What the future holds for Liberal Democrat tax policies

More economically competent than Labour, fairer than the Conservatives – that’s what many at the top of the party hope the message will be come the next general election. If the economy is not doing well at the time of the next election [insert post-watershed phrase of choice]. However, if it is then the party will need the right combination of economic policies to support that proposition.

That is why people such as Danny Alexander are starting to sketch out possible tax policies for the next general election which will involve giving tax cuts to the least well off, paid for by taxing the richest more.

That combination worked well for the party’s £10,000 income tax allowance policy in 2010. The mix of cuts and increases not only made for a policy whose sums added up but also meant the policy appealed across the different wings of the party. The media often rather blunders into overdrawn and inaccurate characterisations of different views within the party, but in this area there are some clear differences between the instincts on tax of, say, David Laws and Simon Hughes. However, the £10,000 policy appealed both to those whose instincts were to cut general tax and also to those who instincts were much more about overall inequality.

HM Treasury logoTax cuts for the poorest paid for by tax increases for the richest could repeat that unifying approach again. Moreover, with the party having already made very substantial (albeit largely unheralded) progress on bring tax on capital gains more into line with tax on income, the obvious place to look at next is other taxes on wealth – and that’s an area where there will almost certainly be plenty of scope for political difference from the Conservatives.

Moreover, higher taxes on wealth and tax cuts elsewhere could appeal both to Liberal Democrats concerned primarily about social mobility and also those more concerned about overall levels of inequality.

Quite what taxes on wealth should be is rather trickier as Vince Cable discovered with version one of his mansion tax proposals. Part of the problem with the original mansion tax plans was the lack of communication and discussion within the party in advance of the announcement. But there is also an inherent problem with such a tax on wealth, which is that some people, especially older people living in the south, have a large amount of wealth locked up in property but do not have much give in their income to pay for higher taxes. Inheritance tax used to be the answer to that, though these days it is often seen as politically untouchable – which is why the idea is being floated within the party at the moment of a property sales tax instead.

More popular amongst party members in areas such as South West London, though not in Whitehall, is the idea of adding extra property bands at the top end of Council Tax.

Despite the controversies around each of these policies, getting the tax cuts right at the other end of the scale may turn out to be the hardest, because if the income tax allowance is £10,000 by 2015, then further reductions in income tax become steadily less effective at helping the least well off as more and more of them are not in the income tax system. Once the details of the welfare changes have be finalised (and expect plenty more debate in the Lords as the current bill makes its progress there), it may yet be that the tax cuts part of the package actually is better delivered in the form of increased spending – but that would open up the different tensions within the Liberal Democrats.

The practical implication for all of this for party members? Political predictions running years into the future have an extremely low success rate, but it’s likely that if you want to influence a key part of the party’s 2015 manifesto, it’s certainly not too early to start getting stuck into debates and policy making over tax at both ends of the spectrum.

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  • Tax free minimum wage – BOOM!

  • @BobbieM That’s a good idea, but what taxes would apply to it? Presumably if the allowance was 10k then income tax wouldn’t be relevant. National Insurance? Anything else? Certainly an idea worth looking at.

  • Liberal Neil 28th Jun '11 - 10:48am

    There is still a good way to go above the £10K basic allowance before income reaches the level considered to equate to relative poverty – 60% of the median.

    Raising the basic allowance not only reduces the tax paid by those on low incomes but also increases the incentive to work and, if done in parallel, should reduce dependency on benefits and consequently reduce the cost of running both the tax and benefits systems.

    In my view the increase in the basic allowance could well be our best headline achievement by the next election and having a policy of increasing it further could be the best policy for that election. (And will carry some credibility too).

  • If Danny Alexander is starting to sketch out policies, perhaps he would have the courtesy to inform the formal policy-making bodies of the Party, of which he is a member.

  • Much as I dislike their general outlook of fingers-in-ears economic denial, organisations like UK Uncut have a point about loopholes and avoidance for high earners – we should be more honest about how much they do pay, and whether that is alright. It’s a popular issue, and it’s not something Labour should be able to dominate uncontested.

    Resolving the 40-50p tax rate issue will be a major issue in terms of tax policy, Miliband having made clear that he’s not in favour of dropping it. There’s room for moderation here, so why not propose a 45p tax rate once the body of the deficit has been eliminated? Not going back to the previous level, but not taxing people out of existence either, proposing a compromise between the positions, garnering sensible, moderate opinion?

