Tag Archives: taxation

Poverty, marginal tax rates and the big state

Are Conservatives serious when they bang on about the high marginal tax rate of people at the bottom end of the income scale and its symbolism as a failure of the “big state”, as David Cameron referred to on Thursday and William Hague repeated on Any Questions?

I ask this because this “tax rate” – which I don’t dispute – is mainly due to our complex benefits and tax credits system. Simply put, there are two ways to reduce this marginal rate: increase the tail off by cutting means testing or at least extending the income levels at which people still receive benefits, or reducing benefits altogether. The latter option would of course lead to more people living in poverty.

The former option however would increase the size of the state, which we are to understand is a total no-no. This is one of those areas, in short, where you have a very simple choice: reduce poverty or reduce the size of the state. You simply can’t have it both ways and in this respect the Tory conference this week has begged more questions than it has answered.

That isn’t true of all areas of public policy – there are plenty of areas where the small state option is the more pro-social one. But it does highlight how the poverty in aspiring for a “smaller state” as an end in itself. It seems to me that the Tories are obsessed with these second order indices and lukewarm when it comes to the fundamentals.

The Liberal Democrat post-credit crunch economic policy. A blow by blow account.

John Harris wonders why the Liberal Democrat party faithful seems so incapable of defining what the Liberal Democrats stand for, unlike the masterful Vince Cable. A clue may come in the fact that the party’s core message on the economy has changed in a significant way on at least eleven separate occasions over the last two years despite very few of these shifts actually being party policy.

Let’s look at Liberal Democrat policy since the credit crunch (assuming for a moment that September 2007 is effectively Year Zero). In terms of tax policy alone, we started with a policy paper overseen by Vince, itself the second in as many years, which essentially called for a 4p cut in the basic rate in income taxes to be paid for by increasing taxes on pollution and the rich. Oh, and to replace council tax with a local income tax which would come to, roughly, 4p in the pound. Clear?

By spring 2008, with the storm clouds already starting to look very grey indeed, Nick Clegg started flying kites about tax cuts. By the summer, that had coalesced into a commitment to identify £20bn of public spending “waste” and a vague promise to cut taxes if after identifying all our spending commitments there was a bit left over. At the start of September however, Clegg had announced that he and Cable had agreed that the “vast bulk” of this £20bn would be passed on in the form of tax cuts, a statement which had the predictable effect of sending the party into a complete tiswas.

A few days after that, manifesto chair Danny Alexander further clarified Clegg’s clarification by explaining that Clegg was in fact referring to the “vast bulk” of money left over after the party had fulfilled all its spending pledges, not the vast bulk of the £20bn overall. This of course begged the question of where the small amount of money that was neither going on tax cuts or public spending was supposed to be going. By the autumn 2008 conference, things had got even more confusing. Nevertheless Cable and Clegg managed to get their proposals through conference, although this involved people supporting them on the grounds that we probably wouldn’t end up cutting taxes overall at all.

This new policy, which by now no-one understood, lasted a whole fortnight before the banking bail out rendered the entire thing moot. Unperturbed however, in April 2009, the pledge to drop the basic rate of income tax was replaced by a pledge to raise personal allowance. In July 2009, after what was by all accounts a tense and at times explosive policy committee meeting to agree the party’s pre-manifesto, Nick Clegg announced that the Lib Dems’ “shopping list of commitments” at the next election would be “far, far, far, far, far shorter” despite the fact that the pre-manifesto itself says no such thing. On Tuesday last week Cable published a pamphlet proposing £14bn of government spending cuts which would have to be made to pay off the national debt. This seemed to be suggesting that the party’s list of spending commitments would not merely have to be shorter but essentially non-existent. This vision of doom opened up enough space for Nick Clegg to open conference on Saturday announcing an intention to drop the commitment to scrap tuition fees and to start talking about “savage cuts”. And the position changed yet again on Monday with Cable announcing a new “mansions tax”, a policy which had apparently been written on the back of the cigarette paper which David Cameron had been experimentally attempting to slip between the Lib Dems and Tories the day before. By Monday evening he was arguing for a watering down of the party’s commitment to a local income tax.

Is it really that surprising that we mere mortals are somewhat confused?

Bonding in Barnet

From the FT today:

A bond to raise up to £360m for transport, schools and other local services will be proposed by a north london borough as it looks for new ways to raise money.

The “Barnet bond” would provide as much as half the £733m the London suburb says it needs to improve its infrastructure to cope with expected housing growth over the next 10 years.

