Monday, August 14, 2006

The Lib Dem Stealth Tax Commission: The Findings


Review of the Lib Dem Tax Commission Paper “Fairer, Simpler, Greener” or more appropriately “Stealthier, Stealthier, Stealthier

Overall, this is an uninspiring document. The LibDems have wasted the opportunity to come up with substantial and good tax reforms, especially for business.

A number of the measures, not least in relation to capital gains and pensions are potentially very harmful, and the better measures are in nearly all cases contradicted by corresponding bad measures. In that sneaky LibDem way, a number of the taxraising measures are strongly of the stealth tax flavour, eg increased Vehicle Excise Duty and reduced tax relief for pensions, whereas the 3 main tax cuts mentioned, ie raising the threshold at which tax becomes payable, increasing the 40% income tax rate threshold, and 1p (possibly) off corporation tax are clearly visible tax cuts.

Graphics

The few graphics look plundered from a 70s textbook. Figure 4 makes very little, if any, sense. Figure 7 compares the UK to high tax jurisdictions. Figure 8 has unlabelled axis and ignores the impact of local income tax. The average A level is better presented. That's now and not 20 years ago.


Assessment of LibDem proposals

HIT – increasing the threshold at which income becomes payable, taking many of the additional 3.6m taxpayers since Labour took power out of the tax net

MISS – there’s no mention of making the corresponding adjustments to the tax credit regime

MISS – lower earners will be hit harder by the higher Vehicle Excise Duties, as they will form a higher proportion of their net earnings

HIT – reducing the marginal tax rate by 2% to 20%

MISS – increasing the marginal tax rate by the local income tax rate, 4.5% (a low estimate) with the introduction of a local income tax, meaning a net higher marginal tax rate for most families and individuals by at least 2.5%, when taking the 2 measures into account.

HIT – increasing the threshold at which income tax becomes payable at the 40% band

MISS – Reducing tax relief for pension contributions for higher rate taxpayers to 20%. Money that goes into pension funds would then become “dry income”, ie you have to pay 20% tax on it, even though you won’t see the underlying cash until retirement. In practice this will be a very problematic measure. There is also no measure to reduce taxation on pension payments so none are taxed at the higher rate. This negates much of the increase in the threshold. Virtually all commentators recognise the UK is facing a pension crisis, this measure will only worsen the problem. A vicious, unnecessary and unwise stealth tax.



HIT – General anti-avoidance rule, this part is well-written

MISS – No corresponding tax cut to be shared amongst all taxpayers. Note also, there’s no mention of any particular legislation that could be removed. The Australians who are mentioned, also have considerable anti-avoidance rules. A GAAR does not reduce avoidance as much as simplified and more consistent tax law would.

HIT – increasing the amount of tax raised at local level

MISS – the contradictory policy to harmonise corporate tax rules, but not rates, across Europe

HIT – reducing corporate tax by 1p

MISS – its not enough. The reliefs to be abolished are not mentioned or stated other than some discussion around R&D

HIT – graduated stamp duty land tax, ie the higher rate is only payable above the threshold

MISS – the lost revenues, from one of the simpler taxes to collect, have not been included in the LibDems calculations, and would more than wipe out their £1.3bn contingency. A more appropriate measure might be to have a single rate of Stamp Duty Land Tax.

MISS - The continued support for Local income tax, the tax that hits 2 earner families hardest and increases marginal tax rates, creating a disincentive to work. The alleged administrative savings forget the basic problem, that many people do not work where they live, and employers would need to separately monitor the rates of each employees tax bill to fit the borough or county they lived in.

MISS – the implication on page 32 that small business deliberately understates taxable profits.

MISS – The environmental taxes are an attack on the use of motor vehicles, already taxed far beyond their cost, and are an attack on individual choice. There is also no corresponding commitment to increase expenditure on public transport. The environmental taxes are potentially regressive and may hit families hard, and may mean the cost of second car gets so expensive the second earner in a family may decide not to be employed.

MISS –Vehicle Excise Duty of up to £2,000 a year.

MISS – 5.1.3 “There have been two major problems with past efforts at so-called “green taxation”. The first is that so called green taxes have often been used as stealth taxes to boost general government revenue” . So the LibDems propose a new raft of them.

5.1.5 Note the comment that the congestion charge had to be increased to deter congestion. The congestion reduced due to the fact that pre-imposition of the charge both excessive roadworks were performed and the green man at pedestrian crossings was switched on for longer, in each case to twist the statistics. The charge went up to pay for the Mayor’s excessive expenditure.

MISS – Aircraft take-off taxes. Aircraft might well choose to miss out the UK altogether, taking their business with them.

MISS – Inheritance tax. Taxing lifetime gifts is daft, an individual should be free to dispose of their wealth as they choose. The inheritance tax paragraphs are especially confused and non-committal.

MISS – Land taxes. How do you value land separately from the property attached to it? It would also be administratively inconvenient to launch an entire new tax.

MISS – Removing taper relief and business asset taper relief. Only the LibDems could propose to abolish one of the better measures Gordon Brown introduced. If you take the disposal of a business, the income may already have been taxed at 40%, the capital gain on disposal would then be taxed again at 40%, and then inheritance tax might also apply at 40%. This can give rise to an effective 78% tax rate on such earnings (40% +40% of 60%, plus 40% of 36%). And in addition, you only get 20% relief for any pension contributions, but can be taxed at 40% on then when you draw the annuity. This move could greatly restrict and discourage entrepreneurial activity, and hence job creation, and is simply a ridiculous idea. The more sensible measure would be a simple abolition of both capital gains tax and inheritance tax, or to increase the thresholds and to reduce the rates. In fact the LibDems former policy of a 50% tax rate for income over £100,000 was potentially more sensible.

DO THE MATHS

MISSING THE POINT – The LibDems accept the government and HMRC’s bizarre premise that tax is a behaviour-neutral concept when estimating the costs of these measures. Any sensible analysis of tax cuts and rises, both in the UK and more recently elsewhere, shows that tax clearly does influence behaviours and hence a strictly pro-rata approach to costing.

£8.1 bn is a large increase in revenues from environmental taxes. Surely if these work, then they do not raise any money as they have discouraged behaviour. I consider that revenues would actually increase if marginal rates of tax were lowered based on experience overseas and in the UK in the 1980s. However, as the introduction of local income tax combined with the income rate tax cuts would cause a net increase in marginal rates, the actual impact of the 2 policies is likely to be to reduce revenues as incentives for additional work are reduced.

It is an incredibly insular survey. The LibDems rarely, if at all, refer to any other jurisdiction’s tax reforms, apart from some obscure taxes in Denmark. LibDems - please note, everyone else in Britain also lives in the global economy. There is no mention of the Irish, Eastern European, Australian, Canadian or American experiences in cutting taxes. On Business tax there is no mention of the international perspective at all, other than the LibDems clear indication of their willingness to surrender tax-law making powers to Brussels. Bet that doesn't get a big mention at the next election.