Lib Dem tax resistors make their case

12.01.00am UTC (GMT +0000) Sun 17th Sep 2006

Progressive Liberal Democrats today published a document in support of their proposal to add a 50p top rate tax on incomes over £150,000 in the party's tax policy aiming to raise more poorer tax payers out of tax altogether.

Dr Evan Harris MP, who is proposing the amendment to the party's tax motion on Tuesday 19th September, said:

"This principled, distinctive and popular policy not only improves the already excellent plans set out in our Tax paper by making it more progressive and helping more poorer tax-payers, it also shows that the Lib Dems are prepared to talk the language of tax that ordinary people understand. Neither of the other parties cares about tax fairness or is prepared to talk about income tax rises for the highest earners. We are willing to do so and it has served us well in the past."

"Adding the 50p top tax rate to the raft of measures already proposed to make tax greener and fairer is entirely coherent and resonant with Liberal Democrat values. It represents an increase in tax on only about 150,000 tax-payers with incomes over £150,000 while benefiting the other 29 million tax-payers, especially the 300,000 poorest. What could be a clearer, more honest and principled demonstration of our commitment to fairer, simpler taxation."

The briefing document prepared sets out twelve reasons to support the addition of the top rate tax to the package and makes clear that amendment is not a reversion to the policy of the last election where Lib Dems called for a 50p rate on incomes over £100,000 to raise cash for spending priorities. This version of the top rate tax would add £2bn to the multi-billion pound proposed package aimed at making taxation fairer, simpler and greener.

"Those of us backing this move fully support the rest of the package as far as it goes and expect the Party as a whole to unite around whatever measure is agreed by our democratic party conference".

END

Notes to Editors:

1) The Amendment that Dr Evan Harris MP will be proposing to the party's tax motion:

F28 Fairer, Simpler, Greener (Tax Reform Policy Paper)

Pararagh 2 first line

Delete 'without introducing a 50% tax rate income tax' and substitute

'in relation to income as well as wealth' by:

Add a new paragraph 2c

'Introducing a 50% marginal rate (combining Income Tax and 1% National Insurance Contributions) on earnings over £150,000 per year, and using the revenue to raise the starting threshold for income tax further towards our goal of £10,000 per year and taking 300,000 more people out of tax altogether.'

Paragraph 4a

After the words 'ability to pay' continue the sentence:

'with such local income tax to be capped at an income of £150,000 per year.'

2) BRIEFING ON THE 50p AMENDMENT - Policy Motion F28 on Tuesday 19th September

1. TAX COMMISSION PROPOSALS

The Tax Commission has proposed a series of tax changes to make taxation fairer, simpler and greener. Their proposals include:

a.Abolishing the existing 10p starting rate of income tax taking more than two million people out of tax altogether and removing one rate of tax.

b. Raising the employee NICs threshold so that NICs begin to be paid at the same level of income as income tax, simplifying the system, and seeking to make employee NICs payable on annual rather than weekly earnings.

c. Raising the starting threshold for the 40% higher rate of taxation to £50,000 pa - taking 1.3 million people out of paying higher rate tax.

d.Cutting the basic rate of national income tax by 2p, as part of a shift from central to local taxation.

These would be paid for by

a.Reforming and simplifying Capital Gains Tax, in particular by removing taper relief.

b.Providing pension contribution tax relief at the basic rate of income tax only.

The Tax Commission proposes scrapping the existing party policy of a new top rate income tax of 50p on incomes over £100,000.

2. OUR AMENDMENT PROPOSES

a.The amendment proposes to restore a 50p top rate income tax - on earnings over £150,000, raising £2bn to be used to raise the threshold for paying income tax (and national insurance contributions, NICs) which benefits all tax payers and would take about 300,000 of the poorest tax-payers out of paying tax altogether.

b.Both the previous 50p tax rate and the one proposed would be maximum marginal rates (i.e. including local income tax LIT) and we propose capping LIT (which is about 4p in the £) at £150,000. At this income level the 9% higher rate tax increase (50p instead of 40p plus 1p NIC) would kick in.

