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After the 2014 conferences (3): Taxing the rich: From the few to the many?
30 October 2014

This is the third of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. The CIOT is strictly politically neutral and nothing in this article should be interpreted as endorsement for or opposition to any of the policies mentioned.

Help ‘for the many, not just the few’ was a key Labour message at the conference. Most of the party’s tax policies fit this theme, broadly taking money from a small number of wealthy and/or undeserving to help either a much larger number (eg. taxing mansion owners and tobacco companies to fund the NHS) or the particularly deserving (eg. taxing banks and bankers to help the unemployed and parents needing childcare).

Labour policies which arguably fit this model include:

  • Return the additional rate of income tax to 50p (a.k.a. ‘reversing the Tory tax cut for millionaires’), so that ‘the books can be balanced in a fairer way’;
  • Repeat the tax on bank bonuses to pay for a ‘Compulsory Jobs Guarantee’, which young people and the long-term unemployed will have to take up or lose benefits;
  • Reduce relief on pension contributions for people earning over £150,000 a year from 45 to 20 per cent to fund the Jobs Guarantee for the rest of the Parliament;
  • Increase the bank levy to expand free childcare for working parents to 25 hours a week;
  • Scrap ‘shares for rights’ and reintroduce stamp duty reserve tax to help fund the scrapping of the ‘bedroom tax’;
  • Scrap the transferable allowance for married couples and use the savings to fund the reintroduction of the lower 10p starting rate of income tax (as mentioned above);
  • Taxing ‘mansion’ owners, tobacco companies and tax avoiders to boost funding on the NHS (see below).

Both Labour and the Liberal Democrats have announced tax increases mostly targeting the well heeled to pay for additional spending on the NHS. In his conference address Ed Miliband announced that Labour would create a £2.5 billion fund for the NHS. £1.2 billion of this would come from the mansion tax, £150 million from a new tax on tobacco firms (a 15 per cent levy on the sector’s annual £1bn of profits) and the remainder from a series of measures characterised as cracking down on tax avoidance. Specifically these are:

  • Action against “umbrella companies” used to employ temporary workers to avoid tax and NI, reportedly an attempt to deal with the long running issue of tax relief for the travel and subsistence expenses of temporary workers; expected to save up to £650 million;
  • “Stop hedge funds avoiding hundreds of millions in tax on shares, so that they pay the same amount as individual investors and pension funds”, lifting an exemption on paying stamp duty that arises when broker dealers transfer shares to hedge funds; expected to raise £500 million;
  • Closing the “quoted eurobond exemption” which allows some businesses to channel tax-free interest out of the UK, raising up to £200 million.

The Lib Dems’ more modest £1 billion NHS funding boost (which would especially be targeted at mental health services) would be funded by:

  • Scrapping the Conservative "shares for rights” scheme where workers can sacrifice certain employment rights in exchange for company shares;
  • Increasing the dividend tax on additional rate taxpayers;
  • Tightening the cap on pension tax relief, cutting the lifetime allowance to £1m.

The Lib Dems have further tax increases aimed at high earners to fund a £500 increase in the personal allowance in 2016:

  • Raising capital gains tax for higher rate taxpayers from 28% to 35%;
  • Cutting the CGT allowance from £10,900 to £2,500 (though the personal allowance would be transferable to capital gains if not fully used on income);
  • Further anti-tax avoidance measures, including a new General Anti-Avoidance Rule (this is the only measure mentioned by name but other Lib Dem policies which might fit in this category include ensuring benefits in kind received in lieu of salary are subject to full NICs, tightening the non-dom rules and extending the time period for which lifetime transfers of wealth are within the scope of Inheritance Tax);
  • Possibly making entrepreneurs’ relief less generous.

Both Labour and the Lib Dems also favour a form of ‘mansion tax’. The Lib Dems reiterated their intention, originally announced in April, of introducing a mansion tax in the form of additional council tax bands for the highest value properties. Nick Clegg explained: “I went off, big time, the idea that you have a fixed levy as a percentage over a certain value. The more I looked at it, the more I thought, 'That's very crude.' It leads to eye-watering amounts of tax being paid. What we should do is go with the grain of the council tax system and apply bands to higher properties.” An aide said this reform would be simpler to put into action as it did not require government to know the exact value of everyone's property over £2 million. The £1.7 billion expected to be raised by the measure would contribute to reducing the deficit. In his conference speech Clegg claimed the Conservatives had explicitly told the Lib Dems: “you can’t have your mansion tax because our donors won’t wear it.”

Labour’s plans have faced especially vocal criticism from inside and outside the party. Labour MP Margaret Hodge, Chair of the House of Commons Public Accounts Committee, branded it a “punishment tax” for those who happen to live in areas which have grown in value, a point echoed by other London Labour MPs. The party leadership are working hard to reassure the middle classes that they will not be affected, and to reassure members in London and the South East that it will not be a vote loser. In his conference speech, Ed Balls said the tax would be “fair, sensible and proportionate”. He gave a number of assurances and clarifications, which were added to in a Sky News interview on October 5th and in an Evening Standard article on October 20th. The main ones are:

  • It will not be levied as a percentage of property value but rather through a banded system (eg £2-3 million) modelled on the existing Annual Tax on Enveloped Dwellings (ATED) with all properties in a band paying the same amount;
  • No property under £2 million will be included and the threshold will be raised each year in line with average rises in house prices;
  • Owners will be able to submit a self-valuation to HMRC, as with ATED;
  • Those owning properties worth £2-3 million will only pay an extra £250 a month — the same as the average top band of council tax – but those with properties worth tens of millions will make “a significantly bigger contribution”;
  • Protections for those who are asset rich but cash poor – those earning below the income tax higher rate threshold (roughly £42,000 a year) will be guaranteed the right to defer the charge until the property changes hands;
  • Labour will look at asking overseas owners of second homes in the UK to make a larger contribution than people living in their only home.

