Will we get fairer taxes under the coalition?

LibDem_Tory_Bombshell

The Liberal Democrat's campaigned explicitly against a VAT increase in the 2010 General Election.

A couple of weeks ago I wrote about the regressive alliance seeking to undermine the new coalition government at every turn.  If that seemed vague and abstract then, it certainly doesn’t any more.

We should at least respect the Daily Telegraph’s candidness; it’s attacks on David Laws and Danny Alexander have been explicitly linked with their specific campaign to prevent the coalition’s agreement to harmonise Capital Gains Tax with income tax and to destabilise the coalition more generally.  What is more unfortunate is seeing numerous people within Labour and on the left joining in, perceiving in some vague unspecified way that Laws’ misguided attempts to protect his private life and Alexander’s significantly less misguided decision to only pay the amount of tax he was legally obliged to were somehow the moral equivalent to the more eyewatering examples of house flipping that Labour ministers got up to in the last parliament.  It is encouraging however that, overall, the media reaction has been relatively muted.  The Telegraph’s ability to blackmail and strong arm the political establishment to do its bidding seems to be fading by the day.

But in terms of Capital Gains Tax, there is a risk that the damage has already been done.  There’s no denying that the Tory right have been incredibly quick off the mark on this and caught supporters of the tax change unawares.  Even before David Laws’ resignation, the former Chief Secretary and George Osborne were already making warm noises in response to John Redwood’s “compromise” proposals.

This is something we simply cannot allow to let pass.  If, after just a month in government, the coalition reneges on one of the few concessions on economic policy that the Lib Dems managed to secure in the agreement, then the long term damage will be immense.   Give Redwood, Davis and company an inch now, and they will go on to take a mile.  It would set an appalling precedent and cast a shadow over the whole agreement.  What’s worse, the case against the tax harmonsation is incredibly weak and largely based on misconceptions about who pays and how Capital Gains works in practice.

The first thing to remember about the Capital Gains Tax policy is quite how little it is expected to raise in relative terms.  The big ticket taxation policy the Lib Dems campaigned on in the general election was limiting tax relief on pensions to the equivalent of the basic rate of income tax.  That (entirely reasonable) measure was to have raised £5.5bn.  Capital Gains harmonisation, by contrast, was only budgeted to raise £1.9bn – significantly less than the equivalent of a single penny on income tax.  From reading the more effervescent articles in the Telegraph and Mail, you could be forgiven for thinking that this simple adjustment alone would pay off the entire national debt!

An article in the Telegraph last week about how the policy could affect the tax burdens of “hundreds of thousands of old people in care homes” is a particularly good case in point.  Strictly speaking that may actually be true, depending on the timescale you are looking at and depending on whether you feel that a tiny, barely noticeable increase actually counts.  To put this into perspective, Capital Gains is only incurred on the homes of elderly people in care homes who have lived away from home for more than three years.  What is more, it only counts against a proportion of the capital gain accrued since the asset ceased to count as a primary residence – and even then only as a proportion of the capital gain accrued since 1982.  So, for example, a pensioner who has lived in a house since May 1970, moved into a care home in May 2007 and sold in May 2010 would only pay CGT on 1/444th of that capital gain.  If they sold next year, they’d pay CGT on 13/456ths, and so on.  Assuming the capital gain was £400,000, that CGT personal allowance was dropped to £2,000 and that the CGT rate was raised to 40%, that tax burden would go up by £0 or £3,526.77 (£234.63 to £3,761.40) respectively1.  A £3.7k tax on a £400,000 profit (less than 1% overall) sounds reasonable to me – and the homes of most elderly people in care are typically sold well within three years.

The bottom line is, if the coalition government lacks the strength to make this modest tax adjustment, then how can it be trusted to make the much tougher decisions regarding the deficit.  Thus far, despite Nick Clegg’s reassurance of “progressive austerity” measures, the vast bulk of spending cuts have been predominantly targeted at the poorest and the young.  It is frankly incredible that young people’s futures are being put at risk while the government rules out even considering cutting free TV licenses for the wealthiest of pensioners (something which, to be fair, Labour are unwilling to contemplate axing or even moderating either).  How can we capitulate over CGT, claiming that it would risk the economy, whilst axing youth employment schemes and pricing people out of higher education and thus harm the very workforce we depend on to drive the economy forward?  The rhetoric is simply not meeting reality at the moment.

