tax policy

The Middle Class Needs Relief Too

Samuel Hooper3 Comments
Too many people paying too much.
Too many people paying too much.

 

David Skelton, director of the campaign group Renewal, has penned a provocative article for The Telegraph in which he dares to suggest that the 40% rate of income tax should be scrapped because it punishes the hard-working middle class rather than skimming off superfluous income almost unnoticed from the ultra-rich.

This is a bold move given that most of the political focus is currently on helping the lowest-income earners by increasing the tax-free allowance again and again. And while the current approach certainly has merits, it is undeniable that the middle class has received far less support.

It may have been quite right to begin means-testing child benefit – this blog certainly thinks so, as the first step toward ending universal benefits which simply should not exist. But actions such as this, while correcting discrepancies, anomalies and moral wrongs in the tax code, were not accompanied by countervailing efforts to lower the overall tax burden. This is where Skelton’s proposal shows its value.

Skelton writes:

It is also important for the Government to help middle income earners who have played such a big role in making sacrifices during the recession and in reducing the budget deficit. George Osborne should take a major step to unwind the undesirable drift towards an ever higher proportion of the working population paying higher rate tax. In doing so he could relieve the pressure on the squeezed middle, so many of whom have borne the burden of paying for Labour’s profligacy.

His proposal would see more than two million people taken out of the higher rate tax band:

A number of Tory MPs have argued that the Chancellor should look to raise the higher rate threshold to £44,000. Our proposal at Renewal would go much further, taking many more people out of paying the 40p rate while simplifying the tax system. We believe he should scrap the 40p rate and start the 45p rate at a much higher level of income. 

Potentially, this could take more than two million people out of higher rate tax, giving a significant tax cut to the squeezed middle.

The retention of the punitively high 45% top rate of income tax is the only unwelcome part of the proposal, but was clearly included to keep the break-even point at what was considered a politically palatable level. But aside from this regrettable acceptance of Gordon Brown’ final act of economic vandalism before being kicked out of office, Skelton’s proposal is very strong.

It is long past time to address the fact that the 40% tax band now includes a very different sort of person to the type envisaged when the rate was set by chancellor Nigel Lawson. As Skelton rightly notes:

More and more people on middle incomes have been dragged into paying the 40 per cent rate of tax over the past decade. That includes teachers, nurses, bricklayers, police officers and Tube drivers. These are not people who should be in the higher rate tax bracket but are because the threshold at which it is paid has been repeatedly frozen. 

The number of people paying 40p tax has risen steadily from just over 1.7 million in 1993/4 to 4.4 million in the current tax year. That is a staggering one in six of taxpayers, up from one in 20 when Nigel Lawson was Chancellor.

Quite right. A person on around £40,000 a year in the early 1980s was far more affluent than someone on that same salary today. But cowardly government after cowardly government have deliberately chosen not to increase the tax rate threshold in line with inflation, bringing this whole new cast of characters into a tax realm originally intended for those who were genuinely, comparatively rich.

The chances of this proposal becoming concrete policy remain slim, however. As James Kirkup notes in the Telegraph, the increasingly boisterous and assertive Liberal Democrats are intent on defending the laser-like focus on raising the minimum tax threshold above all other ideas:

Increasing the basic threshold has been driven by the Liberal Democrats and the party’s Danny Alexander, the Chief Secretary to the Treasury, defended the focus on lower-paid workers. 

He said he “understood the argument” around 40 per cent tax, but insisted that lower-paid workers had to come first. “I think it’s right that we have a policy that is focused particularly at that part of the population.”

More worryingly still, the Conservative leadership also appears slow to embrace the idea – perhaps because it is a good piece of economic policy that originated somewhere other than Number 11 Downing Street. The Daily Mail reports:

In a major speech on the economy, the Prime Minister promised that further savings from public spending would be used to fund tax cuts.

But Mr Cameron, who confirmed the Government would accept a rise in the minimum wage to £6.50 an hour, appeared to indicate that any future tax cuts would be targeted at the low-paid.

He made no reference to raising the starting point for paying 40p tax, which is emerging as a key Budget demand among Conservative MPs.

