A Liberal Democrat Vision for Fairer, Greener Taxes

July 6, 2006: Ming Campbell speaks to the City of London at the London Stock Exchange in association with CentreForum:

Elections show that my party is a powerful force across Britain.

Beating Labour in Dunfermline and West Fife earlier this year; beating Labour in the local elections in May and then within a whisker of beating the Conservatives in Bromley.

Three party politics is here and here to stay.

Our voice – raising issues that the other parties and the fashionable commentators miss – is critical to British politics.

And now as both Labour and the Conservatives want to close down debate on the tax system and tax structure, I believe it is time to open up that debate.

It is a debate that the Liberal Democrats will not shy from, and it is a debate that will be better informed with input from the City. No serious political party with ambitions to reach government should fail to take account of the needs of British business and industry.

I am aware of the contribution that business can make in a liberal society.

The City is at the very core of Britain’s economic achievements. It is here in the City that British companies innovate and succeed through an ethos of openness and competitive free trade. And it is here in the City – not in Whitehall – that jobs and prosperity are generated to the benefit of citizens throughout the whole of Britain.

The generosity of spirit, entrepreneurial know-how and the ambition to succeed found in the City are qualities from which society benefits and which politicians must encourage.

Just last week we heard a prime example of where business can benefit society.

The Children’s Investment Fund – a UK-based hedge fund – was reported to have given £50.4m to its charitable arm, the Children’s Investment Fund Foundation, in the year to August 2005. The money is being used to alleviate child poverty and comprises around 1% of the hedge fund’s total annual profit.

Business stands no chance of giving to society if government stands in its way; and that is especially true of tax policy, which is vital to business performance.

We all know that for business to thrive, it must function within a framework of legal certainty and equitable treatment. That holds as a principle for other areas of life too. That is why I asked the Prime Minister yesterday if he we will do all that he can to end the current situation in which British citizens can be extradited to the United States to face charges for alleged crimes committed in Britain, and yet Britain cannot extradite American citizens in the equivalent position. This is the situation in which the so-called Nat West Three – all of whom are British citizens – are currently trapped. The primary function of any government is to look out for the interests of its people. Our government must not be found in dereliction of that duty.

Business can also inform debate, leading to better politics and, in turn, to a more prosperous society. There should be no doubt about our party’s willingness to engage with the City – and with business and industry beyond it.

With that, let me start with a question:

What is tax for?

The answer to this question usually depends on where you stand on the political spectrum.

Traditionally it might be said that those on the right believe in lower taxes; that government is a necessary evil and should only be accorded minimum resources.

The left, on the other hand, holds that state intervention is generally good and that the principal function of government is to act as a leveller.

So, what should we make of a party that believes in redistribution and smaller government at the same time?

A party that advocates a cut in national income taxes and a significant rise in environmental taxes whilst retaining fiscal neutrality?

How should we describe such a party?

The answer is radical, progressive, and liberal.

A liberal tax system is one that puts the poorest members of society first.

A liberal tax regime is one that is based on Fairness, Simplicity, and Sustainability.

Fairness means that everyone should contribute to the public good, according to their ability to pay.

Simplicity means that taxes should be easy to administer so as neither to hinder wealth creation, nor to over-burden business.

Sustainability means that tax should play a part in encouraging people to act responsibly in preserving our environment – and the key to all of these is reform.

Tax reform is urgent because the tax system has failed to keep pace with changes in society and the economy.

This government has presided over steady economic growth.

But that growth has been unbalanced. It has been fuelled by consumer spending and personal borrowing, but manufacturing has collapsed.

Income inequality has stabilised at historically high levels but wealth inequality is widening still further.

House prices have gone up 175% since Labour came to power. Those rich in assets like homes and shares have seen their property wealth roughly trebling in value since 1997 while those in rented property have experienced no wealth appreciation but substantially higher costs. Britain is divided between those who have property, and those who have not.

The UK tax system is not as progressive as is often claimed, with the bottom fifth of households paying a higher proportion of their gross income in tax than the top fifth.

For business, this government has allowed tax to become ever more complex, so that companies now face a jungle of red tape.

New Labour is addicted to micro-management. It has not kicked its fundamental belief that state regulation must be a good thing.