Indeed, the rhetoric of progressive austerity is at odds of a lot of the economic policy emerging from the coalition at the moment.  For one thing, it currently looks as if the Tory policy of addressing the deficit with 80% spending cuts and 20% tax increases will be pursued – something which inevitably will almost inevitably put the coalition’s actions at odds with the Liberal Democrat manifesto commitment to ensuring that spending cuts do not have an adverse impact on fairness2.  While we should not repeat the mistake of signing up to any docrinal and artificial split between cuts and taxation, it is crucial that Liberal Democrats both inside government and out to continue to make the case for a greatest burden to be paid by the wealthiest.  The case for this is not merely moral; it is rooted in hard economics.  Even if you ignore the growing evidence that more equal societies perform better, you cannot escape from the fact that increasing absolute poverty while leaving vast swathes of unproductive wealth untouched will only make the recovery that much harder.

What we certainly must not do is allow our most progressive measures get bastardised in government.  During the run up to the election, along with most Liberal Democrats, I enthusiastically supported the Liberal Democrat policy to raise personal allowance.  There is much to admire about this policy, but it was always part of a wider, redistributive package.  Frustratingly, the coalition agreement has retained the commitment to raising personal allowance while dropping most of the new taxes that were needed to pay for it.  This means that to pay for it we will either have to impose even greater cuts on public services or introduce alternative, potentially regressive forms of taxation.

Cutting services for the vulnerable or raising VAT simply to hand the wealthiest a £700 tax cut would be nothing less than a scandal.  This doesn’t mean dropping the policy, but it does mean looking at ways to make it more affordable.  The simplest way to do this would be to drop the 40% income tax threshold by the same amount that personal allowance is raised.

Of course, it is to be hoped that Nick Clegg and Danny Alexander have similar proposals in mind and that we will all be pleasantly surprised on budget day (22 June).  But it has to be said that, the most abstract of rhetoric aside, they have not publicly been offering us much, while hinting that they will be siding with the Tory right over capital gains.  If they are to pull a progressive rabbit out of their hat in two weeks’ time, some reassurance that this might be on the cards would be timely.

The Social Liberal Forum Executive is holding an emergency consultation to ask what people think should be included in the coalition government’s upcoming emergency budget. Have your say on the SLF social network.

  1. I am indebted to Matthew Turner for helping to explain this to me, as I am to the HM Revenue and Customs website – all mistakes are my own []
  2. The exact wording in the manifesto reads as follows: “Over and above our planned new levy on the profits of banks, we will seek to eliminate the deficit through spending cuts. If, in order to protect fairness, sufficient cuts could not be found, tax rises would be a last resort.” []
Tagged with: , , , , , , ,
Posted in blog archive
3 comments on “Will we get fairer taxes under the coalition?
  1. > the growing evidence that more equal societies perform better

    [citation needed]

    “The Spirit Level” is on very shaky statistical ground, I hope that’s not what you’re referring to.

    http://lanekenworthy.net/2010/06/07/social-spending-and-poverty/

    http://spiritleveldelusion.blogspot.com/2010/04/20-questions-for-richard-wilkinson-kate.html

  2. James Graham says:

    I haven’t read “The Spirit Level Delusion” but I have read “The Spirit Level” and while it may well be the case that they have been guilty of cherry picking here and there, the links you point do indulge in fairly blatant cherry picking themselves. Moreover, I don’t see how that destroys the underlying argument, which looks at statistical trends across numerous different measures.

    Nonetheless, it is worth looking into.

  3. Stuart White says:

    Excellent article, James. Nice to see the sprit of rational, constructive social liberal dissent alive and well in the Lib Dems.

1 Pings/Trackbacks for "Will we get fairer taxes under the coalition?"
  1. [...] to wonder if the Tories get economics at all (on a related note, see my latest article on the Social Liberal Forum). In a fascinatingly revealing intemperate rant to the Guardian, David Willetts has described [...]

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Follow us on Twitter

Blog archive