Tax Commission Response 2: Personal Taxation

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My first tax commission response post proved to be a modest success resulting in quite a few useful comments. This post deals with the next section.

The third chapter of the consultation paper (pdf) deals with personal taxation, leaving aside local taxation which is dealt with in the following chapter. Here we deal with the review of the party’s 50p upper rate, personal allowance, capital taxes (in which category the paper includes land value taxation, mutter, grumble…) and, just for fun, briefly explore flat taxes before making it quite clear how preposterous the idea is.

I think it would be unwise to sit here typing some detailed wishlist of how exactly I’d like to see the taxation system reformed. In any case, what is relevant is the party’s response to the taxation system circa 2009, not 2005, and so it is largely irrelevant to go into too much detail. Instead, I thought I would attempt to restrict myself to some broad strokes and see what broad principles I can come up with.

In general, I support the party’s long term overall aim of shifting the burden of taxation off incomes and onto resource use. The way I see that working is through significant increases in environmental taxation (in which I explicitly include land) offset by a combination of tax breaks and direct per capita payments/allowances/dividends (see previous post).

One aspect of this would be to provide a decent alternative to tax credits which are horrifically complicated and, as we have seen, are creating huge problems with fraud, over payments and disincentives. Bundling these together on their own into a single benefit/negative income tax would mean that each individual would have relatively little. But combine this with a proportion of the revenue raised through environmental taxes, and it starts to look more realistic.

I would actually argue that this should be a higher priority than raising personal allowance, which barely benefit the least well off (as the paper itself makes clear, the bottom quintile only pays 3.2% of gross income in income tax – it is the other quintiles that will mainly benefit from raising personal allowance). That isn’t to say that raising personal allowance isn’t desirable – it certainly is – just that it is of secondary importance to providing a simple and adequate safety net.

Lowering the other rates of tax should be a third priority. If we were to radically shift taxes off income however, I would agree that there is probably a case for reducing the upper rate before considering the basic rate. Certainly it would tend to be the very rich who will be stung the most by a proper system of land value taxation and we should at least recognise this. I don’t believe in squeezing the rich until their pips squeak, if nothing else than because they will simply move their pips elsewhere.

With that said however, I don’t see that as being a first term priority; if we introduced a fully fledged land value taxation system overnight it would cause enormous problems and hurt a lot of people simply for attempting to do the best for themselves. In the first term of a Lib Dem government, I don’t see us reaching the stage where shifting the tax burden from higher levels of income tax to LVT and on that basis am fairly comfortable with us sticking with the 50p rate for incomes over £100,000. I can wait.

The paper does have a point however, which is that our current policy means that high incomes are effectively exempt from local income tax. I’ll come onto exactly what I think about LIT in my next post, but in principle I am in favour of local government raising a proportion of its income through income tax and feel that it should be a single rate on all levels of income (a flat tax even! :)). I also agree with the principle that we shouldn’t tax incomes at above 50%.

On that basis, if mean nationwide LIT were to be, say 3.5% (the current party position), then the higher rate for national income tax should be no higher than 46.5%. To the wealthy taxpayer, this will not make a difference; as far as the average tax payer is concerned however, this would be significant as the current LIT system is regressive. Every pound local authorities can’t raise from high income earners is a pound it has to raise from the rest of us.

After dealing with income tax, the paper then goes on to consider capital taxes, specifically on inheritance, capital gains and property.

At the risk of sounding like a stuck record, personally I’d be quite happy to be radical here: introduce LVT, which is a far fairer system of property taxation than council tax or the old rates, abolish inheritance taxation and capital gains (and for that matter, other taxes such as stamp duty), and let a combination of income tax and LVT pick up the slack.

As the paper suggests, inheritance tax has become a voluntary tax for the rich and a headache for the middle classes. I’m no fan of inherited wealth, but don’t think that the one-off nature of inheritance tax particularly solves the problem. In the case of land, it makes far more sense to use an annual tax to ensure that the upper classes can’t simply live off the fat of the land.

I’m open minded about the idea about an “accessions tax” – switching the tax from the giver to the inheritor – but why not simply regard it as income?

