Tax Commission Response 2: Personal Taxation

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”.