The litany of failed government interventions is embarrassing: u-turns on Operating and Financial Reviews, company incorporation, film industry taxation, the disadvantaged area stamp duty relief and last minute changes to Self-Invested Pension Plans. All of these are the product of a lack of financial competence, lack of consultation or lack of humility in the face of the complexities found in the real world. Working families tax credits embody these problems.

The complexity of trying to compensate for the fluctuating incomes of large numbers of claimants has defeated Inland Revenue bureaucracy. Half of all assessments are wrong and there has been around £2bn of overpayments a year. The Inland Revenue has sought to reclaim much of this. In many cases this has involved demanding large sums from people who were unaware of overpayments – for which they were not responsible – and who have already spent the money.

Considerable hardship has resulted from this and the Government has been condemned by the CAB and by the Parliamentary Ombudsman for its poor administration which has created opportunities for large scale fraud.

On the environment, the direction is right but the execution is timid.

Inequality and environmental damage are barriers to progress, and are harmful to society.

People are looking to government to generate a greater sense of fairness and personal security without sapping the creative energy of a competitive free-market economy.

Currently the party is considering its position on tax issues. I am clear in my own mind about the direction that I believe would be of benefit to the country.

My starting point is that there is no case for a general increase in the level of taxes. This is a big departure since we have been arguing for the last decade that more revenue was needed for expanding public services. The issue we should be approaching now is how tax should be structured.

I have four concerns.

First, that low and middle income families are paying high levels and high marginal rates of tax while those with large assets or good accountants are paying less.

Second, we are facing a major moral and practical challenge in the form of climate change. It requires radical action to persuade us to change behaviour and to point the way towards the low-carbon economy of the future.

Third, business taxes are too complex and are in danger of choking small business, stifling creativity and undermining entrepreneurship.

Fourth, a heavily centralised government and tax system draws power away from local government and encourages inefficient target setting and distortions in local tax regimes.

We need taxes which are fairer, greener, simpler and more local.

The details of our response to this challenge will be refined as we approach the election, but we have an interim set of proposals.

FAIRER

I envisage a fully-funded, tax neutral package which reduces the direct burden on people on low and middle incomes for whom tax is a disincentive to work and save. Specifically, we would take more than 2 million workers out of tax and national insurance altogether by lifting the thresholds.

I would also raise the starting threshold for the 40% upper rate of taxation to £50,000 per annum, so taking 1.3 million middle-income earners who have been dragged into the upper tax band under Gordon Brown back out of paying higher rate tax.

In addition to lifting the starting threshold for Income Tax, I would also cut the basic rate of national Income Tax, initially by 2p in the £ to 20%. This will substantially assist low and middle-income earners and make it easier to switch to a system of local taxation based on ability to pay.

Our party should be about substance, not symbols.

That is why I propose that we should drop our policy of a symbolic 50p top marginal rate of tax.

I recognise that in the USA, Germany and other key competitors, top rate taxes have come down and are now below the 50% band. We have to be realistic about what can be imposed without avoidance.

Moreover, a 50p rate is no longer necessary to make the system more progressive overall. There are other ways of achieving the same end.

I would end taper relief on capital gains tax. It is far from clear that there is a serious economic rationale for what is a very expensive tax relief. We are also considering a proposal to restrict tax relief on pension contributions to the basic rate of income tax. Money from these changes would be used to cut taxes for those on low and middle incomes.

GREENER

The other way in which we could raise revenue is by shifting the national tax base from income to environmentally damaging activities. Our plans for green taxes are bold, radical and decisive. They have already received an airing – but the rationale should be repeated.

There will have to be radical change in the patterns of consumption and productivity if environmental objections, particularly reduced CO2 emissions, are to be realised. As a liberal party, we believe that it is better to use market incentives rather than regulation.

We would like to see further developments in carbon trading markets, but for some time yet tax incentives will provide a more effective way of changing behaviour. This is about taxing differently, not taxing more.

In practice, the process of changing behaviour is slow which means that environmental taxation will rise. We have adopted an intermediate objective of increasing the share of total tax take and GDP represented by environmental taxes – with offsetting tax cuts in other areas.

In the short to medium term we will increase the level of direct environmental taxation to at least the 3.6% of GDP achieved in 1999.