There is little support in the Conservative Party for additional taxes on the wealthy or high earners. An exception to this rule is ConservativeHome founder Tim Montgomerie, who made a case on the fringe that the mansion tax (amongst other wealth taxes) was not incompatible with conventional free market economics. He argued that large numbers of people had become wealthy not because of hard work but because they invested during the boom years of ‘Britain’s highly regulated’ property market; those who benefited from state intervention should be taxed through state intervention.

George Crozier
CIOT Head of External Relations
Thursday 30 October 2014

Media and Politics
 
After the 2014 conferences (2): Income taxes: gain without pain?
29 October 2014

This is the second of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. The CIOT is strictly politically neutral and nothing in this article should be interpreted as endorsement for or opposition to any of the policies mentioned.

The stand-out announcement of the conference season was undoubtedly David Cameron’s ‘tax cut for 30 million people’ – the promise in his conference speech that a Conservative Government would raise the income tax personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020. These would give taxpayers earning between £12,500 and £42,000 an extra £500 a year and those on between £50,000 and £100,000 just over £2,100 extra. However the latter figure would be reduced to just over £1,300 if, as seems probable, the upper earnings limit for employee national insurance contributions (NICs) – that is the point up to which you pay 12% NICs rather than the 2% you pay above it – were raised along with the point at which higher rate income tax kicks in. The Treasury have been quoted by the BBC as saying the saving would be £1,313, which indicates they have factored this in.

The Conservatives have not explicitly said how the changes would be timed - whether they would be phased in over the full five years of the parliament or only introduced after the books have been balanced (that is, from 2018). David Cameron’s remarks that “We will see the job through and… as we do that… [deliver] tax cuts” imply the latter. Treasury Committee Chair Andrew Tyrie certainly appears to believe this would be the case, noting in a recent interview that “these are tax cuts being offered before the headroom for them is available, conditional on the headroom, some years out”. He added that, of course, “for them to have an effect on economic behaviour those pledges have to be believed.”

Then there are the costs. The Institute for Fiscal Studies has said that the combined cost of the two income tax changes would be £7.2bn by 2020 (£1.6bn for the personal allowance increase and £5.6 billion for the increase in the higher rate threshold). This has been calculated using a baseline not of where the thresholds are now, but where they would be if both had been increased annually in the meantime at the rate of inflation. On this basis the IFS reckon the pledge is only worth about £160 a year for basic-rate taxpayers and £430 a year for those paying the higher rate.

The other parties have unsurprisingly reacted sceptically to the big Conservative announcement. Chris Leslie, Labour’s Shadow Chief Secretary to the Treasury, has written to George Osborne asking him to clarify how the cuts would be paid for, and reminding him of his own comments in November 2008 that “real tax cuts are funded, real tax cuts you show how you are going to pay for them”. For the Lib Dems Nick Clegg accused David Cameron of “spraying around unfunded moon-on-a-stick-type promises” of tax cuts.

Of course raising the personal allowance to £12,500 was Lib Dem policy before it was Conservative policy, leading to some grumpiness at Lib Dem conference about the Tories ‘plagiarising’ their plans. The Lib Dems draw two distinctions between their plans and the Conservatives’. Firstly they argue their proposal is funded while the Conservatives’ is not. To demonstrate that this is the case for at least the first instalment of the tax cut they announced that the party would raise the personal allowance to £11,000 in the first year of the next Parliament (ie. from April 2016), and set out how the £1.5 billion cost of doing so would be funded.

The second dividing line the Lib Dems draw is that their tax cut would be – to quote a (possibly deliberately) leaked draft of the front page of the party manifesto – “paid for by taxes on the richest” while the Conservatives’ cut, if it could be delivered at all, would be paid for by the working age poor. The breakdown of where the Lib Dems would find the £1.5 billion for the 2016 tax cut is intended to illustrate this, consisting of increases to capital gains tax and anti-avoidance measures.

Once the Lib Dems have raised the income tax threshold to £12,500, they have said they will then start to increase the National Insurance (NI) threshold, with a long-term ambition to raise this to the same level as income tax.

Labour also have an income tax cut in their policy locker, albeit it one funded from an increase elsewhere. The party has reiterated its plan first announced a year ago to reintroduce the lower 10p starting rate of income tax that was introduced and then scrapped by the last Labour Government. A year ago this was to be funded by the mansion tax, but that is now being directed elsewhere (see below) so this will now be funded by the scrapping of the transferable allowance for married couples. Government estimates are that this allowance will cost £515 million in 2015/16 rising to £820m by 2018/19, which means that, unless additional funding can be identified, the 10p band will not be able to cover the full first £1,000 of earnings, as previously suggested by Labour (estimates of the cost of having a £1,000 band for the 10p rate range from £1.5 billion to £2 billion.) Ed Balls confirmed this in a post-conference interview in which he said Labour had not yet set a band for the 10p rate.

Labour’s 10p rate proposal has faced criticism for adding further complexity to the tax system. At a Social Market Foundation (SMF) fringe meeting Paul Johnson of the IFS described it as “probably the stupidest thing you can do”.