The bond would be financed by earmarking extra income created by expanding housing stock, including higher council tax and business rate receipts. The borough also says it could raise money from the expansion of BrentCross shopping centre, with a £1 a day levy on eachparking space among the options.

Other sources couldin-clude additional stamp duty revenues from the sale of new homes in the borough, which currently go straight to the exchequer. Another £6m could be raised by Barnet levying a 3p supplementary business rate, one of the proposals made by Sir Mich-ael Lyons in his report on local government, which the government is considering.

The Treasury and the Communities and Local Government department have been involved in discussions, though neither has yet given the go-ahead for the necessary changes. However, Barnet says no legislation is needed for some of its proposals, such as new charges and earmarking additional council tax receipts.

“We’re trying to show that there are options to make this model of local financing work,” said Leo Boland, the council’s chief executive. “What we end up with may be quite different, but there are significant sources of money to pay for infrastructure improvements.”

Barnet expects its population to rise by 30,000-40,000 over the next 10 years as developers build new homes for people working in the City and West End. As a relatively wealthy borough, it cannot rely on grants from central government.

A report by PwC, the professional services firm, proposes creating an arms-length local growth fund to collect the additional revenues giving the necessary security to borrow the money upfront. “Most boroughs are finding the re-sources are not there for the infrastructure they need to build,” said Ray Mills of PwC. “This approach aims to capture the value that would be generated by growth to fund that growth itself.”

It’s an interesting idea but what stood out for me was the fact that they feel they could only raise half the neccessary amount in this way. “Only half?!” you might say incredulously, but these bonds will only be issued against expected increases in business rates and council tax revenue. If we had a decent system of value capture in this country, just think how much more inward investment we could attract through such schemes.

As it is, a wealthy area like Barnet probably can find the remaining £300m+ from somewhere, but what about a Hackney or a Haringey, who they are in direct competition here? Why should such areas have to depend on centralised government handouts for development?

I’m nearly finished reading Tony Vickers’ new book, Location Matters, which explores precisely this problem with regeneration. When I finish, I’ll be reviewing it here.

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.

The first nail in the coffin of Local Income Tax?

I’ve been very good this past month and have managed to keep schtum about the Liberal Democrat Youth and Students’ decision to reject local income tax in preference to land value taxation until after the elections were out of the way. Now I see that the entire motion is up on the ALTER website, I suppose my self denying ordnance can come to an end.

LDYS has a proud history of leading where the party subsequently follows, and I’m hopeful that this will prove to be another example of this. And it is timely, with the National Institute for Economic and Social Research comparing the rise in property prices to the national debt. Aida Edemariam wrote a good summary of how the problem is affecting the whole of the UK in the Guardian on Friday. We have to do something, and a tax on land values is a lot more economically respectable than a crude property tax.

One of the problems the party faced in the latest round of elections was a failure to stand out from amid the crowd. Taking on intergenerational equity would give us a USP. It isn’t simply an old-versus-young issue as older people who were simply in the wrong place at the wrong time have lost out just as much as the younger generation who are now left with the consequences. The introduction of any new tax could be matched by a cut in other taxes, ranging from existing property taxes such as stamp duty through to income tax. Such a tax shift need not be unpopular.

Fundamentally, we have to tackle this situation whereby people have more incentive to invest in bricks and mortar than in stocks and shares. That is bad for the economy whichever way you look at it. I don’t want to sound all Marxist, but if the political system doesn’t solve this problem, the economic system will do it for us in a way that will be much more painful. I’m amazed that the political class isn’t looking at the emerging picture and isn’t worried. To be fair, some individuals such as Vince Cable and David Willets, have been warning about this for some time, but their views have been falling on deaf ears.

But there is no prospect of Local Income Tax on the horizon. With the combined SNP/Lib Dem seats in the Scottish Parliament 2 short of a majority, it won’t be introduced there. Labour and the Tories have resisted the simple populism of LIT with good reason: they appreciate the danger of scrapping property taxation altogether even if they lack the courage to introduce a proper system that doesn’t have the flaws of council tax. Rather than dismissing this as stupidity, the Lib Dems ought to consider why this is one popular policy our rivals (except for the SNP, which in itself should tell you something) have declined to steal.

I still have high hopes that sooner or later the Lib Dems will realise that this is one issue that we could really make our own. Gordon Brown’s announcement to cut income tax by 2p in the pound has forced us to revisit our taxation policy (it’s amazing how much of the paper we passed last year has been borrowed by the Tories in Labour in such a short space of time). Hopefully, more radical minds will prevail.