May 2010 12

Tax policy under the coalition9

Britain has a new Government – and the first true coalition Government in over half a century. Whilst the ink is barely dry on the deal, and the full Cabinet and policy platform is yet to be announced, the first bits of information are surfacing about the tax policies they are likely to pursue.

On public spending, where many absolutely crucial decisions must be taken to battle the deficit and then reduce the national debt, we have yet to hear anything (other than an encouraging rumour about removing the Tory ringfence on NHS spending). We, of course, will be lobbying and campaigning hard to see the ideas for spending cuts contained in the TPA Manifesto and How to Cut Public Spending (and still win an election) adopted – but we won't really know more until the emergency budget in around 6 weeks.

So what do we know on the tax side so far?

There were three key tax policy issues at stake going into the coalition negotiations, one of them Lib Dem and two Conservative. They are: the £10,000 income tax threshold (Lib Dem policy); scrapping Brown's National Insurance Rise (Conservative policy); raising the inheritance tax threshold (Conservative).

Each of these has been the subject of detailed negotiations, and here is the current state of play as we understand it:

£10,000 income tax threshold

This has survived the coalition deal, and has been taken up by both parties, widely being reported as a "priority". This is excellent news – it was among the most radical tax policies put forward during the campaign, and the Conservatives really missed a trick by not making it their own in the first place. It is both simple and sizeable, allowing the existing workforce to keep more of their own money – to the tune of £700 for the average worker – and providing a meaningful incentive for people to leave benefits and move into employment.

Scrapping Brown's National Insurance Rise

This has been a big rallying call – rightly – for the Conservatives. It's a tax on jobs, which is the last thing the country needs at the moment. Sadly, this proposal has only half-survived the negotiations, with the plan now apparently being to scrap the rise in the employers' national insurance but not the employees' share. So now it's just a tax rise on working, rather than a tax rise on employing someone, which is only a little better than Brown's original decision. The new Government are apparently saying that this is "offset" by their plan to increase the income tax threshold, but that means it is blunting the impact of that threshold change.

Raising the Inheritance Tax threshold

This has been a massive issue for the TPA, for the public, for the media and, latterly, for the Conservative Party. It's never been a fringe issue, and the Conservatives seem to have forgotten very quickly that when George Osborne announced it, the overwhelming popularity of the policy produced a surge in their poll rating, and prevented Brown calling an election which he may well have otherwise won. Indeed, you could say that the Inheritance Tax pledge was crucial to the Tories reaching Downing Street this week. It is dismaying, therefore, that it has been "put on the back burner" by the coalition with apparently no intention to propose it in the next five years. The millions who oppose this Death Tax will be disappointed, and the message of cutting taxes to encourage aspiration is taking a big hit. We will continue campaigning for Inheritance Tax to be abolished outright.

What next?

It's good news that the Liberal Democrats have forced the Conservatives to take up their Income Tax policy, but a great shame that the Tories have watered down the plans on National Insurance and booted Inheritance Tax into the long grass.

Perhaps this is down to a nervousness about the state of the public finances. Undoubtedly close scrutiny over the next few days and weeks could turn up some hidden nasties. However, the run up to the emergency budget will offer plenty of opportunities to identify new, larger spending cuts. The coalition must pursue the Google Government transparency agenda, which will bring the public into the process of identifying waste. Furthermore, they must listen to and absorb the proposals coming from ourselves and others. If they do that, I believe they could deliver all three of the above tax cuts – and taxpayers would thank them for it.

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  • http://fluentradical.co.uk/ Daniel Lucraft

    Thanks for the review. The Times says that the Lib Dems capital gains increase will happen. Is that true?

  • Henry Zarb

    This is, so far as I can recall, about the third time the Tories have failed to deliver on a promise to get rid of IHT, despite the obvious popularity of such a measure.
    How are we supposed to trust them on anything else if they can’t even stick to their guns on such a small thing?

  • Mark

    The lib-dems don’t benefit from non-jobs in the public sector. They don’t need union subs to keep going. It’s a good opportunity to cut waste but increase what is achieved from our taxes

  • Tim Calvert

    What is the Taxpayers Alliance view of the proposed 40% CGT?
    For what its worth, I consider that Lawson’ equalisation of income and capital taxes to be far superior.
    I can assure you that via the derivatives market, it is very easy to turn capital gains into income and vice-versa.
    Also 40% seems high for a 20% income tax payer, whereas those paying 50% will convert income into cap gains.

  • http://profile.typepad.com/james1071 james c

    The increase in CGT is ludicrous. It will fall heavily on a small number of people with second properties and raise peanuts.
    Why on earth are the Conservatives doing this?

  • Stuart M.

    The big issue is CGT which will hit the small investor who simply cannot afford to pay it.

  • Dame Davina Pancake

    The real issue with a CGT rise is that it will put off investment in small business (Angel investors & the like)- it skews their risk/reward ratio to the point where they’d more likely do something else with their cash.
    Davina x

  • Peter S

    I’m surprised that a group in favour of promoting aspiration through the tax system are so keen on ensuring people receive inheritance that they have done nothing to earn. Or perhaps that reveals the real motivation for such a position.

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