Conservative members, meanwhile, while welcoming the introduction of the transferable allowance, generally regard its initial value of £150 as far too little and want to see it increased quickly.

Labour figures have also expressed sympathy for increasing the NI threshold, while pointing out that raising the income tax threshold does less and less for the lowest paid. At the same SMF fringe that Paul Johnson spoke at Shadow DWP Minister Stephen Timms drew attention to the large proportion of the personal allowance increase which has been clawed back from low earners in cuts to tax credits. He saw a case for putting up the NI threshold but warned that the impact on the number of people contributing to contributory benefits had to be borne in mind.

Labour, of course, also want to return the additional rate to 50p.

George Crozier
CIOT Head of External Relations
Wednesday 29 October 2014

Media and Politics
 
After the 2014 conferences (1): Bringing the books into balance
23 October 2014

This is the first of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. The CIOT is strictly politically neutral and nothing in this article should be interpreted as endorsement for or opposition to any of the policies mentioned.

This was a conference season where what wasn’t said was as significant as what was. Labour leader Ed Miliband notably forgot to deliver the passage of his speech about the deficit – and was much derided for it – but you could be forgiven for thinking the whole of Britain’s political class had suffered a fit of fiscal amnesia as - £100 billion deficit be damned - giveaway tax cuts and spending promises were sprayed around from the conference stages like Jeroboams of champagne on a Formula One podium.

Anyone would think there was an election on.

More sober analysis, however, suggested voters would be wise to do a little reading between the lines before dreaming of a land of milk and honey in the near future. The Financial Times’ Economics Editor Chris Giles observed wryly: “Any conference delegate who also attended fringe events run by the Institute for Fiscal Studies think-tank and the Chartered Institute of Taxation could not have believed they were listening to descriptions of the same economy. The message from these sober experts was that Britain’s public finances were still in a mess and the repair job to come will be more painful than the cuts to date.”

Indeed.

The public finances: bringing the books into balance?

All three of the main UK parties are committed to ‘balancing the books’ in the next Parliament, but it turns out that this means slightly different things to each of them.

Labour’s aim is to get the current (i.e. not including capital expenditure) budget into surplus and national debt falling as soon as possible in the next parliament. This commitment was endorsed by the party’s National Policy Forum in July and reiterated by Ed Balls in his main conference speech. Balls said a Labour Government would “legislate for these tough fiscal rules in the first year after the election”. Analysis by the Institute for Fiscal Studies estimated that Labour’s commitment would require net tax rises or spending cuts of £18 billion (of which nearly £9 billion have been identified already by the coalition) between 2015-16 and 2018-19.

The Conservative Party’s commitment to deficit reduction was prominent in Chancellor George Osborne’s conference speech. Conceding that the budget deficit and the national debt were ‘dangerously high’, he renewed his party’s commitment to going for an overall budget surplus – rather than just a surplus on the current budget – by 2018-19. In other words, the Conservatives want to ensure that government revenues are sufficient to pay not only for current spending but also for investment spending. This differentiates the party from Labour and would require them to carry out an extra £28 billion of fiscal tightening over and above those required by Labour – an additional £37 billion on top of the £9 billion already set out for next year.

The Liberal Democrats too say they would eliminate the deficit by April 2018, but they make an exception for additional investment in what Chief Secretary Danny Alexander calls “productive economic infrastructure – roads, railways, broadband, housing”, so long as overall debt is falling as a proportion of GDP. The Lib Dems have also been clear that they are talking about the cyclically-adjusted current budget (that is, with adjustments made for the state of the economic cycle that we are at). However, given that the most recent forecasts from the Office of Budget Responsibility suggest that the output gap will close in 2018–19, meaning that cyclically-adjusted measures of borrowing are almost exactly the same as headline measures of borrowing in that year, that would leave the party in a similar position to Labour, with £28-29 billion of extra borrowing permitted above what the Conservatives are committed to.

The make up of fiscal tightening

George Osborne has provided more information about where the axe of a Conservative Government would fall, announcing that a further £12 billion would be cut from the social security budget, including a two year freeze in working age benefits which would save £3 billion. The remaining £25 billion would come entirely from non-social security public spending cuts, not from tax increases (“the option of taxing your way out of a deficit no longer exists, if it ever did” Osborne argued), and also not from the biggest spender, health, which will continue to be ring-fenced. Osborne said a commitment to reduce Whitehall spending by at least the same rate for the first two years of the next parliament as has been done in the current parliament would save some £13 billion. To this was added a commitment to restraining public sector pay.

The Liberal Democrats, on the other hand, made clear that, unlike their coalition partners, they do see further tax increases as having a part to play in balancing the Government’s books. Asked on the BBC’s Andrew Marr Show whether he would raise taxes, party leader Nick Clegg said: “Yes, of course.” The deputy PM added: “No one anywhere in the reasonable world thinks you can fill the black hole in public finances either through spending reductions – though George Osborne and the Conservatives do now – or by taxes on their own. The received wisdom is that you should have roughly about 20% of tax increases versus 80% of spending reductions. That is the mix broadly speaking we have aspired to in this government.” There are indications some in the party, including Business Secretary Vince Cable, would prefer a higher proportion of tax rises than that. Cable told the BBC’s Newsnight that the current 80/20 mix between spending cuts and tax rises should be “rebalanced”, with a greater emphasis on tax rises. Cable is believed to favour a mix of at least 60/40.

