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Tax the wealthy before benefit cuts

October 8, 2012

I’m glad George Osborne said in his speech to the Conservative conference that we are still “all in it together.”  But did he really mean it?  How in the same speech could he rule out a mansion tax, paid by the very richest, yet push for a £10 billion cut in the nation’s welfare bill?

If we are all in it together in the battle to get the national budget into balance then surely the  rich should contribute more than the poor?  As far as I am concerned, we should make sure that no stone is left unturned on  taxes on the wealthy before inflicting financial pain on those lower down the income scale.  Also, as a general principle welfare reform should be just that – a reform that could have been made (and should have by Labour…) in times of healthy public finances.  Welfare reform should be for the long term not for the short term corrective needed by the Treasury.

If my coalition colleagues accept that deficit reduction measures should be distributed fairly across all social groups then why are they so afraid of the Liberal Democrat idea of a Mansion Tax?  It is the simplest form of a wealth tax, easy to assess, easy to collect and pretty hard to evade or avoid.

A mansion tax would operate as an annual levy on domestic property worth more than £2million.  If the levy was say 1% then the mansion tax on a property valued at £2.5m would be £5,000 a year on the excess £500,000.  The vast majority of people owning homes  of this value would be able to bear such a tax.  In genuine cases of “asset rich, income poor” then the mansion tax could be deferred and rolled up, becoming payable on sale or transfer of the property.  A mansion tax should not strike fear into the hearts of the retired of Chelsea and Notting Hill.

A mansion tax is just one way that we should rebalance the tax system.  I want to see a tax system that rewards work and entrepreneurial flair.  Taxes should fall on incomes from work and rise on unearned capital gains.  There should be more effective taxes on wealth held in life and inherited on the death of others.  And of course, all taxes should be hard to avoid.

The coalition has made a good start.  The Lib Dem plan to raise the amount of tax free pay to £10,000 is within reach.  Capital gains tax has gone up by 10% for higher rate tax payers.  But there is much more that we could do:-

  • Restrict income tax reliefs (eg on pension contributions) to 20% basic rate.  The well paid don’t need a tax incentive to motivate them to do things that are in their own interests;
  • Reduce the CGT threshold to say £5,000.  Small gains would still be exempt;
  • Convert inheritance tax to an accessions tax on individuals, rather than on the net estate.  There could be a deferral for the family home if lived in by the beneficiary.   Most other reliefs could be scrapped.

The above are just some of the options.  The Liberal Democrats are currently reviewing our tax policies.

Finally, the Chancellor is quite right to talk about welfare reform.  The welfare system will not command public confidence if some people are able to enjoy cheap or free accommodation, income benefits and other social transfers as part of a long term life choice.  The welfare state should be there to help people in times of need but not to perpetuate a dependency culture.  People who work hard to provide for themselves and their families have to make adjustments throughout life as incomes rise and fall.

There are big societal and philosophical issues to discuss here.  And that is the right forum for debating them, rather than starting from the need for deficit reduction.  Many people contributed to our current financial problems.  But the poorest are least to blame.

15 Comments leave one →
  1. Crow permalink
    October 8, 2012 9:43 pm

    NOW you’re asking the right questions!🙂 You’re a smart man, I think smarter than me (and definitely better educated), but you have the added task of seeing the wood for the trees. You can’t see it as I can, as an outsider, but no doubt you can see some of it as I do now, that this is more than verging on a breach of the coalition, the Tories are rampaging predators and people are living in fear of them rather than of any real economic troubles. It’s like that father of four on Radio 4’s ‘World Tonight’ program just now, he wasn’t profligate or stupid, he had a decent job, didn’t think he’d be unable to support his family, but shit happens, as the Yamks say it so well. And it’s time people stopped fearing their govt and did something about it, and we need leaders to lead, not just tell us what to do. Bad things can happen, and it’s no good waiting to see if it’s the Jews or the Blacks the predators are after. And hiding under the wing of a predator is an excellent way of getting it in the neck first. No-one should ever assume it cannot happen to them, it is better to assume it CAN, that way we all make better and kinder decisions.

    Liberals can take a great deal of pride and honour in trying, but if they cannot admit failure and use the remianining power they have, to figure out whether they want to be Liberals, or cruel libertarians, effectively useful idiots who get used up in the ruthless defence of rich who are now 300-fold richer when just 30 years ago the difference was merely tenfold. My dad, born 1909, a dentist and merchant seaman after leaving the RN in wartime, would never have recognised a Liberal party so used as this, I’m certain he’d have urged separation, and a new election forced two years ago if need be, rather than be so eager to trust a party already known for such ruthless attacks on the poor. I know that times are different from his, but there’s nothing like having a father born in 1909 for making a guy take the long view! Right now we’re in danger of leaving people shocked, aghast at what they have done, or allowed to be done. While it is nothing like as bad as the folly of the Germans about this time last century, it IS enough to make people wonder why anyone bothered to fight wars for freedom and equality! If it is not stopped, there may emerge the kind of predator we will need other nations to stop for us. Best we steer a safe course early this time.