This means raising approximately £8 billion in current values. This will come from four principal sources – fuel duty, aviation charges, vehicle excise duty and the Climate Change Levy.

Fuel duty should rise along with inflation.

We will reform Vehicle Excise Duty (VED) on new cars purchased in future so that it is much more sharply graduated according to CO2 emissions, with the most highly emitting vehicles paying as much as £2,000 per year.

We will replace the existing Airport Passenger Duty with an Aircraft Tax based on the emissions of each aircraft. This will cover freight aircraft as well as passenger services, and will be charged on the operator rather than individual passengers.

Aviation is seriously under taxed in relation to the environmental costs it imposes and I am quite explicit that this industry will face higher taxation.

But there are remote island communities in the UK that are dependent on air links and we would exempt these services.

We will reform the existing climate change levy on the use of carbon fuels, which is over-complex, and has not been indexed.

By off-setting our green taxes with corresponding tax cuts, we seek to avoid causing overall harm to business.

On the contrary, we believe that our proposals will open up particular opportunities for eco-friendly business.

One of the key new developments in financial markets is the emergence of significant volumes of shareholder funds which are seeking ethical outlets and, in particular, investments in companies with a record of environmental responsibility.

Green issues have become more prominent in political debate and the public mind. It has therefore become less acceptable both to investors and consumers of any given business for that company to neglect its moral responsibility to protect the environment. In an era of increased business transparency – aided by the government’s Freedom of Information legislation – business ethics are more apparent, and pressure to observe them is stronger.

Market forces now push towards green reforms, not against them.

The Fortune 500 Company, DuPont, is an excellent example. Between 1990 and 2003 DuPont reduced its green house gas emissions by a staggering 72%. Rightly, it received public recognition for its achievements.

By reducing its energy consumption, DuPont has also managed to save more than $2 billion dollars since 1990.

Either environmental ethics, or the realisation that financial gain was possible, persuaded DuPont to change its ways. Our off-set green taxes, aimed at recognizing the polluters and taxing their behaviour, will surely encourage other companies to behave both ethically and, to their own financial advantage by changing their behaviour when it comes to polluting the environment.

There is an increasing synergy between Liberal Democrat policy and market forces.

SIMPLER BUSINESS TAXES

Business currently contributes a significant proportion of the total tax take. The most significant business taxes are corporation tax, business rates and employers’ national insurance contributions which account for over a fifth of tax revenue between them.

Business taxes are too complex and the job of administering taxes and tax credits for employees is a significant burden, especially for small business.

Promoting innovation is better served not by government spending but by cutting the burden on new enterprises.

Simplification of the business tax system must be a top priority. We cannot have a tax system that only tax accountants can understand.

We need a simpler Corporation Tax structure.

There are a number of tax reliefs available to companies which, if removed, would allow the Treasury to cut corporation tax by a full percentage point from 30% to 29%. Whilst this proposal is a modest one, it points in the right direction.

There are complex technical arguments about tax avoidance which politicians are ill equipped to deal with. Though I am by no means an expert in this field I can see the conceptual merit in a general Anti-Avoidance Rule which would allow for a massive simplification for businesses, cutting hundreds of pages out of the tax code.

Simplification is good not just for its own sake, but because it would help with the move towards harmonisation of the tax base across the EU, whereby a number of key taxes will operate on the same basis – though not necessarily at the same rate – in member states.

Let me be clear, I am not calling for the harmonisation of EU tax rates. Tax competition within the EU is healthy. But in order for competition to be effective, it must be based on a level playing field.

Business seeking to operate in many different EU countries face a minefield of 25 different tax systems and are sometimes taxed twice in different jurisdictions.

The introduction of a standard set of tax rules in the EU is currently being considered by the European Commission. In practical terms, companies are already moving towards a standard set of “International Accounting Standards”, and the standardised tax rules could follow on from these accounting rules.

Special measures are necessary for small businesses. Most small business failures are caused by cash flow problems rather than an inherent lack of profitability.

It is time for the Treasury to look at an option for small businesses to be taxed on net cash flow not profit. It would be broadly revenue-neutral. It would save on expensive accounting procedures and it would better reflect small business’ ability to pay corporation tax.