Labour have also said that tax increases should have a part to play in deficit reduction, and have indicated that the proceeds of putting the additional rate of income tax back to 50p would be used for this purpose. Both Labour and the Lib Dems have committed to using tax changes to make fiscal austerity ‘fairer’. The Lib Dems have promised a ‘fairness rule’ to ensure that the wealthiest people continue to contribute most to deficit reduction. For Labour, Ed Balls vowed that, “unlike the Tories we will always ask those who have the most to make the biggest contribution”. Additionally, Chris Leslie MP, Shadow Chief Secretary, is conducting a ‘Zero-Based Review’ of public spending, examining every pound spent by government to cut out waste and make different choices. Leslie stressed to a CIOT/IFS fringe meeting that Labour did not see public service cuts as part of an ideological drive to shrink the state; social benefit would be best felt through the ‘pooling of our taxes’. He said that more concrete proposals on how to plug the gap would be unveiled in the party’s manifesto next spring.

George Crozier
CIOT Head of External Relations
Thursday 23 October 2014

Media and Politics
 
A warm welcome from Glasgow
15 October 2014

Tax devolution has been a major theme of the conference season so it was particularly fitting that Scotland’s largest city provided the stage for the final CIOT / Institute for Fiscal Studies party conference debate on Balancing the Books – tax and spending choices in the next Parliament, which took place at Liberal Democrat conference in Glasgow’s SECC. Douglas Fraser, Business & Economy Editor for BBC Scotland took the Chair whilst the panel featured IFS Director Paul Johnson, CIOT President Anne Fairpo and Ian Swales MP, Co-Chair of the Lib Dem Backbench Treasury Committee.

Mr Fraser set the course for the debate reminding the audience of key Lib Dem tax proposals, most prominently increasing the personal allowance to £12,500 and the introduction of a ‘mansion tax’ on high-value properties.

Paul Johnson was first to speak and after guiding the audience through current tax and spending challenges focused on how the Lib Dems were intending to achieve fiscal consolidation. The Lib Dems have stated they will seek to balance the cyclically-adjusted current budget from 2017-18 onwards. Given that the latest OBR forecasts suggest that the output gap will close in 2018-19, meaning that cyclically-adjusted measures of borrowing are almost exactly the same as headline measures of borrowing in that year, that would leave the party with a similar commitment to Labour, with £28-29 billion of extra borrowing permitted.

Next to speak was Anne Fairpo who suggested that the issue of balancing the books fed into the broader theme of reshaping the state. She emphasised that whilst much media attention concentrated on tax avoidance, tax evasion (activity which is illegal) was a far larger part of the tax gap. Anne focused on three areas of current resonance: BEPS (the Base Erosion and Profit Shifting project dealing with the profit allocation of multinational corporations), tax devolution and self-employment. Ms Fairpo struck a cautionary note on BEPS. She remarked that the impression that the system would result in the UK receiving its ‘fair share’ of tax overlooked the fact that the wording of the rules may mean a quite different reality. The attractiveness of the UK, particularly its low corporation tax rate, could be under threat from the OECD’s flagship project. There would be winners and losers as a result of profit allocation and it could spur significant tax competition. On devolution, Ms Fairpo remarked that this too could lead to tax competition. Finally, the significant rise in self-employment (we are now broadly in line with the EU average), predominantly in the low-skilled sector, was identified as a key reason for the decline in income tax receipts to the Treasury.

Ian Swales offered a less technical and more political perspective. He emphasised the need for fiscal responsibility and opined that debt was increasingly viewed as an inter-generational issue. He felt that there was a moral difference between debt that came as a result of paying for a good such as a motorway that his grandchildren would use and debt accrued as a result of keeping tax rates artificially low. He argued for a further increase in the income tax personal allowance (paid for by lowering the capital gains tax threshold and a crackdown on evasion) in order to reduce inequality. On capital gains tax, Mr Swales remarked that there was a ‘strong’ case for alignment with income tax. On spending, he said the current rate of VAT was about right. He defended the ‘mansion tax’ as an effective, limited way to tax wealth and opposed Conservative proposals to raise the IHT threshold to £1m, arguing it should be kept at £325,000.

Mr Swales was candid about spending challenges and remarked that there was a long way to go; public sector efficiency had to be improved. He reminded the audience that Labour had added a million jobs to the public sector payroll, almost all of which had been taken off by the coalition government without considerable damage to service.

Douglas Fraser quizzed Paul Johnson on balancing the budget at a higher tax rate as the floor was opened for questions. Mr Johnson responded that, technically, the economy can work with a 40% rather than 38% tax take but the more you take in tax the more efficient the system needs to be. He identified capital gains tax and VAT as areas of particular complexity. He lauded the scale of tax cuts pursued by the Government at a time of ‘astonishing austerity’.

In response to the devolution of certain taxes to Scotland and what benefits they may bring, Anne Fairpo remarked that the devolution of CGT and IHT was unlikely to bring in much money though she conceded it may make devolved governments feel ‘more in control’. Mr Johnson agreed and remarked that it would result in significant complexity and that resistance to inheritance tax was growing.

Responding to a question on care for the elderly, Ian Swales made the point that taxing low income people in order to pay for the care of those who were better off so that their children could inherit more was morally indefensible.

Paul Johnson finished his remarks by singling out SDLT as a particularly inefficient tax and arguing that more tax revenue would be raised through a proportional council tax. On income tax, he felt that the distributional effect of the current rise had benefited middle income earners the most. On Lib Dem proposals to further raise the threshold he said the point at which you start to pay income tax had become a ‘totem’ but, in his view, it was ‘clearly better’ to increase the point at which you start to pay national insurance contributions, as this had fallen so far behind the income tax threshold.

