Tag Archives: income-tax

Myleene Klass and political failure

Myleene Klass may be deeply confused about how the mansion tax will work in practice, but she probably isn’t the only one. As a supporter of land value taxation, it is no surprise that I think it is a flawed policy, but what’s really problematic is the way both Labour and the Lib Dems are attempting to sell it.

In many ways, Klass’s tustle with Ed Miliband sums up the problem. She seems to think that, as a tax which will only apply to properties worth £2m and over, that in parts of London that applies to garages. She’s wrong. The £2m figure was calculated to be as painless to as many people as possible. In fact, under Vince Cable’s original proposals in 2009, the tax was to apply to properties worth £1m and over. This was quickly adjusted following an outcry from Cable’s fellow South West London MPs who feared a backlash (and even £1m is a bit steep for a garage, Myleene).

The UK – and London in particular – has a real problem with rising house prices. Home ownership has reached extremely low levels compared to recent history and the fears of another housing price bubble, despite the views of fantasists like Danny Alexander, are very real. The UK ought to be having a very serious conversation about how it tackles this.

Instead, we try to kid ourselves that this is just a problem for the very rich. Hence the mansion tax’s £2m threshold. We ought to be having a national conversation about restructuring our economy to avoid property bubbles. We ought to be talking about a property tax which kicks in at much lower levels. But we’re too busy blaming everything on immigrants and the poor.

Meanwhile, our existing domestic property tax, the council tax, has not been revalued in England since 1991. If our politicians lack the courage to even do that, what hope is there for us to have a serious conversation about what’s needed.

Ironically, the Lib Dems in particular, are in a better place than they have been in years to make the case. 10 years ago, they were transfixed with the idea of scrapping all property taxes and making taxes on employment take up even more of the strain. Now they are making the case for more taxes on property and taking people out of income tax altogether. Yet there is no narrative connective tissue between the two. They aren’t making the case for a fairer society and stronger economy in which a hard day’s work is taxed less and wealth is taxed more.

Ignore policy for a minute, which is largely irrelevant these days in a world of coalition government. What a liberal party ought to be making the case for right now is a new economy with significantly different priorities. It can’t be done overnight, but it can be done over time, piecemeal. There can be a direction of travel. It can’t however be done by stealth; the public need to buy into it or it will fall apart after the first Daily Mail headline.

The mansion tax could be step one of a new economic plan; as it is, it’s a policy cul de sac. Assuming it eventually happens, it will probably suffer the same indignity as council tax, and never be touched again. Or worse, start going up by inflation to ensure that only a tiny minority ever pay it and its true revenue potential is never realised. It’s emblematic of the political malaise; instead of dealing with the big political issues of the day, we’re reduced to soundbites.

Why Zoe Williams’ tale of Tesco subsidies only tells half the story

Zoe Williams makes a good point in the Guardian when she questions why the taxpayer effectively subsidises companies like Tesco by paying out tax credits which would be unnecessary if they paid decent wages, whilst executives reward themselves massive bonuses from the profits they make as a consequence. There is clearly something wrong here.

But she only tells half of the story.

Yes, allowing highly “profitable” companies pay low wages is a scandal, but so is artificially increasing those wages by imposing income taxes on low incomes. This is effectively a dead weight cost on labour; neither the employer or employee benefits from it. It artificially raises the minimum wage which, in turn, strengthens the hand of those who would have you believe that the national minimum wage is an unacceptable burden on employers. And it undermines Zoe’s argument; that subsidy she alleges is at least in part coming out of the very low wages she is so critical of.

For this reason, it is absolutely crucial that personal allowance is raised to ensure that, eventually, no one on a living wage should be paying income tax. The coalition government has already made a start on this, and should be encouraged to move as swiftly as possible.

It would be nice to think that such a policy measure would be entirely uncontroversial; sadly it is not. In 2010, Left Foot Forward teamed up with the Fabian Society to produce a series of articles designed to prove that such a policy was one of the least fair and most regressive policies ever devised. On the narrow point about higher income earners gaining more from the policy than lower income earners, they had a point – although their manufactured outrage rings hollow in light of the new Labour orthodoxy about sticking up for the “squeezed middle”. In any case, this could e easily solved merely by lowering the higher tax rate bracket by the same amount as the personal allowance increase, which is indeed what George Osborne has done.

But it represents a wider failure of imagination on the part of Labour thinkers; that is to restrict their definition of fairness to purely one of income distribution. I strongly agree this is an important factor, but it would be a profound mistake to make this the only fairness test in public policy. Any tax policy which has the effect of making it more affordable for employers to pay people a decent wage should be championed; the public purse should indeed be used as a safety net, but it is simply madness to create a system such as the one built by Gordon Brown in which money unduly paid out on low incomes is recycled to top up the pay of people on low incomes. This is Alice in Wonderland economics – and that is even before you consider the billions in unclaimed benefits that this shockingly complex system effectively deprives people of each year. Surely even the most staunch statist cannot rationally argue against the inland revenue butting out at this point?

