Budget 2012: the tax battlegrounds

It's the most exciting period of the year (for accountants): The run-up to the budget. But what's in

 

1. Mansion Tax

What is being proposed?

An annual tax of one per cent on properties worth over £2m, applicable to value of property over that figure.

Who is behind it?

Business secretary Vince Cable.

Will it work?

The devil is in the details. The central idea is to move some of the tax burden from income to wealth. So far, so good. Unfortunately, using property value as a proxy for wealth is open to abuse, difficult to administer and will lead to some strange quirks in who does, and doesn't, pay.

The tax will hit almost exclusively the older rich, writes Chris Dillow -- those who already own houses worth over the £2m threshold. Not only will they have to pay the tax, but they will very quickly see a deprecation in the value of their houses as the tax is priced in to the sale price. Who benefits from this?

"The younger, slightly less rich -- those who might well already own houses in the £1-2 million bracket."

The administration of the tax will require a massive investment by the government to put together a database of house values (Sale prices can't be used, for obvious reasons), or piggybacking on the information already gathered for council tax -- which would have been easier before Eric Pickles sabotaged the data. Simulating the tax by adding new bands to council tax would be a possibility -- but would move the burden of payment from landlords to renters.

Will it in be in the Budget?

The tax is the most popular of the possible replacements for the 50p tax (see below), but it is very much a Liberal Democrat desire, even though Nick Clegg appears to have cooled on the idea, and it is burdened with some seemingly-intractable problems standing between it and implementation. The Chancellor is said to be dead against the idea.

2. Tycoon Tax

What is being proposed?

A British equivalent of the American "alternative minimum tax", ensuring that the wealthiest Brits pay overall tax rates of at least 20 per cent - the same as the basic income tax rate.

Who is behind it?

Nick Clegg, attempting to outflank Cable's mansion tax.

Will it work?

No. The alternative minimum tax, the last attempt to pass this sort of rule in the US, is itself the subject of reform, and failed to stop Mitt Romney paying a total tax rate of 13.5 per cent. Discovering this fact was, apparently, Nick Clegg's motivation for introducing the idea in the first place.

Richard Murphy has a handy checklist of reasons to doubt the tycoon tax could work, of which the strongest is the same problem facing the US: capital gains tax. While that and the dividend rate are less than income tax, a great number of the wealthiest in society will be paying miniscule proportions of their income. Yet the aim of capital gains tax, to encourage investment, remains something we greatly desire. Until that contradiction is ironed out, the tycoon tax is going nowhere.

Will it be in the Budget?

Maybe. Although Nick Clegg appeared to have backtracked, using his keynote speech at the Lib Dem conference to promise to “call time on the tycoon tax dodgers” without actually calling for a new tax, new reports this morning suggest that the Chancellor is giving the idea serious consideration, since he prefers it to the mansion tax.

3. Raising the tax threshold

What is being proposed?

Speeding up the rate at which the tax threshold (the level below which income tax is not payable) is raised, ensuring that it hits the target of £10,000 before the current deadline of 2015.

Who is behind it?

As a Lib Dem manifesto pledge, it has support from most senior Lib Dems, who see it as a chance to finally put the party's stamp on some progressive policy. Raising the threshold to £10,000 by 2015 is in the coalition agreement -- but then again, so are a lot of things.

Will it work?

If the aim is to help the worst off in society most, then it seems unlikely that it will be able to achieve that goal. The IFS analysis shows who the biggest winners are:

IFS income ratio

 

This chart shows the effect of the £10,000 tax threshold when the unit of analysis is the family, rather than the individual. As the IFS says, "We would expect at least some degree of income sharing within families."

In addition, the raised threshold isn't a particularly good fiscal stimulus. The IFS write that effective stimulus needs to be "timely, targeted and temporary", and raising the threshold is none of those. As a result, it seems unlikely that it would provide much of a boost to the economy.

The policy is a very expensive commitment, and if the Lib Dems can't easily win the argument as to whether or not it is progressive, they may think twice about pushing it too hard. The staggered introduction -- the threshold will already be £1500 higher in 2012/13 than it was in 2010/11 -- also means that they don't have nearly as much public support as they would have hoped, since voters haven't noticed any sizeable change in their tax bill.

Will it be in the Budget?

The ball is largely in the Liberal Democrats' court for this one. If they keep pushing, the tax threshold will keep rising, but if they decide the money would be better off spent elsewhere, then there's no-one to argue with them. If they go the other way, and try to get the whole of the £10,000 threshold introduced in one go, there will be considerable opposition from the Conservatives, who have their own pet projects to spend the money on.

4. Scrapping the 50p tax

What is being proposed?

Getting rid of the 50p tax rate, currently levied on income over £150,000.

Who is behind it?

The Tory right, but the pre-budget horse-trading has secured the support of Lib Dems provided it is replaced by another tax on the rich -- most probably the mansion tax -- rather than being scrapped outright

Will it work?

The problem the opponents of the 50p tax have is that it has its second birthday next month, and the sky has not yet fallen on their heads. The first revenue figures are dripping in, showing a "surge" of hundreds of millions of pounds, and there is no evidence of any widespread flight to low-tax nations either. In the 2011 budget, there was a chance the Chancellor could confidently state that the downside simply hadn't started yet; this year, that claim will be harder to make.