James Knell
CIOT External Relations Officer
Wednesday 15th October 2014

Media and Politics
 
Minister pressed on public finances in CIOT-sponsored debate
10 October 2014

‘We have cut more in business taxes in this parliament than in any other parliament over the course of our history’ was the triumphant message delivered to a Conservative conference fringe audience by David Gauke MP. However, the Financial Secretary to the Treasury cautioned that the road to cutting the deficit would see social security make an increasingly substantial contribution. The debate, Balancing the Books, focusing on tax and spending choices facing the next parliament, was jointly held by the Institute for Fiscal Studies (IFS) and the CIOT and took place in Birmingham on September 30th. The event was chaired by the Financial Times’ tax journalist, Vanessa Houlder, and speaking alongside Mr Gauke were Patrick Stevens, Tax Policy Director of the CIOT, and Paul Johnson, IFS Director.

Mr Johnson commenced the debate by guiding the audience through the fiscal landscape, reminding them that the Government remained only halfway to its goal of balancing the books. Responding to Mr Gauke’s warning over welfare, Mr Johnson argued that finding £12 billion (6% of the total) from the social security budget would be a significant challenge, and would still imply cuts of 31% in unprotected departments.

Patrick Stevens focused on addressing three areas likely to alter the tax take: BEPS, self-employment and tax devolution. On BEPS (the OECD’s Base Erosion and Profit-Shifting project designed to amend the rules regarding the taxation of multinational companies), Mr Stevens said that there was wide acceptance that the current system was ‘broke’. BEPS would mean that our corporate tax base was likely to see a slight decrease but whether we would ‘win’ or ‘lose’ was ultimately a matter of opinion. Self-employment had risen markedly, and such individuals tended to pay less in tax and later (they pay less national insurance), meaning that the Treasury was witnessing a decrease in tax receipts. Finally, devolution, a major theme of the conference season, was touched on. Mr Stevens informed the audience that there was an expectation of considerably more tax devolution, particularly in the wake of the Scottish referendum, and that the Scottish Government was already about to get the power to increase or decrease income tax by up to ten per cent. He finished by declaring that it was yet to be seen how tax competition might affect the overall take.

David Gauke focused on his Government’s efforts to reduce the deficit and the part that taxation was playing in that effort. He remarked that the amount now spent on debt interest payments was a very significant sum. Planning for the future, he said that there were significant pressures on the budget; many of the baby boomers would be in nursing homes by the 2030’s and that was a stark argument against Labour proposals to run a current budget surplus, allowing them to borrow an extra £28 billion. Mr Gauke reminded the audience that the Government had focused overwhelmingly on reducing spending rather than tax increases. Indeed, for the first time since 1950, public spending had fallen, by 1.4%. He cited growth as a result of business tax cuts: introduction of the patent box, increased employment allowance and a decrease in corporation tax. He attacked Labour’s 50p top rate of income tax policy in view of the mobility of capital and people. He finished by praising his department’s soon to be sent out personal tax statements which he said would increase HMRC transparency and public knowledge of how taxpayer money is spent.

More than sixty attendees provided a challenging Q&A session for the panel. A representative from the TaxPayers’ Alliance questioned whether it was a sustainable policy to run surplus after surplus until debt was zero. Mr Gauke understood the ‘it’s our money’ logic but noted that we remained a long way from running a surplus.

An audience member asked if Conservative targets to tackle the deficit, with their ‘disproportionate’ focus on cutting welfare, were achievable. Responding, Paul Johnson remarked that he was sceptical about the ring-fencing of pensions and health and there needed to be a more public conversation about how we would pay for them.

Questions also focused on the increased size of central government but Mr Gauke defended his department saying it had decreased its size and increased efficiency. He also commented briefly on the raising of the retirement age which had made the long term fiscal situation less grim that it might otherwise have been.

Finally, the panel were quizzed on devolution. Richard Johnson of Public Finance Magazine asked whether the current system of setting national taxes had anything to recommend it. David Gauke remarked that some taxes were better suited to devolution than others and lauded the devolution of income taxes to Scotland. He said that tax competition could be advantageous in bringing to people’s attention the dangers of wrongheaded taxes. He cautioned against the devolution of corporation tax north of the border as this would result in uncertainty for Scottish businesses. For Paul Johnson, fiscal choice was ultimately about where the decisions came from, reminding the audience that outside of Scotland local government was responsible for only about 20 per cent of spending; the rest came from Whitehall.

James Knell
CIOT External Relations Officer
Friday 10th October 2014

Media and Politics
 
Labour party conference debate a great success
3 October 2014

The joint CIOT and Institute for Fiscal Studies Labour fringe event, Balancing the books – tax and spending choices in the next Parliament, was held in Manchester on September 23rd. The lively debate saw around sixty attendees listening to expert opinion and then partaking in a Q & A discussion. Paul Johnson, IFS Director, began by setting out the overall fiscal situation. Bill Dodwell, CIOT Vice President, discussed the options for tax reform and Chris Leslie, Shadow Chief Secretary to the Treasury, elaborated his party’s position on the key challenges facing the next government. The debate was chaired by Chris Giles, Economics Editor of the Financial Times.

