The TaxPayers' Alliance - Economics 101

Liberal Democrat Tax Proposals

Download Reducing the Burden:  Policies for tax reform (PDF)

There are some good ideas in the Liberal Democrat tax proposals:

1. Simplification of the tax code and postcard-style returns could ease the administrative burden faced by individuals and companies.  Britain has the most complex tax system in the world, having recently overtaken India; there has to be room for simplification.
2. A cut in the basic rate would give millions of Britons some of their money back.  Very welcome.
3. Replacing the council tax would address the problem of a tax which hits the vulnerable the hardest and reduces pensioners to penury.

However, there are also some bad ones:

1. An extension of green taxes would be an inefficient way to raise revenue, would likely prove regressive and could do serious harm to British industry.  In particular, plans to increase the variation in vehicle excise duty on the basis of emissions would probably still not take lifetime emissions into account: some estimates that do include costs of construction and design suggest that a Toyota Prius Hybrid puts out more emissions than even a huge Hummer H3.
2. Taxing the rich more may appeal to social democratic notions of fairness but could do the British economy serious harm.  Estimates by the Liberal Democrats suggest that the tax bill of a City banker earning £250,000 would be increased by 11,800 pounds.  If the bank that employs that banker moved to another country to avoid the additional bill or international investment was diverted elsewhere we would all lose out.
3. There are risks to introducing a 'General Anti-Avoidance Rule'.  As the Conservative Tax Reform Commission pointed out:  "It is not easy to define exactly what such a rule should say, and experience in other jurisdictions shows that it may take some time before sufficient issues have been brought before the courts to enable to scope of the GAAR to be clarified."  Until clarity is achieved there is a lot of uncertainty in the law which exposes business leaders to unfair legal risk.

In short, a mixed bag.  Certainly an improvement over past Liberal Democrats plans to introduce a new 50 per cent tax band.  This platform would make important positive changes to the tax system by simplifying it.  If only the Liberal Democrats could get over the need to keep these changes revenue neutral they could avoid compensating measures that might undermine our economic competitiveness.

Early thoughts on the Conservatives' tax announcements

The Conservative Party’s Social Justice Policy Group will be presenting its findings tomorrow. It has been widely trailed in the media. Two stories today, in the Financial Times and the Telegraph, will leave taxpayers with mixed feelings.

On the positive side, David Cameron said yesterday that he will go into the next election pledging a full review of Britain’s tax and benefits system to make it more marriage-friendly. If this results in tax reductions for married couples (rather than tax rises for single people and unmarried couples), it can only be a good thing. Families have had to endure years of inflation-busting tax rises, with little to show for the extra spending it has financed. Recognising their difficulties and doing something to reverse Gordon Brown’s tax raids will be good for the economy and a popular electoral move.

On the negative side, however, it is reported that the Policy Group will tomorrow recommend a tax hike on alcohol to tackle binge drinking. We have no issue with the diagnosis that there is a serious alcohol problem in Britain that is leading to social and family breakdown. But we question whether hitting the hard-pressed taxpayer yet again will solve the problem. Why should ordinary people enjoying a pint after work have to pay more? Politicians should realise that raising taxes is not a solution to all the world’s ills.

We look forward to reading the report in full tomorrow.

Brown's pensions raid has also cost savers

New calculations by Mike Warburton and Maurice Fitzpatrick at Grant Thornton are yet more evidence of the damage that has been done by Gordon Brown's removal of tax credits on dividends. They show that an estimated three million investors in personal equity plans (PEPs) and equity-based individual savings accounts (ISAs) have lost an average of £2,000 each, or £6 billion in total, over the last eight years.

The reason for this is very simple. Until 1999 investors could reclaim 20 per cent of the tax that they were due to pay on dividends generated from equity investments within PEPs. In 1999 Gordon Brown replaced PEPs with ISAs and halved the benefit, allowing investors to reclaim a maximum of 10 per cent. In April 2004 he removed that benefit altogether.

The £6 billion figure includes not only the direct reduction in income, but also the knock-on effect of the loss in investment returns had that extra money remained in the PEP or ISA. So not only has Gordon Brown whacked pensions, he has also damaged non-pensions saving.

And the result? The savings ratio has dropped from 10 per cent in 1997 to only 2.1 per cent, the lowest level in almost 50 years.  Not something for Gordon Brown to shout about.