Whether the Conservatives have any fire left in their belly to enact a genuinely useful tax cut in the face of this opposition and distraction remains to be seen, and go some way toward showing whether there really is any conservatism left in this coalition government at all.

If they do find the courage, it will be a major victory for middle class earners and for common sense.

A Move Toward Transparency On Tax

Samuel HooperLeave a comment
Image from ConservativeHome.com
Image from ConservativeHome.com

 

It may be a small, mostly cosmetic change, but for once it is a change that small government and libertarian-leaning conservatives can really get behind.

Ben Gummer MP, who has made tax transparency a major focus of his parliamentary career, is today proposing that National Insurance be renamed the “earnings tax”.

The Telegraph reports:

National Insurance, a 100-year old charge on employers and employees, will be renamed “earnings tax”, the Chancellor has signalled.

The change, which will be proposed in legislation to be published on Tuesday, is the first step towards merging income tax with National Insurance.

Ben Gummer MP, a rising star Tory backbencher who has been campaigning on tax transparency, will propose the change in a Commons Bill on Tuesday.

On the face of it, perhaps nothing to get too excited about. After all, nothing is being done here to address the punishingly high rates or the legacy of fiscal drag that has seen people on relatively standard incomes being taxed at the top rate.

But Gummer’s proposal is significant because it is the first step toward the government finally and explicitly admitting the obvious – that National Insurance is a second income tax in all but name. The money collected is vast, all goes into the same pot, and is in no way strictly reserved for specific purposes as the “insurance” moniker suggests.

At the present time, Ed Miliband and Ed Balls are able to rail against the Conservative/Liberal Democrat government and accuse them of enacting “massive tax cuts” for the rich – by which they mean reversing half of Gordon Brown’s gargantuan tax increase – and keep a straight face while doing so.

Using the innocuous term “50p” tax which evokes the small sum of fifty pence rather than the cold reality – half of each additional pound earned, for top band taxpayers – is bad enough. But high tax advocates such as those in the Labour Party are also aided by the fact that discussion of income tax alone does not come close to recognising the full tax burden.

The Telegraph shows the full extent of this second income tax:

National Insurance rakes in billions every year for the Treasury. Anyone who is employed and earns between £149 and £797 a week pays 12 per cent of their income in National Insurance. A further 2 per cent is paid on all earnings over that level.

It is doubtful whether, if asked, most people would correctly identify the top rate of tax as being 59% – a staggeringly high level that immediately makes Britain’s anaemic economic growth statistics much more understandable.

Therefore, from a fiscally responsible and small government-advocating stance, anything that helps the public consciousness to start to recognise income tax and national insurance as nothing but two sides of the same coin can only be a good thing.

ConservativeHome also recognises the importance of this seemingly small proposal:

There’s a fundamental, sound principle here – which has been championed by the TaxPayers’ Alliance among others.

It is clearly unfair and immoral for taxpayers to be misled about the level and function of taxation. National Insurance is income tax in disguise, but many people still think it actually pays into a pot for their own social security.

Hopefully the Chancellor will listen to Gummer, and it will be a step on the road to merging NI with Income Tax altogether.

Indeed, merging NI (or whatever name it ultimately goes by) and Income Tax should be the end goal. Just as Ben Gummer successfully campaigned for taxpayers to receive a yearly statement showing exactly how their tax contributions were split up to fund the operations of government

The proposal will doubtless meet with strong resistance, primarily from those on the left who continue to support high taxation and high spending with such fervour that they almost seem to be an end in themselves. It is not in the interests of such people for the public to have full visibility of the amount of tax they pay – the more confusing it is, the more easily their distortions and rhetorical sleights of hand about the tax burden are believed and accepted.

ConservativeHome also notes this fact:

There’s a test for Labour here, too. They will instinctively dislike the idea, given that it will make it harder for future governments to raise taxes by stealth. But Ed Miliband rails against opaque, complex and misleading charging by companies as a rip-off which harms consumers – surely they should hold the taxman to the same principles?

Surely they should hold the taxman to the principle of transparency, perhaps, but inevitably in practice they do not – a century of experience tells us so.

While transgressions by the private sector are immediately jumped on, the failures and mistakes of the public sector are excused or overlooked time and time again, and are then counter-intuitively used as justification for increasing spending and expanding the public sector even more. Private sector failure and opacity, in other words, is punished while public sector opacity is encouraged and rewarded.