Mr Johnson guided the audience through the fiscal landscape, reminding them that the Government remained only halfway to its goal of balancing the books. He stressed that around £70 billion of the deficit was structural meaning that amount of tax increases or spending cuts would be needed over the next Parliament. Four choices were offered by Mr Johnson: huge additional cuts to public service spending, bigger cuts to social security, smaller cuts to spending and doing more to get debt under control later on and substantial tax rises – not the easiest of sells, politically.

Mr Dodwell touched on corporation tax and the BEPS, the OECD’s Base Erosion and Profit Shifting campaign to tackle international tax avoidance. Current proposals for Scottish income tax were touched upon briefly. Mr Dodwell praised the reduction in corporation tax rates as pro-business but warned against corporation tax devolution as it would incentivise competition between the UK regions.

Next to speak was Chris Leslie MP. He stated that a major challenge would be servicing the rising £1.1 trillion of national debt. He said his party did not see public service cuts as part of an ideological drive to shrink the state and remarked that social benefit would be best felt through the ‘pooling of our taxes’. He spoke about a ‘fair’ approach to deficit reduction and that the extension of the 1% child benefit cap, though politically unpopular, would go some way to closing the fiscal gap (along with nuclear decommissioning amongst other areas). He lauded his zero based review of public finances but said that more concrete proposals on how to plug the gap would be unveiled in the manifesto.

The floor was then opened for questions. Questions on whether the burden of tax should fall more heavily on capital rather than labour and the mansion tax elicited varying responses. Chris Leslie opined that the mansion tax was targeted at people who were ‘particularly asset capital rich’; he remarked that treating property as a commodity was distorting the housing market.

Daisy Srblin of the Fabian Society sought the panel’s thoughts on reform of national insurance. Paul Johnson responded that to combine national insurance with income tax would be good for growth, but politically difficult to implement. Asked their opinions on the lay-off of HMRC staff, Mr Dodwell remarked that staff cuts were not as severe as in some other countries such as Ireland and that the more pressing question was on the replacement of those soon to reach retirement age.

There was also brief discussion on the expansion of BEPS and the reduction in corporate taxation posed by Labour councillor Sam Corbin. Bill argued that corporate taxes were damaging to business growth and all those who depend on the business. He cited Ireland as an example where 15% of the workforce were employed by US multinational subsidiaries who located there because of its low corporation taxes. On BEPS, Paul Johnson was candid in his assessment that it would be challenging to ‘patch up’ the international tax system as it was very difficult to say where profits are made.

Mark Turner of the Urban Institute asked the panel’s thoughts on the Financial Transactions Tax. Paul Johnson forcefully rebuked the need for it. He remarked that we already have a stamp duty on share transactions, which was operationally similar. He remarked that the FTT in its current manifestation was inefficient and was not transparent in terms of who actually pays for it.

James Knell
CIOT External Relations Officer
Friday 3rd October 2014

Media and Politics
 
Balancing the books – CIOT and IFS take tax debate to party conferences
18 September 2014

The Chartered Institute of Taxation (CIOT) and the Institute for Fiscal Studies (IFS) are jointly organising debates at the three main UK-wide party conferences on the theme ‘Balancing the books – tax and spending choices in the next Parliament’. The speakers will discuss the UK fiscal position and the economic challenges facing policy-makers over the next five years.

Shadow Chief Secretary to the Treasury Chris Leslie MP, the man leading Labour’s ‘zero-based’ spending review, will be on the panel for next Tuesday’s debate in Manchester. Newly promoted Financial Secretary David Gauke MP will speak at the Conservative conference in Birmingham the following week. Ian Swales MP from the Lib Dem Treasury Team will be on the Glasgow panel. The politicians will be joined on the panel by Paul Johnson of the IFS and senior CIOT representatives.

As well as politicians, party members and media we are inviting CIOT members, their friends and colleagues to attend these debates. Indeed anyone with an interest in debating tax policy is welcome to attend. Attendance is free of charge and refreshments (wine and hot canapés) will be served. You do not need to register your attendance but will require a party conference pass for the Glasgow event as it takes place in the conference secure zone (no pass is required for the other two).

Further information including timings and venues can be found here.

If you would like any further information or have any queries, please contact jknell@tax.org.uk

We look forward to seeing you there!

James Knell
CIOT External Relations Officer
Thursday 18th September 2014

Media and Politics
 
Scottish independence - tax and the benefits system
15 September 2014

The interaction between the tax and social security benefits systems can result in additional complexity of what are already fairly complex systems, as the two do not operate as a cohesive whole. For example, for many people, a £500 increase in the income tax personal allowance means a fall in their income tax bill of £100. For people who both pay income tax and receive certain means-tested benefits, however, the reduction in their tax bill will lead to them receiving fewer benefits. As an illustration, a Universal Credit claimant who pays tax at the basic rate may only be £35 better off (rather than £100), as a result of a £500 increase in the personal allowance.

Independence opportunities

In the case of independence, the Scottish Government would have a cornucopia of options for reform of the tax and welfare systems and how they interact. For example, they could adopt a holistic approach, designing the tax and welfare systems in tandem and not simply looking at tax policy in isolation. This would help to ensure that both systems work together to achieve overall policy aims. This is indeed the proposed approach of the current Scottish Government in the event of independence. In practical terms, what this should mean is that a change in the tax system which results in slightly higher taxes on all individuals, for example, is accompanied by a change in the welfare system that compensates people on lower incomes, if the overall policy objective is that people on lower incomes should not be made worse off by the tax change.

Independence risks

Alongside the opportunities there would naturally be risks that Scotland would have to be aware of when framing policy.