I can’t claim to be an expert in capital gains tax (or anything for that matter, but particularly capital gains), and am happy to be persuaded either way.

I’ll go into some of this in more detail when I deal with the next chapter, “decentralisation”.

5 thoughts on “Tax Commission Response 2: Personal Taxation

  1. “LVT for domestic property is an impossible sell because it cannot be explained in fewer than 2000 words.”

    Discuss.

  2. “No tax can be explained in fewer than 2000 words.” Discuss.

    Seriously, why do people always claim that a change can only be made if 90% of the public understand its deeper inner workings? People say the same thing about STV – people don’t have to understand the complex way the votes are counted, just that they need to number their preferences 1,2,3…

    Back to LVT (and I’m planning to write my next post just on LVT, to get it out of the way!), I don’t really see why you need to say more than, for example:

    “We would replace council tax with a tax based on land values to ensure that more efficient use is made of land and to stop people from being taxed for investing in their homes.”

    A final point. If the public had a good working knowledge of economics, I’m confident the current Lib Dem policy of replacing property taxes with income tax would be a massive vote loser. Just because it is simple, doesn’t make it right.

  3. And just because it is right, doesn’t make it politically possible.

    Sure, I don’t need to understand STV in order to vote “1, 2, 3”. Just as I don’t need to understand the “deeper inner workings” of the internal combustion engine to drive my car.

    But a tax demand isn’t like either of those things. You cannot seriously expect people to hand over their hard-earned cash without at least some idea of how the figure is arrived at.

    Even the awful council tax has a commonsense basis that people can grasp: “The bigger the house, the bigger the bill.” LIT is another easy sell: “It’s like income tax, only local!”

    Look, I’m not unsympathetic. I’m a technical author. I’ve spent my entire professional career explaining complex computer systems to people who couldn’t tell a mouse from a modem. I like a challenge!

    So maybe LVT can be put over in a way that will be intelligible to the general public.

    But I haven’t seen it done yet. And until I do, I fear the Liberal Democrats’ land taxation policy will remain stuck at SVR for commercial property, because businesses can’t vote and you don’t have to explain it to them on the doorstep.

  4. LVT is easy to calculate. In simplistic terms, take the market value of the land, deduct the value of the bricks and mortar, and there you have it.

    I don’t believe it is that hard a concept for the public to grasp. After all, they all sit there watching Location, Location, Location. Surely no-one in the country is unaware that property values are not simply dependent on the materials used for building and take into account external factors?

    I don’t think Council Tax is as easy to defend as you suggest. On the one hand it is currently not based on anything at all (other than property values in 1991 which are largely irrelevant now); on the other hand revaluation has become politically impossible. Yet strangely, neither the Tories nor Labour are taking the easy way out and adopting LIT as a policy. Why? I would suggest it is because they know abolishing property taxation altogether would be economic madness.

    You’re right that it needs to be framed in a way that Jo Punter can understand, but I don’t accept it is all that difficult. And with people from New Statesman through to Martin Wolf, the economics editor of the FT, starting to publicly make the case, I’m convinced that it is an idea whose time is about to come. The question in my mind is: will the Lib Dems embrace their heritage as the party of LVT before Gordon Brown adopts it and puts us on the back foot?

    A bigger challenge in my view is introducing LVT in a way that doesn’t unfairly penalise people who have been trying to work the system in good faith over the past couple of decades, knowing that it is the only way to give them some security. That’s why I don’t favour a ‘big bang’ approach. But like I said, I’ll come back to this again soon.

  5. Having forced your website into Verdana, it makes a lot more sense now. Remind me to throttle you next time I see you.

    I’ve got to agree with you about the 50% maximum rate; we also need to apply a 50% maximum marginal rate on lower incomes, which certainly does not pertain at the moment. Of course, that requires integrating tax with benefits in some fashion, which – as Brown’s tax credits are demonstrating – is an administrative nightmare, at least in part because we have household benefits and individual taxation. Thoughts?

    LVT I’ll discuss in a future posting, but it’s not easy to explain. Reasonably intelligent political people don’t understand it and many of them are trying to.

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