Transparency is the ultimate antidote to the big tax/big spending status quo, and to the policies of those who continue to view fiscal policy as a tool for punishing success. Britain needs Ben Gummer’s medicine, and the government should now give tax transparency its full-throated support.

Are Labour At War With Poverty Or With Success?

Samuel HooperLeave a comment

 

Well, now we have it conclusively. It has nothing to do with making the rich in our society pay their “fair share”, no matter how loosely you define (or indeed blatantly misuse) the word “fair”. Nothing to do with ensuring that essential public services are funded, either. No, Ed Ball’s announcement of the Labour Party’s intention to reinstate their punitive 50% top marginal rate of income tax has everything to do with punishing people for daring to still be rich, for having the temerity to succeed.

Daniel Hannan MEP, writing in the Telegraph, ponders the cognitive dissonance behind a proposal to raise taxes without realistic hope of increasing revenues, and wonders if Labour are right to stake their electoral hopes on the British people being motivated primarily by envy and a desire for vengeance:

Labour doesn’t actually think the 50p tax rate will make Britain more prosperous. We know this because, for all but the last few weeks of its 13 years in office, it kept the top rate at 40p. Yet it now brazenly calls a 45p rate “writing a cheque to millionaires”. On one level, this is too silly for words: even if  everyone earning £150,000 were a millionaire, on no conceivable definition does demanding less money from someone constitute “writing a cheque”. But Ed Balls has presumably calculated, as Iain Martin adroitly observes, that there are enough votes in envy to cobble together a majority under the uneven constituency boundaries.

In another column he also reflects on the results of a YouGov poll showing that an overwhelming majority of Labour supporters believe that a 50p tax band should be brought back even if it was conclusively demonstrated that doing so raised no additional revenues. The telling visual is here:

YouGovTaxpoll

 

Hannan goes on in this second piece to explain the motivations that may cause people to vote as they did in the poll, and has the humility to accept that he (and others on the opposing side of the argument, myself included) probably suffer from similar confirmation biases and reverse rationalisation on this and other matters.

But the inescapable fact is that the motivation for supporting a revenue-neutral or revenue-negative tax increase comes largely down to envy, and that ugly part in the minds of some in the Labour Party (fully accepting that the Conservative Party has other ugly parts of its own) that would rather everyone in the country be worse off and more equal than better off and more unequal:

Envy is an ugly and debilitating condition, but it seems to have an evolutionary-biological basis. The dosage varies enormously from individual to individual, but even toddlers often display a sense that, if they can’t have something, no one else should either. If they had the vocabulary, they would doubtless, like the 69 per cent of Labour supporters, explain that emotion “on moral grounds”. Few toddlers, and few Labour voters, openly admit to being actuated by vindictiveness.

Most policy positions are an expression of some ingrained tendency. For example, we have an instinct to care for the vulnerable, and also an instinct to value reciprocity, and our welfare system results from an interplay between the two. Similarly, the current row about deporting foreign criminals has less to do with their numbers or the nature of their crimes than with our instinct – again, a human universal – about hospitality and its abuse. We shouldn’t be surprised when people who suffer from envy elevate it into a political precept and call it “fairness”.

The concept of fairness has been much abused by politicians (generally those on the left of the political spectrum), particularly since the start of the Great Recession. The worthy desire of Labour politicians to ease the crippling, painful effects of poverty on those less fortunate in our society is not in question, but it is disconcerting when they cling to the idea that punitively high, revenue-neutral tax increases will do anything at all to help the poor other than to cheer them up with the knowledge that wealthy people are also feeling the pinch.

And while we are quibbling about wording, Ed Balls needs to be taken to task in the media for characterising George Osborne’s decision to reverse half of Gordon Brown’s 50p tax hike to a slightly more palatable 45% top rate as a “massive tax cut”. If a five-point reduction in tax rates constitutes a massive tax cut, surely the ten-point increase in income tax instituted in the dying days of the Labour government of which he was a part could only be described, using the same dramatic language, as a gargantuan, devastating, apocalyptic tax increase? And yet, come general election season 2015, it is certain that we will not see Ed Miliband or Ed Balls’ faces smiling down at us from billboards promising “massive tax increases”.

