Sunday, July 15, 2007

Lib Dem tax plans

Over the years, the Lib Dems have had many different tax policies. Their latest one (pdf) is to announce a four pence in the pound cut in income tax, plus other changes designed to make the tax system 'fairer, simpler, greener'. It's quite a shift from calling for higher taxes to fund public services.

What they call a 4% cut in the basic rate of income tax in fact means reducing it from 20% to 19.5%. Or, if you believe Sir Michael Lyons, increasing it to 23.7%. This is because the reduction in national income tax is counterbalanced by the introduction of a Local Income Tax. The rate of this is the subject of some dispute - the Lib Dems say the average increase will be 3.5%, the Lyons Review said 7.7%. Whether or not this is a contribution to making tax simpler is rather dubious.

The other major change for simplicity is to replace regulations to prevent tax avoidance with a 'General Anti Avoidance Rule' which automatically withdraws any tax benefits where the avoidance of tax is the main reason for a transaction. This sounds great if it works (apparently it is copied from Australia), but it sounds implausible that preventing tax avoidance is that easy.

As for 'fairer', they are proposing a shift from property taxes (by abolishing council tax and raising the threshold for inheritance tax), to indirect taxes (through 'green taxes' such as quadrupling the tax take on flying) and taxing wealthy non-residents. As Lib Dem Jock Coats points out, one effect of reducing taxes on property is to make housing less affordable - with house prices rising by about eight times the level of council tax. Entrenching the gap between those who own property and those who don't is a curious way of promoting 'fairness'.

Understandably, they spend more time talking about where they are reducing tax, and almost nothing on their plans to increase tax, so it is hard to evaluate their 'greener' tax plans. In particular, it's not at all clear who will pay the vastly increased level of tax on aircraft take-offs, or what will happen if the tax level is sufficient to alter people's behaviour so that they fly less and revenue drops. The 'polluter pays' principle which can work well when levied on a business is much more problematic when levied on a low or middle income family.

It'll be interesting to see how much of all of this gets picked up by Labour or by the Tories. If we get the chance, can we have the bit which includes higher taxes for wealthy non-residents and less 'tax avoidance', but skip the bit which takes money from working people and gives it to property owners?

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