because he stepped in to stop the investigation into Viscount Rothermere’s non dom status. Why should the owner of the Daily Mail get away not paying proper tax? (One might ask the same question of the owners of the Telegraph as well).

  • Andrew Duffield 6th Jan '12 - 8:15pm

    @ Jonathan Price

    Land Value Taxation is regarded by almost all economists as completely unavoidable. The socially created wealth that accrues to landowners is exactly what government should be collecting – in lieu of transactional taxes on earned income, goods, services and productive trade.

    @ Mark

    Not sure why you think there is no “clear consensus” on the form of wealth taxation we should pursue. LVT was affirmed as party policy – in the longer term – a few years ago. Thankfully, the longer term gets shorter by the day.

  • Wealth tax generally is problematic, because it leads to avoidance if not evasion and encourages wealthy people to leave the country, which is not something we want!

    I would support a land value tax as long as it is proportionate and broadly fits with the existing Council Tax rates. An excessively high rate of tax, starting at an arbitrary threshold such as £2m, would lead to gaming and would not pass the broad test of fairness. Many of the people who were against the mansion tax would have accepted a return to something more proportionate like the rates for example.

    Inheritance tax is too high at 40% and leads to massive avoidance. Instead of raising the threshold to £1m as suggested by the Tories, I suspect we would collect almost as much in the long term if we reduced the rate to 20%, and perhaps started taxing lifetime gifts as well, because there would be less avoidance.

  • Alex Sabine 7th Jan '12 - 4:42pm

    I had been hoping that one of the Lib Dem challenges for 2012 would be ‘wealth creation’, as the party seems to spend a lot of time talking about how to tax or redistribute wealth but not nearly enough about how to create it in the first place.

    And while it could be argued that a switch towards greater taxation of wealth could finance lower taxes on income, this is not the same thing as encouraging wealth creation – certainly not if it took the form of a ‘wealth tax’, which as Wikipedia tells us, is “generally conceived of as a levy based on the aggregate value of all household holdings actually accumulated as purchasing power stock (rather than flow), including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts”.

    Cutting personal income tax may be desirable as a means of incentivising people to move from welfare to work or to work more hours, but long-term prosperity depends on capital investment and accumulation, not simply taking home a slightly higher pay packet to finance present-day consumer spending.

    For this reason the idea that raising capital gains tax is a good thing in itself – as opposed to a means of preventing ‘leakage’ in the income tax system by wealthy individuals – is deeply misguided.

    Indeed, as economists have long argued, ideally we would not tax the return to saving at all (since saving is simply deferral of consumption, and consumption tomorrow shouldn’t be taxed more highly than consumption today). Capital income is also taxed at the level of the corporation, and the effect of a high CGT without indexation is to tax capital itself rather than the income from it – a form of arbitrary wealth tax.

    I’m not sure what the best solution to this is. In principle you could raise CGT to the same level as income tax IF you also abolished corporate-income tax and introduced an indexation allowance to ensure that only real rather than paper gains were taxed. In any event the solution won’t be arrived at by starting from the economically illiterate premise that the accumulation of wealth (as opposed to economic rent, as in rising land values) is a Bad Thing.

    Agree with Dane and Paul K on some of the problems with inheritance tax, but many of them also accompanied its predecessor capital transfer tax and before that estate duty. Reform here needs to start from first principles looking at the tax system in the round, and the different and often illogical ways in which we tax different forms of income, capital gains and wealth.

  • Alex Sabine 8th Jan '12 - 1:24am

    I agree one can make a legitimate distinction based on how the wealth was acquired, not by making moralistic judgements but by recognising that wealth acquired through the ownership and exclusive use of finite natural resources or other monopoly rights (so-called economic rent) is a special case, as classical economists like Adam Smith and David Ricardo recognised.

    In principle I agree with broadening the base of inheritance tax and cutting the rate – and/or reforming it into an ‘accessions tax’ on recipients rather than estates – and with some form of land value taxation to capture economic rent. The Mirrlees review identified some practical problems with both of these, and as a first step advocated a site value tax on commercial but not residential property (which I believe happens to be Lib Dem policy).

    What I do not agree with is a punitive attitude towards wealth creation and success; indeed we should be encouraging wealth and job creation through reductions in corporation tax, employers’ National Insurance and improving the capital gains tax regime.

    As I pointed out, the policy of equalising CGT and income tax rates sounds reasonable enough, but would tax shares excessively since company profits that give rise to capital gains have already been subject to corporation tax; and unless there was an indexation allowance for inflation, it would tax illusory rather than real gains and eventually bite into the capital itself. This would be detrimental to investment and wealth creation.

    The coalition’s policy of a 28% CGT rate is a kind of rough-and-ready (and not all that satisfactory) means of compensating for these factors, but raising CGT to 50% would be a big mistake. Already the signs are that the revenue from CGT has taken a hit, although it is hard to be sure because you have to look at income tax and CGT revenues together (since the main role of CGT is a backstop to income tax revenue) and the general economic climate means we wouldn’t expect to see high returns.

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