    If all this seems meldromatic, remember the phrase ‘the road to hell was paved with good intentions’. My deep instincts are deeply disturbed by the purges and blame games being forced on the British public right now. There is NO WAY ‘we are all in it together’ anymore. But to survive the crisis, we need to be, and it won’t happen as forceful rhetoric from the rich. This isn’t ‘politics of envy’. This is a wake-up call.

    Breaking the coalition has arguably already been done. There are Tories who would do it formally in a hearbeat the instant they no longer need you. Do it to THEM while there is anything left to work with. Go to the country. Trust to whatever they vote for. If they vote like turkey’s for Christmas, on their own heads be it. Just tell them what the stakes are, and let them choose. They will forgive any errors the Liberals have made fastest that way, and more quickly come to respect any good that has been done.

  2. October 8, 2012 9:47 pm

    Steven,

    Have the Tories ruled out upper rates for the Council Tax Bands? And when I listened to the ChX, he said £10bn in “the first full year of the new Parliament” – which surely is 2016-17, ie. the year after the current debate on the £16bn of cuts in the last year influenced by the coalition agreement. Or have I got it horribly wrong?

    And unhelpful typo time – 1% of £2.5m is £2,500.

    Toby

  3. October 8, 2012 9:48 pm

    £25,000, in fact…

    • October 8, 2012 10:24 pm

      the levy would be on the excess over £2m, so it’s 1% of £500k, which is £5k. But I’ll amend the text so crystal clear it’s on the excess, not the whole. (so different to the odd way stamp duty operates)

  4. John S permalink
    October 8, 2012 10:59 pm

    When income tax was introduced, it was only payable by those whose income was over three times the average. Now it is paid by everyone whose income is around a third of the average. How long will it be before the “mansion tax” becomes the “one bedroom flat tax”?

    How much will the “mansion tax” raise? How much will it cost to administer and collect? Who really cares? This is pure political gesturing from the LibDems. Are they trying to seize the political ground vacated by “Old Labour”?

    • Crow permalink
      October 9, 2012 12:12 am

      Two spurious contradictions, one in each paragraph… First, if you assume that income tax became more predatorial on the less well off, then why argue against a mansion tax? Instead of assuming that it would go the same way, stay with your starting premise: that top-down predatorial use of tax needs to be countered. THAT was the point of the mansion tax. (I’ll leave it to Stephen to spell out how it works, I don’t know enough to speak about that).

      The other contradiction is the notion that the left-of-centre stance is being taken up by the Liberals. Would that it were! Right now the left wing in the UK is more right wing than the Tories were before Thatcher’s time. Flirting with the right is downright dangerous. The Dutch and the French have seen the error, and risked a more collective approach. They are not happy right now, are arguably in worse straits than we are (surprise surprise, the crisis is not something our local Labour party made). But those nations have at least decided not to risk further right wing mission-creep. Time we showed solidarity with that decision, that way we might beat this on a scale fit to match the causes, it IS affecting all of Europe after all. No doubt we might help Greece better that way too, they are at even more risk of right wing dangers than most of us. I think the stakes are a great deal higher than we’ve been willing to accept. I think the last time Europe was safely close to a moderate political base was shortly before the cold war ended. We need to do a tad bit more than count a few (billion) local pennies to fix this one.

      • John S permalink
        October 9, 2012 1:19 am

        Forget the political verbal runny stuff. How much will the “one-bedroom flat in Mayfair, next year Peckham” tax actually raise, NET of admin and collection costs?

  5. October 9, 2012 7:36 am

    Can I remind you what the rich actually contribute to this country.

    The top 1% (just 300,000 ) of earners pay 27% yes 27% of income tax receipts.
    The top 5% 47% of income tax receipts.
    The top 10% of earner contribute 57.6% of all income tax revenue.
    The bottom 10% only pay 0.5% of income tax revenue.

    If this mansion tax comes out and does raise some revenue what will it be spent on? Paying to upgrade India’s space programme, more civil servants and red tape?

    The rich will find property in other countries long before the pips squeak.

    http://www.taxpayersalliance.com/economics/2012/04/rich-poor-middle-pay-lot-tax.html

    • Crow permalink
      October 9, 2012 11:35 am

      If the top 1% have a third of the nation’s wealth *, there’s no disproportion there. Besides, you’re assuming they actually pay. Bad assumption, given the amount of news coverage given to problems of both personal and corporate nonpayment. The ones at the bottom DO pay, before they get their wages. If they didn’t they’d go to jail. So the emphasis SHOULD be to examine what goes on at the top.