The starting point for any changes under independence or further devolution will be the current system. Under devolution, there will probably continue to be restrictions on the changes a Scottish Government can make; under independence, although there will in theory be the ability to make the system anew, in practice its complexity and the need for wide consultation, scrutiny and refashioning of IT and administrative systems will place restrictions on the number and speed of changes . There is a risk that if changes are not achieved within the time span of one Parliamentary term, a new Government could change the strategy and mean that the Scottish system is no less complex or no more cohesive than the UK one. You only have to look at how the timetable for the Westminster Government’s introduction of universal credit – a radical reform but far from all-encompassing – has slipped to realise the challenges of serious welfare reform.

Welfare reform is never uncontroversial. The best laid plans of think tanks and policy working groups often come unstuck when confronted with the political challenges of dealing with the losers which nearly every reform (the exceptions being those the Government has the resources to throw money at) creates, let alone the practical challenges of actually implementing changes on the ground. Relatively limited changes – think of the introduction of the bedroom tax / spare room subsidy – are often the most controversial.

Conclusion

If Scotland gets the opportunity to frame policy holistically in relation to personal taxes and the welfare system it would make sense to agree an overarching strategy that successive Parliaments would uphold to ensure an effective and integrated system is developed. Of course that’s easier said than done. Politics has a habit of intervening, and I suspect it will continue to do so, whatever the result of September’s vote.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Monday 15 September 2014


NB. The CIOT is a strictly non-partisan organisation and is strictly neutral in the referendum campaign. This posting is intended to inform and nothing within it should be interpreted as advocating or opposing any of the options mentioned. We are pleased to have been closely involved in discussions on the devolution of tax powers, working with both the Westminster and Scottish Governments, regardless of their political complexions, to assist them at a technical level in the implementation of their objectives.

Media and Politics
 
Scottish Independence and National Insurance contributions
15 September 2014

National Insurance contributions (NIC) can be quite complex, as there are a number of different ‘Classes’ of NIC, depending on whether you are employed or self-employed, and they all have their own allowances, bands and rates. Unlike income tax, you only pay NIC on ‘earned’ income - that is, income from employment (salary or wages) or self-employment (profits). There is also a different starting point for paying NIC compared with income tax (currently £7,956 compared with £10,000). Another key difference is that you pay NIC on your weekly or monthly earnings rather than your annual earnings on which you pay income tax.

Independence opportunities

Independence would offer the opportunity to consider the way income tax and NIC work together. Originally, the decision to build a contributions-based welfare system led to the introduction of NIC. Now, the link between state benefits and NIC is less significant than when NIC started. So, the Scottish Government could consider merging income tax and NIC completely – or at least aligning their rates and reliefs – either of which would represent a major simplification of the tax system. Alternatively they might look at strengthening the link between NIC and state benefits, if there was an objective of moving to a more contributions-based system.

As with income tax the Scottish Government could adjust national insurance rates and reliefs to make the system more or less progressive, to incentivise employment of particular groups (as with the Westminster Government’s decision to abolish NIC paid by employers for most under-21s from next year) or to support businesses in particular sectors or parts of the country (as with the Westminster Government’s employer NIC holiday that applied to new businesses in certain areas of the UK).

Independence risks

Alongside the opportunities there are also risks that Scotland would have to be aware of when framing NIC policy.

As with income tax one of these is that mobile individuals might react to higher Scottish NIC rates by relocating to England. Of course the converse is also true. It is also easy to envisage employers’ NIC (as well as corporation tax) becoming a competitive weapon for a Scottish Government keen to attract mobile businesses north of the border. But again this could cut both ways and Holyrood and Westminster could end up engaged in a race to the bottom to attract business, but with the net result of both Treasuries losing revenue.

While full alignment (or even merger?) of income tax and NIC has much to commend it in terms of simplification it has complex implications. In the UK NIC only applies to earnings, not savings income. Either alignment would result in all income (earnings and savings) being subject to the unified tax or there would need to be different sets of rules for different types of income, undermining some of the simplification objectives. Would pensioners (exempt from NIC) be brought into the net? How would employers’ NIC be treated?

Changing the link between national insurance and benefits also has implications. Weaken the link by making some contributory benefits (eg the state pension and part of the Jobseekers Allowance) residence-based and some recipients may wonder what they paid their NIC for, if non-contributors are suddenly getting these benefits too. If the continuing UK kept the existing system then migrants moving north could receive benefits that migrants moving south would not. Strengthen the link by making more benefits contribution dependent and other perceived unfairnesses could appear.

This is not just an issue in terms of the rest of the UK: the Scottish Government would have to consider interaction with the social security systems in the rest of Europe as mobility extends well beyond the UK these days.

Conclusion

The national insurance system is complex. Simplification and greater integration with income tax are attractive but would throw up problems of their own. In essence the more the Scottish system diverges from that south of the border the more anomalies, apparent unfairnesses and incentives for relocation would emerge.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Friday 12 September 2014

NB. The CIOT is a strictly non-partisan organisation and is strictly neutral in the referendum campaign. This posting is intended to inform and nothing within it should be interpreted as advocating or opposing any of the options mentioned. We are pleased to have been closely involved in discussions on the devolution of tax powers, working with both the Westminster and Scottish Governments, regardless of their political complexions, to assist them at a technical level in the implementation of their objectives.

Media and Politics
 
Scottish independence and income taxes
15 September 2014

Income tax is Government’s biggest revenue raiser. And income tax in Scotland is set for changes, whatever the result of the independence vote.