    That said, reducing VAT back to (and below) the level it was before we came to government should be a greater priority. Fuel duty should also really be cut, or at the least capped, so that it can remain where it lies as the price of oil rises (I would favour a cut in the duty, then a cap).

    We’ve done and are doing a great job on income tax, it’s the reason I joined the party. I’m glad that this is being thought of in appropriate time for the next election.

  • Didn’t Danny write the last manifesto which included the fees pledge which was apparently unsustainable? Is he a fit person to write it again?

  • This drives me mad.

    ‘But there is also an inherent problem with such a tax on wealth, which is that some people, especially older people living in the south, have a large amount of wealth locked up in property but do not have much give in their income to pay for higher taxes.’

    So what?

    I think that the boomer generation have been cosseted quite enough. It is strange, I can almost smell the sweat of granny’s labour soaked into her house price inflation.

  • Well, this is a kind of mini-revelation. Tax the rich to cut taxes at the other end of the scale? – rather than tax the rich to reinvigorate public services? Ah, I see – so this is just the plain old libertarian, low tax, minimal state, free trade doctrine as sold by the swivel-eyed mainstream of the Tory party. I mean, I might be over-deducing here, but the approving comments seem to back this up. Honestly, this party is turning into a 19th century economics reenactment society.

  • Liberal Neil 28th Jun '11 - 11:50am

    @Mike Cobley – You are making quite a leap there. It is quite possible to believe that people on incomes low enough to qualify as being in poverty should not be paying income tax, and to also believe in investment in good quality public services.

  • mike cobley/Liberal Neil

    The lower your wealth, the greater your reliance on public services. The article above positions as the lib dems as believing that this situation is best addressed by increasing the purchasing power of the poor, not improving public services. The logical outcome is that they will purchase services once provided via taxation.

    It’s a perfectly coherent economic strategy, and a pure Tory one.

    The dividing lines between New Labour and the Lib Dems/Tories are now clear. The former believe in using the market to improve public services, the latter in using the market to replace public services.

  • @Duncan Stott

    The point I was trying, and clearly failed, to make was that investment in public services was a defining characteristic of New Labour and was something emphasised in their tax policy. The above is different, it focuses on wealth redistribution exclusively.

  • G,

    Tories are not known for reducing the tax burden of the worst off, at least not those in modern history. Liberals have always emphasised choice.

    I thought spending like a social democrat and taxing like Thatcher was the emphasis of New Labour tax policy.

  • Thread,

    What Hywel said.

    Even Danny admits that they got tuition fees badly wrong now. While you can begin to justify scaling back HE numbers next year with this week’s graduate oversupply figures, the argument didn’t cite macroeconomic policy or realistically accept that all the unis would charge top dollar once Browne’s progressive fee levy was thrown out.

    Who are the four who thought this was a good idea for the party and the country? Step forward David Laws, Danny Alexander, Vince Cable and Nick Clegg — i.e., with the departure of Matt Oakeshott and the theatrics of Chris Huhne, almost our entire economic team. The £1.2 billion+ cost to our economy and to government spending that the new fee regime will bring in should be a ringing reminder that this is the wrong policy at the wrong time.

    I have pressed each of them on separate occasions to take some responsibility for this if we can rebuild for the future. As this government has trailblazed, it’s never too late for an apology and a U-turn.

    — Robson

  • Bill Kristol-Balls 28th Jun '11 - 4:48pm

    Make CGT payable on all home sales and use the proceeds to fund halving the rate of income tax between £10,000 and £20,000 to 10%.

    I know, i know, i know. More chance of Danny Alexander and Harriet Harman getting married and HH staying at home to look after the kids and do the dishes.

  • @Mark Pack

    I know it’s a bit of a favourite trope amongst non-Tories to characterise them as being about tax cuts for the rich and making it easier for corporation to screw the little man, and this, to some extent, a fair description of some. But most Tory voters, and MPs, believe that it is right that the richest should shoulder the greatest burden. And you can check their manifesto if you don’t believe me…

  • Paul Pettinger 1st Jul '11 - 11:01am

    One of Labour’s main achievements in its 13 years of power was to merely grow the size of the state, while they failed to improve inequality and mobility. I for one am happy to depict Labour as a big state party and the Lib Dems as one that actually wants to improve social mobility. Tax reform ( such as reducing taxes on the poorest through taxes on wealth, assets, unearned income, pollution and reducing pension relief for high earners) has the potential to be a signature Lib Dem position, like support for free trade was 100 years ago.

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