Coming from a Chancellor who professes to believe in social justice, the budget has been another wasted opportunity. The Chancellor tinkers - giving tax credits here and one-off payments there. But under Labour, lower income families and pensioners are paying more of their income in tax than the rich. This Government is failing to tackle the fundamental unfairness in our tax system.
At the outset, I should say that I consider current planned levels of tax funding of public services are about right (though, obviously, the exact tax take will fluctuate over the economic cycle.) Overall, I have no appetite for a society in which taxes are cut to the point that publicly financed health, education and transport are little more than the default option for the poor; I equally do not think that the state is always the best judge of an individual’s spending priorities - leading to remorseless rises in tax.
On current trends, the likely tax take over the next three years will rise by about 2% of GDP. The other parties are reluctant to be honest about this; indeed, the Conservatives have been talking up £4 billion pounds worth of cuts. But the reality is even the Tories still project increases of £24 billion in tax receipts. So, let’s acknowledge upfront that - regardless of who is in power - the next few years will see more money being taken in tax.
My priority is creating a fairer tax system. The Chancellor talks a good game about the ‘progressive consensus’ but the reality is his complicated means tested tax credits haven’t delivered. Wealth inequality is, if anything, worsening – so the poorest 20% of the population is paying a larger share of its income in tax that the richest 20%: which cannot be right.
Fairness requires imaginative thinking. My party has different priorities for public spending. During this Parliament, the Liberal Democrat Treasury team has conducted a careful review. The result is that where we would spend more, eg on bigger pensions, better schools and more police - that extra spending would be funded by cuts elsewhere. We would scrap the ‘baby bond’ scheme and ID cards, cancel the next stage of the Eurofighter project, cut industrial and agricultural subsidies and close government departments of questionable value like the DTI and ODPM - transferring essential functions to other departments. Such choices allow us to promise significant improvements in public provision: notably, a generous non-means tested Citizens’ Pension for older pensioners ending the scandalous discrimination against women in our pension system for the first time – without the need for extra taxes. Unlike the other parties, our manifesto will be accompanied by detailed costings and the figures add up.
The current regressiveness of the overall tax structure is largely due to the council tax – a tax which bears no relation to ability to pay and its unfairness will be highlighted in the forthcoming revaluation. We have a clear alternative, unlike Labour and the Conservatives. We would scrap council tax and replace it with a local income tax, collected nationally through the Inland Revenue, with rates around a national average of 3.7% to reflect local differences. LIT is simple and cheaper to collect than council tax. They use it in the USA, Switzerland, Sweden and Japan. Analysis by the Chartered Institute of Public Finance and Accountancy and the Institute of Fiscal Studies shows it to be eminently feasible. Such a change would mean a typical family on median income is £450 a year better off.
Fairness also underpins our sole income tax raising proposal: a top rate of 50% on every pound earned over £100,000 – which would apply to 1% of the population. Government figures suggest this would raise £5.2 billion which we would use specifically to scrap student top-up and tuition fees, end personal care charges faced by people with conditions like Alzheimers or Parkinsons and ease the transition from council tax to LIT. Any disincentives from the changeover would be mitigated by capping the top rate at 50%.
I believe that taxes can – and should – also be used as an incentive to changing behaviour, particularly environmental behaviour, without recourse to regulation. It’s a pity that environmental taxes have been abused by the Treasury as a ‘cash cow’. Our proposed environmental tax changes are strictly tax neutral. For example, working on the ‘polluter pays’ principle, we would shift the vehicle taxation from small, low-polluting to large high-polluting vehicles; we would shift aviation taxes away from passengers (as at present) and onto aircraft - thus encouraging airlines to fly with fuller planes - and we would also equalise the rate of VAT on new buildings and home improvements.
Under this administration, tax has become absurdly complex. I don’t share the Chancellor’s enthusiasm for endless tinkering and ineffective tax reliefs which are a bonanza for tax accountants but confusing to everybody else. I would put the emphasis on simplifying tax and the associated bureaucracy. There is an added benefit that fewer people would be caught by tax.
Under our tax proposals, 70% of the tax-paying public will either pay less or be unaffected. But the big long term challenge is to lift low paid workers and pensioners out of income tax altogether. It is certainly unfair that today workers or pensioners who don’t even get the equivalent of the minimum wage are paying income tax on half their income.
However, our immediate objective at this election is a fully costed package. What the Liberal Democrats will be offering is more credible and straightforward than either Conservative or Labour promises. It’s a real alternative.
ENDS
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