The Scottish Parliament already has the right – not yet exercised – to vary income tax rates by up to three per cent. From April 2016, this will be broadened into a requirement to set a Scottish rate of income tax (SRIT).

Technically what this means is that the three UK rates of income tax (20%, 40% and 45%) will each fall by 10% for Scottish taxpayers; this will reduce the tax revenues available to Scotland. The Scottish Parliament must then set one rate for the SRIT, which will apply to each tax band, with the money flowing to Scotland. If the SRIT is 10%, Scottish taxpayers will not notice any difference in their rate of income tax and the money flowing in will be the same as it would have been without devolution. If the SRIT were to be raised to 11% the rates would rise to 21%, 41% and 46% respectively and more revenue would be expected to come in. If the SRIT were lowered to 9% the rates would fall to 19%, 39% and 44% with a commensurate fall in revenue. The rates would still be subject to possible change as a result of decisions taken at Westminster. For example if the additional rate were raised from 45p to 50p by a Chancellor at Westminster that would mean a 5p increase in the additional rate for Scottish taxpayers; if the rate had earlier been cut from 45p to 44p as a result of a 1p cut in the SRIT it would go back up to 49p in Scotland.

The SRIT is not a devolved tax, which means that HM Revenue & Customs (HMRC) will administer it in parallel to their administration of UK income tax.

The income tax system is pretty complex. It is not just that there are four different rates (including the untaxed personal allowance), there are numerous reliefs and exemptions, and there are even differences as to how you pay income tax on different types of income.

Independence opportunities

Under devolution the SRIT offers the ability to raise or lower income tax by a substantial amount, but by requiring all rates to be moved up or down together it is a pretty blunt instrument. An independent Scotland would have a much wider set of options. The Scottish Government could set its own allowances, bands and rates. It could alter the types of income subject to tax and the reliefs available.

So, for example, the Scottish Government could decide to increase the additional rate for the highest earners to 50p (as some on the left would like), or abolish it altogether (as some on the right have called for), without having to change rates for the majority. They could decide to increase the personal allowance (the portion of income you pay no income tax on) further or reverse the Westminster Government’s increases. They could alter the point at which people start paying the 40% rate. They could decide to keep the higher personal allowance for pensioners that the Westminster Government is phasing out. They could decide to scrap the right of married couples to transfer part of their allowance between them (due to come in next year) or make it more generous. They could even play around with the different treatments given to different kinds of income, such as the lower rate for interest from savings.

There are also all sorts of changes that could be made to the 445 (yes, really!) reliefs currently available for income tax, as well as potentially the creation of new ones. The biggest of the current reliefs is tax relief on pension contributions. Designed to encourage people to save for their retirement this relief currently costs the Westminster Government a whopping £42 billion a year (including relief of national insurance too). The Westminster Government has been gradually reducing the amount well-off contributors can get relief on. An independent Scotland could continue this trend, reverse it, or change the relief entirely so that all contributions are relieved at the same rate, whether that’s the basic rate (saving the Government a large amount of money) or a higher level (which would boost incentives to save among low and middle earners).

The other 444 reliefs could all be fiddled around with too. Gift aid could be made more or less generous. Exemptions for visiting sportspeople (like the one put in place for the Commonwealth Games) could be widened, or scrapped altogether. New reliefs could be created, to reward and incentivise particular kinds of activity and sectors of the economy. Of course, given the number of reliefs already in place some would argue that the priority should be getting rid of a few of the reliefs already in place before creating any new ones.

Independence risks

There are three kinds of risk the Scottish Government would need to be aware of if reframing the income tax system post-independence: mobility, complexity and revenue loss.

Individuals in the UK are fairly mobile. Some people who currently live and work in Scotland may be able to relocate to England, if Scottish income tax rates are higher than those in England. The converse is also true, however, and different individuals will have differing views over when the tipping point is reached, particularly when one considers other factors, such as family, friends, lifestyle and cost of relocation. In addition, if a higher rate of income tax results in better local services, for example, people may be willing to accept it. This risk would be present in a non-independent Scotland too, if the SRIT is adjusted.

The greater the differences between the Scottish income tax system and the (rest of the) UK the greater the complexity for taxpaying individuals, businesses and the tax authorities themselves. Independence would undoubtedly mean a significant increase in the number of people who have to consider cross-border issues and double taxation, for example people who live (and work) in Scotland, but are employed by a UK employer with a UK payroll. This might result in more taxpayers having to complete personal tax returns for Revenue Scotland and/or HM Revenue & Customs, as well as creating headaches for payroll departments and tax advisers.

The other risk is of course to the Government’s revenues. More generous allowances and reliefs are always tempting but the money usually needs to be made up from somewhere, whether that is increased taxes elsewhere, cuts in spending or higher borrowing.

Conclusion

Under greater devolution or independence, Scotland will have the opportunity to frame more of its own income tax policy in future. But caution is likely to remain the order of the day. The policies of the Westminster Government and the effect of cross-border issues are likely to weigh heavily on the minds of decision makers in Edinburgh.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Thursday 11 September 2014

NB. The CIOT is a strictly non-partisan organisation and is strictly neutral in the referendum campaign. This posting is intended to inform and nothing within it should be interpreted as advocating or opposing any of the options mentioned. We are pleased to have been closely involved in discussions on the devolution of tax powers, working with both the Westminster and Scottish Governments, regardless of their political complexions, to assist them at a technical level in the implementation of their objectives.

Media and Politics
 

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