In short, we have a right to expect corporations like Tesco to pay decent wages to their employees – but Tesco have a right to expect the state not to have policies in place which actively discourage them from doing so. Both the government and corporate sector need to take action here, while Labour needs to decide which side they are really on.

Quality of Life (2) – work and unemployment

This is the continuation of my series of posts in response to the Lib Dems’ Quality of Life consulation paper, the first of which can be found here.

Taking the next three questions in one go next:

6. Should there be compulsory limits to working hours? Can employees make a genuinely free choice to opt-out of the European working time directive? Is it liberal to restrict how much we work?

7. Would a more flexible approach to working make a difference to people’s happiness? How would this be achieved without creating unnecessary bureaucracy?

8. Should we incentivise part-time jobs through NI or other employment tax breaks, especially to encourage employers to create senior part-time roles?

I have to admit that I don’t have much of a problem with the current working time directive (i.e. 48 hours). Most countries have worked perfectly well without the opt-out and the 17-week reference period stops the rule from being silly. There might be a few areas where we might allow for some exemptions but the current blanket opt-out option, in practice, seems as meaningless as the rules of shop workers working Sunday shifts (I worked in a shop full time when these rules were introduced. I was formally told I had the right to opt out but it was made very clear that anyone who did would be looked at unfavourably in the future). If a compromise could be brought forward between the opt-out and compulsory options I’d be open-minded about it, and I would certainly be sceptical about a France-style 35 hour week, but I would have little problem with the current European law.

With all that said, I do think there is a lot we could do to make it easier for both employers and employees. Fundamentally, we tax work far too much in this country while leaving wealth almost untouched. While this is the case there will always be pressure on employers to employ fewer people for more hours (as opposed to more people for less hours) and pressure on staff to work whatever hours they can. The right to flexible working is all very well, but are making it has hard as possible for people to be flexible. A liberal government would consider changing this to be a priority. The poor record of the Lib Dems in this respect has been deeply disappointing.

The party’s move towards lifting the poorest paid out of taxation is a long overdue step in the right direction (it should be noted that this was party policy in 1997) but I would like to see us go much further.

The 1992 Lib Dem manifesto, which more than anything else is the document which made me join the party, contained a commitment to a modest citizen’s income. I believe we should revisit this policy.

How would all this be paid for? The only way I can conceive is by establishing a national Land Value Tax, something which has been Lib Dem policy for a long time but which we have been very lukewarm about in recent years. Instead of cravenly following public opinion on this one, it is time we started to make the case for a fundamental shift in the burden of taxation. I really do believe it is an argument that can be won.

9. Are they ways we can promote greater employee responsibility for their work, and/or involvement in deciding how they work? How could we encourage staff stake-holding?

All the evidence I’ve read – and personal experience – indicates that greater democracy in the workforce leads to a happier workforce and greater efficiency. It would almost certainly also help control out of control executive pay in a way that crude mechanisms such as a “maximum wage” could not.

Again, in the not so distant past the Lib Dems had much stronger policy on this and the time is right to rediscover our passion for “industrial democracy.” This means much more emphasis on obliging companies to consult their workforce, share ownership schemes and mutualism.

10. How could quality of life thinking shape our approach to education, training and career choices?

This is a huge topic and I am not an expert in education. I certainly think we need to broaden apprenticeship training in this country. A shift away from income taxes would encourage this, as would greater workplace democracy.

Vocational qualifications such as MBAs can be fearfully expensive. Some employers are better than others at helping staff cover the cost of these. A great many employers are simply too small. I certainly think there is a case for government subsidising these qualifications through small businesses and non-profit organisations.

11. Should we have more public holidays or increased holiday entitlements? Or even statutory education and training days where employees would be free to pursue skills related either to their current job or future employment prospects?

A few more public holidays would bring us up to the European average. I’m not convinced about the need for statutory training days as the need for these would vary enormously depending on the employee and employer.

12. Technological developments have changed the way we work and at times can contribute to unemployment as companies need fewer people to do the same work. Would it be better for wellbeing if we reversed this trend?

I didn’t realise Ned Ludd was on the working group! Technological developments certainly can lead to structural unemployment in the long term but if anything the experience of the past 250 years points in the opposite direction: we are working longer hours than ever and are able to afford a welfare state. Technology also creates new types of work and will continue to do so in exciting ways. The fact that fewer people are working themselves to death in factories and farms than in the past is a good thing.

With that said, it does bear repeating that while companies are free to make whatever capital investment they wish, labour costs come with a deadweight cost. We should be less concerned about technology putting people out of work and more concerned about ensuring that the two are put on a level playing field. Once again, this means taxing labour less.

13. How can we tackle the stigma of unemployment?

14. Should employment policy be refocused on creating a more flexible employment market with more active government intervention, like Denmark, where it is easier for the unemployed to find new work and consequently less necessary to have high job protection? How would this be achieved?