      * http://www2.ucsc.edu/whorulesamerica/power/wealth.html
      I’m not sure that the 1% figure owning a third is correct for the UK as it is for the US, but the UK’s top 10% apparently owns 56% so it seems a fair assumption, and should be considered when bandying figures about. So, John S ought to understand that hard figures are just as capable of ‘runny stuff’. This is especially true when blinkered vision makes them as selective as too many people want to be when it comes to taxes.

  6. mark permalink
    October 9, 2012 9:20 pm

    “The ones at the bottom DO pay, before they get their wages. If they didn’t they’d go to jail.”

    Wrong; it would be their employers who go to jail; the ones whose duty it is to collect the taxes and pass them on and who bear all of the the financial risk in doing so.

    • Crow permalink
      October 9, 2012 9:56 pm

      Point taken, but I was also allowing for those who are self employed. My point was that where the earnings are small and locally established it is easy (though tedious) to assess and collect, hence the risk being high on failure or fault because that is easy to prove. That’s why scrutiny and collection efforts need to be tightened at the top of the scale, where financial and business mobility, along with schemes the lower paid can never afford to use even if they know where to find them, make it harder to account for and to collect what is due, and where for every rich individual who does not pay, the losses are a lot greater.

      Extra point, not in answer, it’s just something I considered as useful earlier on while thinking about stuff… I’m not automatically against the rich, I just dislike powerful predators who take advantage of weakness to consume or hoard beyond their real needs. Where rich people spend heavily on traceable local (to UK) business and industry for supplies and materials, instead of hoarding wealth or removing it from the country, I imagine that could be a great reason to give them tax discounts. ‘Growth’ is not all-important, it’s only been fashionable for about 70 years or so, but avoiding an economic freeze IS important, as people still have to trade to live. People keep bleating about how the rich will just leave the country if taxed extra, so why not tax more to prevent hoarding or removal of wealth, and discount taxes for those who will spend it here to help keep things moving. That way we should quickly find out who has any loyalty because those will be happy to stay and get some benefit from doing so. This might lessen the burned of tracing due taxes because those who stay will likely enter into systems that make the tracing that much easier, just to satisfy the conditions for their tax relief. It will certainly define who the real ‘wealth creators’ are a lot more clearly than at present.

      Just mentioning it… I don’t know if I just crudely reinvented a wheel, but if this is NOT already either happening or being considered, I’d like to know why not. If the public start clamouring for nationalisation of nationwide networks like rail and road and electricity supply, which I think is the best move, the free-market capitalists will rapidly lose ground if they do not at least seriously consider such a scheme. Right now we have the likes of EDF running a lot of UK power, and not investing unless they not only get a hefty whack out of profits but also out of govt subsidy too! Presumably to remove it to France where they are based. If the free-market types cannot figure out a way to keep it local and make the required investment and building happen withput falling foul of trade laws or agreements, then either those agreements will have to be rewritten to adapt, or the demand for full nationalisation will grow. This is already happening. Either way, I don’t care so long we don’t scupper our ship and see the lights go out because we didn’t have the wit to think ahead. To do that we have to keep the heavy profit HERE so it can be invested where we need it, instead of seeing govt held to ransom by foreign ‘investors’. No-one wants to spend a life building what they know will be taken away. Got to CHANGE that before people will be willing to work that hard. And it’s no good ‘outsourcing’ to China or India either. This is stuff that has to be entirely done here, by people here. ANY tax agreements that favour this are ok by me, although for standard methods and equipment on a nationwide basis, I prefer nationalism because the experiment with privatisation in the railways is only 17 years old, is clearly NOT a resounding success. When researching new things, private enterprise works well, but it makes for lousy squabbles and inefficiency when maintaining national standards and networks. If taxation is to be of any real use it needs to help steer a useful course through the mess. Failing that, the whole political order may change as a result of stress from public demand.

  7. October 9, 2012 9:34 pm

    DaveAtherton: 27% is accurate but not relevant. Jonathan Portes’ analysis is spot on: http://notthetreasuryview.blogspot.co.uk/2012/10/taxing-rich-and-fairness-its-not-just.html

    Stephen: my apologies on the tax test. But I think that there are more elegant solutions to taxing wealth – especially from the gains from the planning system. Paper to follow, that should allow us to reform SDLT, as well.