But let us return once more to the YouGov poll results. No other mainstream British political party – not even the Liberal Democrats or the supposedly crazy UKIP – has a majority of their supporters who believe in raising taxes for the rich just to teach them the lesson that hard work does not and should not pay. That distinction is reserved for the Labour Party, a party whose leadership and supporters are now – quite cheerfully, openly and stridently – acting in a dangerously irrational way.

Irrational, that is, if we take them at their word that they have the best interests of all the British people at heart.

The Green Party Goes All In

Samuel Hooper1 Comment

A city to watch in 2014.

 

Interesting news from the city of Brighton, where the UK’s only Green Party-controlled local council is planning to put the question of a significant council tax increase directly to the people who would have to pay it. At an estimated cost of £100,000, the council plans to hold a referendum to ask citizens to approve a 4.5% council tax increase which is expected to raise £2.5 million per year more than the assumed 2% increase.

Consulting the people directly is entirely the right thing to do, and is actually very much in line with Conservative party policy under the influence of Eric Pickles, the Communities Secretary. There is currently a threshold in place requiring local councils to hold a referendum to gain approval from constituents for any council tax increase of above 2%, but this has led to a rash of councils repeatedly skimming just beneath the 2% level year after year, continually cranking up the tax without having to gain the consent of the people. In fact, this has prompted some within the Conservative party to agitate for reducing the referendum threshold to increases in excess of 1.5%, a figure well below the current inflation rate.

Credit must be given to the Green Party for actually having the guts to stand behind their favoured spending plans and asking the local citizenry to sign off on them. I may vehemently degree with some of their specific goals or policies, but I will always respect a party that is willing to go directly to the electorate on an important issue over one that claims to speak for the people without having consulted them.

Of course, the referendum plan was announced with a predictable degree of sanctimony and victimhood from the Greens, as The Guardian reports:

Justifying the move, [Green Party council leader] Kitcat said: “The coalition’s cuts mean we cannot deliver the services we were elected to provide and which our consciences say we should provide. We have no choice but to seek the views of local people on funding these services through a tax increase.

“Westminster’s ideologically driven cuts to local councils are huge and relentless while demand for our services continues to grow. Vulnerable people who depend on our services are being threatened from Westminster like never before.

The Green Party leader, Natalie Bennett, ladles it on even thicker:

Bennett said: “As Greens we believe that decisions should be made closest to the people who are affected. Instead of letting Whitehall impose cuts on vulnerable people in Brighton and Hove, this announcement takes the decision to the people.

I do find it slightly ironic that the Green Party should take this opportunity to boast about their supposedly-favoured tactics of localism and direct democracy when it is quite plainly apparent that they only turned to the referendum idea out of desperation once all other avenues to fund their big-spending plans had failed to deliver.

Nonetheless, this is a broadly positive development, and it will be very interesting to see how the people of Brighton vote if the referendum does take place. A referendum would require the support or abstention of the Conservative or Labour parties, as the Greens have only minority control of the council chamber, and I would hope that both parties would gladly consent to letting the people have their say – though this is by no means certain.

Not for much longer, perhaps.
Not for much longer, perhaps.

 

The denizens of Brighton are an interesting bunch in terms of their political leanings, having returned Caroline Lucas to Westminster as the only Green MP in Parliament, and so they can hardly be described as a bellwether city or constituency for gauging the national mood. But one thing is readily apparent: if the referendum takes place and it turns out that even left-wing Brighton isn’t willing to put up the money to fund high levels of public spending, then there will be precious little appetite to do so anywhere else.

Which would rather undermine all of the anti-austerity arguments so loudly proclaimed by the left since 2010, wouldn’t it?

Taxes, The Answer To Everything

Samuel HooperLeave a comment

HMRC taxes

 

When your default position holds that Government should always be bigger and seek to do more, and play an ever larger role in the life of the citizenry, it generally follows that you will also be obsessed with tax policy, and ingenious ways to come up with new revenues. After all, the all-seeing, all-knowing behemoth has to be funded somehow.

