Nick Clegg's Tycoon Tax would affect the rest of us soon enough

Deputy Prime Minister Nick Clegg has proposed what he calls a new Tycoon Tax.  The proposal sounds quite reasonable but in reality it would produce unfair results and, judging by past experience of these kinds of policies, affect plenty of non-"tycoons" over time.

There are four important points to bear in mind: most people on high incomes pay a lot of tax so this won't affect many of them; sometimes people appear to pay low taxes on their income because they have already paid taxes elsewhere; a similar tax in the United States (the Alternative Minimum Tax - a better description of the proposal) has become a heavy burden on the middle class; and a tax system functioning effectively wouldn't need this kind of back-up.

There is a constant stream of ideas emerging from Westminster for the next big means to get more money out of high earners.  Many of them are premised on the bizarre idea that, for the rich, tax is almost voluntary.  Richard Murphy was repeating it over the weekend when we discussed the mansion tax on the BBC Radio 4 Today programme over the weekend.  Even the most reasonable plan to increase taxes on high value properties, an increase in the range of bands for council tax, would require a costly revaluation that could easily be used as cover for a more general increase in rates.

In announcing his proposal for an alternative minimum tax, Nick Clegg said that:

If you're earning millions per year, if you're able to pay an army of lawyers and accountants to basically pick and choose what tax you are paying, if you are paying as low as 25%, 20% or even less in tax, there should be a minimum fair share that you should pay to society.

In 2007-08, the highest earning 1 per cent of the population earned 13 per cent of total income but paid 24 per cent of total income tax, £39.4 billion.  Does the Deputy Prime Minister really think that was all some kind of voluntary donation?  That the rich paid all that money - their share of taxes is nearly twice their share of income - for the fun of it?

No.  There are some ways that high earners, particularly foreigners, can avoid some taxes like Stamp Duty.  It is hard to see how that would be captured by a Tycoon Tax though, as it isn't related to their annual income.  It would be better to either find a way of closing the Stamp Duty loophole or ask whether a tax on moving is a good idea in the first place or if it should be abolished over time for the rest of us too.

There are other loopholes but there are also situations where low tax rates are charged because the income is taxed in other ways.  For example entrepreneurs pay a low rate of tax on capital gains when they sell businesses that they have established.  But that income is already taxed because expected taxes on future profits depress the value of the shares they are selling.  If we add to the double tax on growing businesses that will mean fewer jobs, less innovation and lower wages for workers.  Sometimes tax bills are also lower because money has been taxed abroad.

That won't just be a problem for "tycoons either".  As I mentioned earlier, in the United States they have a tax called the Alternative Minimum Tax, a more accurate description of what Nick Clegg is proposing here.  Representative Paul Ryan spoke to the Cato Institute about why that tax should be abolished:

The AMT is a federal income tax that is imposed on top of the existing income tax system. In 1969, AMT was passed to go after 155 rich people who were using deductions and loopholes to avoid paying any taxes. And while subsequent tax reform closed those loopholes, the AMT remained. Most critically, the AMT was never tied to inflation, so that today the AMT is targeting an ever-increasing fraction of the middle class.

About 20 million Americans were subject to AMT in 2006; 23 million in 2007. Their estimated increased tax liability was about $2,000 per person. According to the Congressional Budget Office, by 2010, if nothing is changed, one in five taxpayers will have AMT liability. Nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.

So the AMT represents an enormous tax hike on the middle class. Going forward, it will represent an even larger tax increase. That is a major reason it must be repealed.

If you think that won't happen here, then you haven't been paying attention as tax after tax - starting with Income Tax - has gone from being a tax on the rich to a tax people have to pay on much more modest incomes.

There is a much more effective strategy to get greater revenue from high income taxpayers, one that we have tried in the past with great results.  Cut marginal rates of income tax across the board giving everyone a better deal.  Then simplify taxes so there are fewer loopholes and everyone pays the same single rate on different streams of income.  That can be done, it's the heart of the 2020 Tax Commission's plan.  It will be much more productive than yet more lazy sticking plasters and won't be the same kind of threat to our prosperity.