  8. Crow. permalink
    October 10, 2012 6:36 pm

    Sorry to risk overdoing this, Stephen, and no doubt it will be seen as political drivel by those who only want to talk figures, but to me this seems totally relevant to the discussion, and it extends my theme about predators… If you want me to stop, ask by email if you want, that address is a real one.

    I was reading Clair Fox’s bit on this page: http://www.bbc.co.uk/news/uk-19873832

    I am careful to pay attention to her because on the Moral Maze she is strict in her judgments, but definitely no predator, if there were more like her at the helm we might get through this yet. Anyway, she is arguing that while benefits can cause dependency, cuts will cause more pain than gain unless there are opportunities and housing for those who have to make a living. I ended up thinking about the ‘predator’ thing and realising that this dependency is at the top as it is at the bottom. The term ‘fatcat’ is surely not just idle derogation of the rich, there is a direct implication in the term, of one who predates beyond need, hoards to the point where they become unfit, dependent, and in their fear of inability to adapt to cruel change, they continue to predate, taking far more than they need. Even predators can and should be kind for the simple reason that predation is expensive, and anyone who can’t rely on a paid servant to do it for them never does it without need. Most animal predators spend most of their time in happy langour, letting the world go by or moving calmly through it without bothering it. Only humans have taken it on themselves to demand more, abusing strength, or demanding that others use it to serve them.

    If that’s the signal sent from the top, no wonder those at the bottom often feel no need to do any more for themselves than they have to. We are often told of the ideal endeavour, such as the factory that grows, makes good stuff, turns a profit back into more stuff, more tools, more workers… The truth is often less than this, many factories owned by rich are basically milking machines to get as much value as possible from the few people the owner is willing to pay, and with as little as possible at that. This has been true since before the Luddites (quite reasonably) got it up their noses and tried to resist.

    In short, this problem is clearly VERY old now, yet apparently those least able to change it for the better are compelled to make it happen by those most able, while those most able sit back and take the credit if they’re lucky enough to make it work. Which of course they won’t be, it’s as primal as basic physics that if you offer attractions, people will move themselves, if all you offer is repulsion, you’d have to do all the pushing yourself. And so it is that the state cannot be reduced in a ‘big society’ by a govt that seems hellbent on coercion and will not offer enough of its stored wealth. The only way to reduce the state this way is to wear it out to the point of failure! There are houses to build, rails to fix and use, power stations to build, and all of this cannot be done on the basis of hoarded wealth any more than charge in a disconnected capacitor can be used to drive a motor. Given that people nearly always self-motivate to do SOMETHING, then if coercion fails, it just means that guidance has already failed earlier.

    As to why I write this here, I figure there’s a chance that the SNR is better than most other places on the net, and the net has made it possible to place such thought in easy reach of a member of Parliament. That never used to be an option, and I’d be daft not to take it now. There might be others who can get something out of it too, if they’re willing to read and think about it. Some stuff is too complex for sound bites or sloganeering, which is pretty stupid anyway.

    I suspect you might already recognise this thought or agree with it, but I imagine there are people reading this who don’t, and who maybe need to give it some thought themselves. If politics is reduced only to bean-counting, then it has failed. There is no point at all to taxation if we can’t agree on why it is to be done. Like policing, it is usually only possible by consent.

  9. James Fox permalink
    November 14, 2012 5:36 pm

    How can this possibly help to reduce the deficit, there are maybe a hundred houses in Bristol worth over £2m ? Even if it’s a thousand, on your own figures this would raise about £5m. What about the £25m being thrown away behind Temple Meads in an “enterprise zone”, exactly the sort of waste which caused the deficit in the first place ?

  10. tim permalink
    November 14, 2012 6:53 pm

    This will not do anything to help the deficit. There is a real opportunity for tax reform and more importantly a real need. I am so tired of workmen asking for cash, supposedly to save me VAT but really to save them income tax. But I don’t blame them, the threshold for VaT is so low that the only way they can compete with the big boys is to offer lower labour costs to offset the VAT the big companies pay on labour, so they ask for cash and avoid income tax as well. So lets offer all small employers a real VAT free threshold of around £150k and a lower labour vat rate above that.. Bear in mind if you are a builder ( I am not) it does not take long before materials get into that region. This would not cost a penny to the treasury on vatable goods and a relative small amount on labour. Tie this in with some real eduction to the public about the damage and extra cost to them helping people avoid tax does and you might actually start to make some ground on the underground economy.

    It would be nice if our politicians actually think instead of throwing out the same old ” lets make the rich pay more” policies that don’t begin to tackle the tax avoidance issues that exist. I can only imagine what a wealthy and lower tax country, we would be if everyone paid the tax owed on their earnings, and not just us mugs who happen to be employed by a company.

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