Polly Toynbee, in her latest Guardian column, lambasts the Conservative-led government for “giving up” on trying to find new revenues, and imagines a world where tax avoidance (perfectly legal) and tax evasion (not so much) can be eliminated at the click of her fingers. She writes:

Cutting the 50% top rate suggests no great enthusiasm for rigorous taxing. Last week’s ONS figures revealed gigantic avoidance of the 50% top rate. It could have been collected but George Osborne needed to prove it didn’t work. The Treasury estimated raising the rate to 50% should bring in £6.2bn, but the actual return was a puny £100m.

In year one, before its official start date, high earners gamed the tax by rushing to take dividends and bonuses early. They paid more into pensions, gaining undeserved higher tax relief. Or they used trusts, or took income as capital gains. (That can be stopped, by fixing capital gains, as Nigel Lawson did, at the same rate as income tax, as the Institute for Fiscal Studies advocates.) Once Osborne announced the top rate would fall to 45%, high earners gamed it again. Incomes Data Services reports a massive delay in bonuses until after 6 April, when they leapt up by 107% in the finance sector to catch the new 45% rate. That could have been forestalled.

In Polly Toynbee world, a 50% top rate of tax is absolutely worthy and to be encouraged, and she sees nothing wrong with this, but we already know that. What is more striking, however, is the glib way in which she assumes that the population, outraged by such high taxes, can simply be stopped from taking perfectly legal measures to limit their tax bill. Phrases such as “that can be stopped” or “that could have been forestalled” are boldly laid down, but are not followed up with the how to do it when it comes to implementation.

When she does offer specific prescriptions for raising more tax revenues, she picks and chooses from the worst and most counter-productive tax policies from around the world, including this gem:

Britain can do plenty alone: we could adopt US tax laws that make every UK passport holder, wherever they are in the world, pay UK tax.

Ah yes, double taxation. The United States is the only major western country to enforce this policy of taxing their citizens on money earned overseas, and the policy is universally despised and acts as a significant disincentive for many Americans to work abroad for any length of time. But by all means Polly, let’s adopt that hated policy.

This is not to say that there is not a very real problem of tax avoidance, but it is far more on the business side than the individual side. People are rightly outraged when companies such as Starbucks use crafty mechanisms (“oh, we have to pay all the money we make in our UK stores as a royalty to our European headquarters in Amsterdam, so we don’t have any UK profits to be taxed this year, sorry”) to avoid paying tax on profits earned in Britain. And somehow it seems even worse when those same corporations, under the harsh glare of the media spotlight, deign to cut the government a cheque, to throw the exchequer a small bone to help solve their PR crisis.

Of course, the whole quagmire could be cleaned up very easily if only there was a political party (hi, UKIP) willing to take a scythe to the existing British tax code and rebuild it from the ground up, based on the tenets of real fairness, which of course means a flat tax. A flat rate of tax on income, corporate profits, capital gains and (if we must keep it) on value added, i.e. sales. Wherever possible, double taxation should be avoided – if you have paid tax on income or a purchase already, HMRC should not be allowed to come back for a second bite of that asset later on. And if we have learned nothing else from our friends across the sea in the United States, deductions should be avoided at all costs, as should Gordon Brown’s labyrinthine system of tax credits that you can claim for everything under the sun. Eliminate deductions and tax credits so that you can lower rates for everyone.

Toynbee concludes:

Tax cheating should be Labour’s chance to tell honest political truths: you get what you pay for, you can’t have Swedish services on US tax ideology. Tax is the price we pay for civilisation. At elections, all parties promise the impossible, more with less and cuts in “bureaucracy” to pay for everything. Treating the public like children on tax does nothing for trust in politics. The door has opened for that conversation.

In her mind, big government is synonymous with “civilisation”. The more responsibilities that the government takes on, and the more that citizens are subservient to the government, the more “civilised” that society becomes. Polly Toynbee probably knows more history than me, but I can think of at least a couple of great civilisations from the past that survived and prospered just fine without 50% top rates of income tax, married couples allowances, earned income tax credits or personal allowances.

And if Polly Toynbee really thinks that the door has opened for a conversation about the government going back to talking half of every pound that you earn above a certain threshold, and preventing citizens from making private financial decisions and transactions at a time of their own choosing so as to limit their tax liability, I am reasonably confident that she will find that door slammed very hard in her face by the British people.