One of Labour's major achievements has been to remove nearly a million children from poverty. What a tragedy if goodwill from this highly significant gain were lost through the 10p tax debacle. The problem for Labour, facing an imminent rebellion, is how to turn this round, in a manner that not only restores respect, but solves the big problem of how to recoup lost potential revenue. It can be done.
The cost of restoring the 10p tax rate would be £6.6bn. To concentrate the gain on those in need, and particularly the 5.3 million losers, one obvious mechanism would be to limit the res toration to poorer taxpayers and those who pay the standard rate. Since about 12 per cent of taxpayers pay at the higher rate, this would recoup some £2.4bn. The problem then is to raise the further £4.2bn. There are ways to do it that would make the tax system a lot fairer.
It is little known that although UK-based individuals hold some £284bn in shares or UK-based unit and investment trusts, the total declared disposal value of quoted shares in 2004-2005, the last year for which data is available, was only £5.8bn - just 2 per cent of their shareholdings. That 2 per cent figure implies that on average their portfolios are changed once in every 50 years. However, it is known that the average market holding at the time was in fact only 14 months. So we should end what is clearly substantial undeclared share trading taking place on the London Stock Exchange. Even if individuals traded their portfolio only half as frequently as 14 months, it would still, if collected, raise the revenue take by some £4bn a year. And collection could be secured by requiring automatic declaration by the stockbroker of all such deals.
Another remarkable fact is that nearly half (45 per cent) of all commercial property in the UK is now owned by foreign nationals. Yet they are unlikely to pay UK tax on their UK property sales, in contrast to the practice in many other countries. In addition to the revenue loss, this distorts the market. Closing this gap by charging capital gains tax (CGT) on the sales of foreign holdings could well form the second strand of the strategy. Property disposal in 2004-2005 accounted for nearly a third of all reported capital gains and amounted to £5.3bn. That suggests that gains for foreign property owners totalled some £2.4bn, and with an 18 per cent CGT applied, it would yield about £430m.
It may also not be realised that a fifth of all financial assets sold and subject to CGT have been owned for less than a year. But gains are meant to arise on investments, which by definition should be long-term holdings. Those arising on short-term trades are likely not to have come from investments at all, and it is clearly right that the profit in that case should be subject to income tax. More than £1bn of chargeable gain was declared on these disposals, representing a profit rate of only 13 per cent. This is far lower than the rate for disposals as a whole, where the average is 52 per cent. Closing this anomaly would yield at least a further £500m a year.
These actions alone would be enough to recover the revenue loss resulting from restoring the 10p tax rate. But there are other options.
For example, recent research for the TUC by Richard Murphy, one of Britain's foremost tax experts, found that the 50 largest UK companies almost always pay 5 per cent less tax on average than they declare in their accounts. As such, the actual corporation tax rate paid by these firms in 2006 was 22.5 per cent, when the rate set by parliament was 30 per cent. By the end of 2006, the cumulative tax savings recorded in the accounts of these companies amounted to a staggering £47bn - which seems indefensible when people on £200 a week are required to pay more tax.
Or how about getting tougher on tax avoidance? A recent crackdown has already led to more than 60,000 people admitting substantial undeclared income in offshore bank accounts, with a prospect of a £500m tax recovery.
All this of course raises the spectre of redistribution from rich to poor, a politically taboo subject. But there has never been a time when this was more justified, and it would signify a Labour government that really meant business.
Michael Meacher is MP (Labour) for Oldham West and Royton