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The tax debate at the heart of the Budget

19 February 2012

The run-up to last year’s Budget was all about fuel duty. This year it’ll be
all about direct taxes. The Lib Dems are determined to put their manifesto pledge of raising the income tax personal
allowance to £10,000 front and centre. They already managed to turn this promise into government policy in the Coalition Agreement, and last year’s Budget announced that the threshold
would rise to £8,105 in April this year. But Nick Clegg’s made clear that he wants to go ‘further and faster’
on this. The Conservative response at the Treasury – according to today’s Telegraph – is simple: ‘how are they
going to pay for it?’

Initially, Nick Clegg has answered this with three revenue-raising schemes: a General Anti-Avoidance Rule, of the sort proposed by the
Aaronson Review
in November; clamping down on stamp duty avoidance; and a 1 per cent ‘Mansion Tax’ on properties worth over £2 million. Danny Alexander has also pointed to another proposal from the Lib Dem manifesto: removing the higher-rate of tax relief on
pension contributions. And now, the Lib Dems’ Federal Policy Committee has put all these policies together – plus a couple more – in the form of a motion to be debated and voted
on at their party conference in three weeks. You can read the full ‘Making Tax Fairer’ motion here, on page 37, but the Independent has a good summary of it, complete with estimates of the
costs and benefits of the measures, here. Interestingly, while the Mansion Tax
is the more talked-about and controversial policy, the estimates suggest it would raise far less (£1.7 billion) than axing the higher-rate of tax relief on pension contributions (£7

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In the Observer, Andrew Rawnsley predicts that Osborne will give in to the Lib
Dems on raising the personal allowance further, not least because it is incredibly popular with the public (today’s YouGov poll shows 88 per cent support for it). It’s also worth remembering that many
Tory MPs support such an income tax cut, with one or two even trying to claim the policy as their own. On the other hand,
Iain Martin in the Telegraph doubts Osborne will go for it, claiming the Chancellor ‘is
wedded to the numbers in his deficit reduction plan and is not convinced by the idea that reducing taxes can stimulate growth.’

And, of course, while the wrangling goes on between the coalition partners, Ed Balls is keen to ensure that he is not forgotten. In the Sunday Times (£), he redoubles his call for a temporary VAT cut (as Fraser noted earlier), but also comes close to backing Clegg’s policy:

‘If George Osborne can’t bring himself to reverse his Vat mistake, he has other options. For the same amount of money, he could cut the basic rate of income tax by 3p for a year.
Or raise the income tax personal allowance to more than £10,000. Or increase tax credits for almost 6m working people by about £2,000.’

If Osborne does relent and give the Lib Dems their income tax cut next month, Clegg and Alexander will rightfully claim the credit. But expect Balls to claim that it was really the
pressure from him that brought the Chancellor round.

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  • Sir Everard Digby

    Daniel Maris,

    That was in place prior to 1973 and called purchase tax;

    All of this debate reminds me of the Spanish proverb -“Habits are at first cobwebs, and then they become cables.” all the political classes are in a rut,from which they are making no moves,however small,to escape. Until they do,expect more misery

  • daniel maris

    We should be moving from income tax to property and sales taxes, far less easy to evade.

    We should be looking to have a flat rate income tax rate at around 20% for all earners, so we have no disincentive to work. Abolish all the personal allowances. Bring in a basic income for citizens.

    Property taxes would be much higher than now and should be fully banded.

    Sales taxes should also be banded so that higher value purchases have a much higher tax rate.

  • Kevin

    Magnolia raises an important point re married couples, but this quote needs addressing:
    “The Conservative response at the Treasury…is simple: ‘how are they going to pay for it?’”

    Taxing someone who only makes £10,000 a year is theft. It is up to you to figure out how to get by without benefiting from the proceeds of crime.

  • Magnolia

    Thanks Kingstonian. I’ve just looked again at the effects of the tax threshold changes from 6/4/11 on the HMRC website and they withdrew the tax free allowance at £100K specifically to prevent higher rate tax payers from getting any advantage from it. There are still 280,000 HR taxpayers who are expected to be better off though.
    There was also some fiddling with NI as well.
    I’ve noticed that they bragged about the high percentage of women who were helped in their equalities impact statement (23 million women better off and 60% of those taken out of tax women) but that takes no account of the poor old stay-at-home mums who loose out from the single income family tax penalty.
    It seems that some are more equal than others as usual.