15. Can we better use unemployment as an opportunity for people to retrain and gain new skills?

Unemployment should carry a stigma and there are too many parts of the country where it doesn’t have enough of one. That isn’t to say we should ever write people off – quite the opposite.

Again, I think a shift away from taxes on labour would help increase the fluidity of the labour market (I know I sound like a stuck record here, but this is the problem with answering each question in turn). This, combined with a citizens’ income would reduce the disincentive within the benefits system to take on low paid work.

We also need to remove the barriers for internships and volunteer work. Currently in my experience the system all but discourages these by forcing people to do less than 16 hours a week and insisting on a paper trail. Yet such activity ought to be encouraged – even incentivised. We could even extend this to political parties: there are much worse things people could be doing with their time than actively working within their communities.

I don’t know enough about the Danish system. Since the working group is clearly looking at this model, it would have been useful to have an explanation, or at least a footnote for us to explore in more detail.

Triangulation and the Treasury

Credit where it’s due, at least Alastair Darling’s statement today has the virtue of being a simple change, rather than the convoluted nonsense he was talking about a couple of weeks ago.

I find the psychology of Labour ministers throughout this debacle fascinating. At each and every turn their response has been to sell off their critics rather than sort out the problem at root. At first, they simply couldn’t understand why a change that benefited the majority of people was proving so unpopular. In interview after interview they blathered on about most people being better off and “hard working families” as if the inherent unfairness of it all didn’t matter. When that didn’t work, both three weeks ago and now, their response has been to buy off not just the people least effected by the change but a large number of other voters as well.

Three weeks ago, it was a massive bribe aimed at the over-60s while offering almost nothing to young workers. Today it is an even bigger bribe aimed at most of the workforce (at least this time it isn’t something that people paying the higher rate of tax will be benefiting from), the only catch being that the worse off you are, the more you will remain out of pocket. It remains a cynical exercise in squeezing the least “attractive” element of the working poor – single, young, un-unionised (for “attractive” read “deserving” in NuLabSpeak) in order to bribe the fattened masses; the bribe has just ended up being a little bigger, that’s all. That should tell you all you need to know about Labour’s commitment to social justice.

What will be fascinating is how they manage to dig themselves out of the hole they’ve effectively dug for next year’s budget. They’re options appear to be limited. Do they not increase personal allowance by inflation next year? That will effectively mean that their plan is to claw back all of this tax over the next few years. Do they cut spending by £3bn? Another stealth tax? Or do they bite the bullet and whack it on higher wage earners?

Of course all these numbers are a bit fictional; Darling could still be saved by the Laffer Curve and a spot of wage inflation. With the precarious state of the economy though, I wouldn’t bet on it.

Those Redwood tax cuts – a question of priorities

I’ve been going down the list of tax cuts that John Redwood is proposing. Scrapping inheritance tax, lowering corporation tax, raising the super tax threshold, restricting capital gains… to be brutally honest, I regard all of these as good things in principle, but even leaving aside the affordability issue, how can they be said to be priorities?

Inheritance tax, for example, certainly does hit a lot of middle-income families these days. But what would you prefer? A tax cut on your estate when you die, or a tax cut on your income now? I know that I for one would prefer the latter. Happily, I’d also argue it is better for both the economy and society more generally.

As I’ve argued before, the accretion of wealth within an ever declining number of families is not a particularly healthy thing for our society. It creates a situation whereby, because of historical accident, some individuals end up higher up on the ladder than others. If that wealth is bound up in property, it is a finite resource and our existing financial system creates a situation whereby the more property you own, the easier it is to acquire more. As it is a finite resource, that means that, over time, private ownership becomes nothing more than a dream for more and more people and an underclass emerges.

To a certain extent you might argue that is inevitable, but if anything ought to be a candidate for taxation, it is this. Indeed, the creation of IHT and other fiscal tools in the last century have done much to create a more egalitarian society which we now seem to be slowly slipping away from.

IHT’s biggest problem is that it doesn’t do this terribly well. Nothing a half-competent financial adviser can’t wriggle around any way. There are better ways of taxing wealth such as a land value tax. Needless to say, this isn’t top of Redwood’s wish list.

For me, the “Competitive Challenge” is to ensure that the fruits of people’s labours and entrepreneurship are kept by the individual to as great an extent as possible. IHT doesn’t make our economy uncompetitive; income tax does. The point at which the 40p rate for income tax kicks in isn’t the main issue: the 20p rate and the level of personal allowance are. And then, of course, there’s VAT (which Tories historically seem to love).

But if I don’t understand the economic case for Redwood’s priorities, I understand the political case even less.

It’s a gift to the Lib Dems: not only are our policies better targeted at people at the lower end of the scale (I’d go further, but that’s another issue), we explain how we will pay for it. Redwood’s case, by contrast, is tax cuts for the relatively well off, paid for by vague, amorphous cuts in ‘red tape’. I for one would relish that particular fight.