Taxation Okey-Kokey

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The Observer has been given a sneaky-peak of the Lib Dem’s Taxation Commission’s current thinking and it sounds good. 2p off the basic rate of income tax, paid for by increases in environmental taxation and “tougher tax rules for the wealthy”.

By the latter, I’m taking it to mean, at least in part, to some kind of “progressive property tax,” although Vince Cable’s quotation about share income being taxed at a lower rater than general income suggests reform of capital gains. Nonetheless, I welcome it: the Lib Dems absolutely should be the party of low income tax. These reforms suggest a “direction of travel” that I’m very comfortable with.

But there is a cloud on the horizon however. Read carefully, and it is clear that we are just talking about national income tax here. Existing Lib Dem policy is to replace Council Tax with a local income tax of, on average, 3.5p in the pound. If this policy isn’t significantly changed by the Tax Commission, we would have to go into the general election with the highly confusing policy of saying that, nationally, we want to cut income tax while locally we want to pile it on. In net terms, every taxpayer would end up paying 1.5p more in income tax.

Kiss goodbye to any electoral benefit we might expect from the tax shift, in other words: our message to the electorate would be horribly confused. We wait and see what the Tax Commission come up with, but there seem to be two solutions. The first one is to replace Council Tax with something else, maybe a genuine tax on property that is continually revalued (every 1-2 years for instance, like everywhere else: Council Tax is mostly based on 1991 values and thus has little to do with actual values) and taxes high value property at the same rate as low value property. The Band system of council tax leads to effectively a subsidy on the rich that the middle classes have to pay. Better yet, base it solely on site values and leave the capital entirely out of the equation. The second solution would simply be for our policy to not have a policy: local authorities should be free to raise their taxation however they pleased. Of course, that would be pretty meaningless as a policy if 75% of local government expenditure continued to come from national government: a shift to 50% or even 25% would, at a stroke, give local authorities far more clout, and enable us to drop the basic rate of income tax even more.

The problem is, a lot of senior Lib Dem spokespeople have gone on record to say that our local income tax policy is here to say. It seems to me though that we’ve reached a crunch point: either we think income tax is a good tax that we want to shift the burden onto, or a bad tax that we want to shift the burden away from. There is no middle way or third position. That is the decision the Lib Dems, collectively, have to make over the next 3 months. Fudge this, and all our critics will be vindicated.

5 thoughts on “Taxation Okey-Kokey

  1. I understand your grounds for pessimism, and if we don’t end up with a radically altered LIT policy after this review, all this talk of a “tax shift” will just look silly. I’m just hopeful that someone in the upper echelons will realise that.

  2. I’m not as pessimistic as some. Surely national income tax (NIT) is most amenable to tax shifting anyway, because it’s easier to aggregate green taxes across the country. Only the most ardent advocates of LVT think it will replace IT altoghter, so even if we see a significant change in the balance of funding away from national to local government, reflected in decreased NIT and increased LIT rates respectively, there’s still likely to be lot of NIT remaining to be “shifted”. Can’t we just make it clear that our long-term aim is for NIT+LIT to decrease over time?

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