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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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.