  • Kingstonian

    Magnolia – the last time the Personal Allowance was raised, the starting point for the 40% rate was lowered. The effect was that those earning less than the 40% threshold benefitted by paying less tax – and some were taken out of tax altogether – and those in the higher bracket paid the same or more tax.

    Osborne raises Personal Allowance again in the next budget, expect a similar sleight of hand i.e. giving with one hand and taking with the other.

  • Ron Todd

    Those that can afford a £2000000 house can usually afford a good accountant.

    If the liberals want a mansion tax Cameron will probably give it to them though I would not expect it to raise much.

    How likely is it that the rich politicians will slip in an exception for themselves?

  • Magnolia

    If the tax free threshold is raised to £10K then everyone who has an income under £100K will benefit and not just the ‘poor’.
    The single income families will pay an even higher percentage of tax compared to a dual wage family on the same income than they do already.
    This policy penalises traditional families and rewards many who are on very big salaries.
    The Centre for Social Justice has said that a transferable tax allowance for married couples is a better policy for helping poorer people than raising the tax free threshold.
    It just shows that the LibDems are only interested in popularism rather than in genuinely helping poorer people.

  • whatawaste

    And when is Cameron going to deliver on his promise to cut red tape for businesses? This will help growth far more than any tax cuts.

  • Sue L

    If higher rate tax relief on employee pension contributions is axed then more employers will adopt salary sacrifice schemes – the net effect will be to reduce employee contributions, increase contributions paid by employers and reduce cash salaries. In other words, there will be no additional tax raised for HMT and employer and employee NIC payable will be reduced. It is difficult to see how HMRC might try to outlaw these schemes (which are documented in some detail on their website).

  • AAE

    Once again it is the public who respond to posts on this site who ask the questions that journalists should be asking. I haven’t yet noticed anyone asking Nick or Vince to supply details of their proposed Mansion Tax. Who, for instance, is going to do the valuation and using what criteria and at what cost? Have they thought perhaps that a house that was worth over 2 million quid might, on the introduction of said tax, suddenly find its value dropping like a stone? I struggle to see how the phrase “Left-wing Intellectual” was ever coined.
    Perhaps some journalist could really make a name for themselves and tell us all who are the real puppet-masters of that group of narcissistic simpletons that like to call themselves a government.

  • Swinners

    Of course the removal of higher rate relief on pension contributions can be very simply mitigated by entering into a salary sacrifice arrangement with your employer. Basically you stop paying (say) your £1000 per month contribution into your pension fund. Instead you ask your employer to pay it, and reduce your salary by the same amount. Your employer is happy, because he saves the cost of employer’s NI. You still get £1000 per month into your pension fund, and the exchequer is worse off, not better off.


  • David Boycott

    According to that Indie article, “38 per cent of Tories back the idea of raising the 50p tax rate for those earning over £150,000 to 60p.”

    I don’t know who these people are, but they are NOT Tories.

    The idea that we need to raise ANY tax is ludicrous, given the vast sums of money wasted by government. The idea of raising an income tax rate to over 50% (it is already over 50%, because of NI) is quite incredible.

  • Ruth

    That’s the nauseating thing about it-Balls claiming credit for anything after such an appalling and incompetent influence on economic policy during his time in Govt. He doesn’t realise he’s considered to be an absolute berk by the majority of sensible people.

  • Heartless Curmudgeon

    Cut the C*ap! – CUT TAXES !!!! end of!

    How to ‘pay’ for it (bearing in mind it’s OUR money) – CUT GOVERNMENT WASTE . . . CUT THE O/S AID SCAM . . . CUT THE WIND FARM SCAM . . . CUT ECOLOON TAX! and follow on by cutting all the other lunatic scams and taxes.


  • Cynic

    Balls said, “If George Osborne can’t bring himself to reverse his Vat mistake” when surely it was Alistair Darling’s policy Osborne was implementing, so shouldn’t that be reversing Darling’s mistake?

  • MilkSnatcher

    Sure, go populist and “fair” to burnish your political image, or be serious about economic growth and cut corporation tax, employer’s NI and increase entrepreneur reliefs and call of the mad dogs of the HMRC from destroying businesses.

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