Then again, the reasons for keeping the 50p rate have never been entirely down to revenue. As Fraser Nelson, who is confident the tax will end up damaging income, wrote:

It's not just that the Tory leadership are nervous about being teased for their own backgrounds. It's that they believe there is no choice but to assuage the eat-the-rich mood in the country. The argument for 50p is political, not economic.

For this reason, it is hard to work out what the desired result from scrapping the rate is. It will definitely result in the richest Britons getting richer; it will almost certainly result in a lower tax take; and with the "eat-the-rich" mood showing no signs of abating, it's not going to be a vote winner either.

Will it be in the Budget?

This is the big one. Almost every other proposal has been priced against the 50p tax, either to fill in the gap left by its abolition, or to show how much more effective it would be. There is a widespread understanding that if Osborne can find a replacement which ticks all the boxes, he would love to be done with it. Yet there doesn't seem to be that easy replacement on the horizon.

5. Changing pension taxation

What is being proposed?

A raft of measures, from exempting the state pension from the income tax, to ending tax relief on private pension contributions from top-rate taxpayers.

Who is behind it?

The independent government body the Office for Tax Simplification, the Centre for Policy Studies, and "senior Liberal Democrats".

Will it work?

Taken as a bundle, the measures pay for themselves. In addition, they form a broadly progressive change, moving some of the burden of taxation to top-rate taxpayers from those who rely solely on the basic state pension. The biggest concern is that doing so will introduce some element of double taxation; not an intractable problem, as Richard Murphy explains, but potentially unpopular nonetheless.

Will it be in the Budget?

Some big guns are in support, and there is little heavy opposition, but a change funded entirely on the back of top-rate taxpayers may have trouble getting through the doors of number 11.

6. Corporation tax

What is being proposed?

A long term plan to take Britain's corporation tax rate down to 20 per cent. (£) Britain's corporation tax rate currently stands at 25 per cent, and the Chancellor has already pledged to reduce it to 23 per cent over the course of this parliament.

Who is behind it?

The Chancellor himself.

Will it work?

It is unlikely to do a great deal to lure businesses over to the UK; any that choose their headquarters based on the tax rate still have a wealth of options to pick from, including Ireland (with a rate of 12.5 per cent), Liechtenstein (12.5 per cent) or the Isle of Man (0 per cent). It will make us competitive with Luxembourg, which has a rate of 20 per cent, and increase our lead over America (35 per cent), France (33.3 per cent) and Germany (15 per cent, "but additional social taxes mean an effective rate of more than 30 per cent" according to the Sunday Times).

Those leads have stood for quite some time, however. Before Osborne became Chancellor, corporation tax stood at 28 per cent, and yet there was no flood of companies moving headquarters across the Atlantic to take advantage of our low rates. It seems unlikely that much will change with a further cut.

Will it be in the Budget?

It has the Chancellor behind it, no opposition, and is being pre-briefed to the Sunday Times. It may as well be law already.

 
Nick Clegg at the Lib Dem conference. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Voters are turning against Brexit but the Lib Dems aren't benefiting

Labour's pro-Brexit stance is not preventing it from winning the support of Remainers. Will that change?

More than a year after the UK voted for Brexit, there has been little sign of buyer's remorse. The public, including around a third of Remainers, are largely of the view that the government should "get on with it".

But as real wages are squeezed (owing to the Brexit-linked inflationary spike) there are tentative signs that the mood is changing. In the event of a second referendum, an Opinium/Observer poll found, 47 per cent would vote Remain, compared to 44 per cent for Leave. Support for a repeat vote is also increasing. Forty one per cent of the public now favour a second referendum (with 48 per cent opposed), compared to 33 per cent last December. 

The Liberal Democrats have made halting Brexit their raison d'être. But as public opinion turns, there is no sign they are benefiting. Since the election, Vince Cable's party has yet to exceed single figures in the polls, scoring a lowly 6 per cent in the Opinium survey (down from 7.4 per cent at the election). 

What accounts for this disparity? After their near-extinction in 2015, the Lib Dems remain either toxic or irrelevant to many voters. Labour, by contrast, despite its pro-Brexit stance, has hoovered up Remainers (55 per cent back Jeremy Corbyn's party). 

In some cases, this reflects voters' other priorities. Remainers are prepared to support Labour on account of the party's stances on austerity, housing and education. Corbyn, meanwhile, is a eurosceptic whose internationalism and pro-migration reputation endear him to EU supporters. Other Remainers rewarded Labour MPs who voted against Article 50, rebelling against the leadership's stance. 

But the trend also partly reflects ignorance. By saying little on the subject of Brexit, Corbyn and Labour allowed Remainers to assume the best. Though there is little evidence that voters will abandon Corbyn over his EU stance, the potential exists.

For this reason, the proposal of a new party will continue to recur. By challenging Labour over Brexit, without the toxicity of Lib Dems, it would sharpen the choice before voters. Though it would not win an election, a new party could force Corbyn to soften his stance on Brexit or to offer a second referendum (mirroring Ukip's effect on the Conservatives).

The greatest problem for the project is that it lacks support where it counts: among MPs. For reasons of tribalism and strategy, there is no emergent "Gang of Four" ready to helm a new party. In the absence of a new convulsion, the UK may turn against Brexit without the anti-Brexiteers benefiting. 

George Eaton is political editor of the New Statesman.