All future tax legislation should be subject to pre-legislative scrutiny.

As a party we are also remain open to evolving policy in line with the legitimate needs of business. We understand the concern here in the City about the potential effects of driving non-domiciled residents overseas. We also hear the voices of those in the business community who fear the effects of stamp duty on shares. I look forward to hearing from the business community how further tax reforms might be paid for, but we hear these concerns – and others – and there should be no doubt of our willingness to engage with them over the months and years ahead.

Consultation with those affected and with independent experts can only improve the policy-making process and the end result.

MORE LOCAL

These tax plans are part of our vision for a different Britain.

A Britain that is not only greener, fairer and more productive but more democratic too.

Our commitment to more power for local authorities stems from a belief that decisions about communities and local public services are best taken by people in those communities.

But freedom for devolved and local government is ultimately dependent on freedom to raise and spend money.

Until parliaments, assemblies and local authorities have control over their purse strings, central government will continue to call the shots.

Britain is the most centralised of all the member states of the European Union: 95 per cent of taxation is raised by central government.

Local government in England only raises about 25% of its money locally. This leads to problems with gearing, where small budget increases lead to huge tax rises, and it gives Whitehall the authority to micromanage and interfere, just because it pays the bills.

We need a radical decentralisation of power.

That means councils taking responsibility for a far higher proportion of public spending.

If that responsibility is to be meaningful, a higher proportion of revenue raising must transfer from national to local government.

Liberal Democrats would ensure that local government is responsible for raising the majority of its spending locally.

We already have established policies to relocalise business rates, albeit with safeguards to protect the business community from totally inequitable levels, and to introduce a Local Income Tax in place of the unfair Council Tax. These will raise the proportion of revenue raised locally from approximately 25% to 50%.

Our long term goal is to raise this further, dependent on the pace of devolution of powers to local government.

And we would give elected councils powers to vary the taxes assigned to them and to innovate. I welcome the way in which the Corporation of the City of London has developed a simple tariff system for securing a share of the development. A Liberal Democrat council in Milton Keynes has already adopted this approach, which is much better than the centralised Planning Gain Supplement envisaged by Gordon Brown.

We also support the idea that infrastructure projects such as Cross Rail are more likely to happen quickly if devolved government has discretion to secure development gain.

Local government is subject to a variety of Central Government targets, controls and inspections which cost around £1.5 to 2bn pa according to the Local Government Association.

Giving local councils much more power over discretionary spending would eliminate the excuse for such central government control, and save billions into the bargain.

CONCLUSION

All major parties are committed to maintaining existing levels of public spending.

But that should not mean that we remain wedded to existing mechanisms of financing.

I reject the Brown-Cameron thesis that the tax system needs no reform, no change. A system established by Gladstone is long overdue for change.

We are not proposing to tax more or less but we are proposing to tax differently.

As the sources of wealth and inequality change, the tax system must evolve.

We must recognise the consequences of fiscal stagnation and regulatory accumulation.

Any party serious about enhancing the productivity and competitiveness of the British economy in the 21st century must be prepared to call time on unnecessary regulation and find ways of reducing the burden on business of administering taxes.

Any party serious about social justice in the 21st century cannot ignore the divisive impact of asset price inflation. Where some can claim tax relief on the sale of a second home, others struggle to find even one affordable home to live in.

Any party serious about action to tackle climate change cannot ignore the need for substantive measures to change behaviour which move the economy in a low carbon direction.

The Liberal Democrats are that party.

And we are serious.

…Serious about competitiveness and efficiency…

…Serious about the environment….

…Serious about fairness…

And serious in our desire to see a prosperous Britain – fairer, and greener – where everyone can flourish.

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1 Response to A Liberal Democrat Vision for Fairer, Greener Taxes

  1. Tim Murray says:

    Fairer and greener? If Britain’s population rises from 61 to 70 million in the next two decades because of continued uncontrolled immigration, what difference will it make if everyone has a “fair” share of so much less. Real wealth=number of people divided by resources. How “green” will the UK be when the gains of renewable technology and greener lifestyles are wiped out by there being more people? Reduce individual footprints but increase the NUMBER of footprints? Cameron says he will cut back on immigration, where do the politically correct Liberal Democrats stand? Tim Murray Canada

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