3. REASONS TO SUPPORT THE AMENDMENT

The reasons for supporting the amendment are;

a) Income tax is the most progressive tax, and a new top rate is the most progressive form of income tax so the addition of this measure would make the overall package significantly more progressive.

b) Other than the retention of LIT (which was in the last manifesto already) most aspects of the commissions existing proposals are not very progressive:

i) the 2p cut in the basic rate of income tax is a cut in the most progressive national tax and while benefiting all tax-payers therefore helps the rich more than the poor.

ii) The benefit of the rise in the threshold for upper rate tax (URT) from £38,000 to £50,000 outweighs - for all those earning over £40,000 - the cost of raising the upper earning limit (UEL) for NICs from £33,000 to £50,000. This is a tax gain only for those earning over £40,000 and not for the poorer tax-payers.

iii) Green taxes are not as progressive as income taxation so a switch from basic rate tax to green taxes is regressive. For example the current VED and fuel duty regime are as regressive as VAT. (Regressivity co-efficients are council tax 0.25, VED/Fuel duty 0.6, VAT 0.6, Income tax 2.9). Even for air transport taxes, rich people do not travel at their own expense more than the poor people to the same proportion as their income, i.e. those earning £80,000 do not make personal (as opposed to business) journeys four times further by car or plane than as those earning £20,000.

iv)Raising the threshold at which people start paying tax and NICs does help the poor more than the rich due to the increased proportion of income that is retained, but it is not very efficient as a way of redistribution because all tax payers benefit. So the funds we can put into this the better

The IFS have said that adding the 50p top rate on incomes of £150,000 and spending the proceeds on raising the personal tax allowance, is bound to make the package more progressive.

c) Most of the revenue raising measures in the tax commission proposals are aimed at high wealth not high incomes. Capital Gains Tax Taper Relief is enjoyed by those with large assets not high incomes, and higher rate relief on pension contributions is enjoyed by those building pension pots not on those specifically with high incomes.

d) To argue against the 50p rate on the basis that we should not be taxing incomes, but rather only wealth is not consistent with a £20bn wealth to income switch represented by council tax to LIT.

e) The proposed 50p tax is a development of policy:

Compared to the last election manifesto, this 50p tax proposal is different

• It is levied on incomes over £150,000 not £100,000

• It is no longer tax to spend (i.e. to fund specific policies in Higher ed and Long term care) but to make tax fairer, by cutting unfair taxes

• It is a coherent part of the new tax proposals

f) It is a coherent, distinctive, newsworthy, resonant, principled, practical and popular policy

• Coherent - it is an utterly rational part of the new "fairer, simpler, greener" tax policy package -

• Distinctive - it is one policy that the other parties won't even pretend (unlike Green taxes for example) to copy from us

• Resonant - it is one of the few policies (along with scrapping tuition fees, free personal care and anti-Iraq war) that Liberal Democrats are known for - we should be loathe to scrap it without good reason. CGT Taper relief and Pension contribution relief reform are hardly comprehensible, let alone resonant, with the public.

• Newsworthy - Lib Dems need media coverage for our popular policies and 50p top rate is popular as are the things the proceeds are spent on. The risk is that without it we will be less newsworthy except in being described as "raiding pensions" or being one of the parties proposing Greener taxes. The whole simpler, fairer, greener package would benefit from the profile provided by a higher rate of income tax.

• Principled - it is the most progressive form of the most progressive tax, and used to help poorer tax payers more than wealthy ones. It also symbolises honesty and courage in policy

• Practical - It is well understood and difficult to evade/avoid. It only represents 5% more than the existing proposals due to the LIT cap and with LIT 9% more than the current regime, all on incomes over £150,000. This will affect about 150,000 tax-payers, and benefit the other 29 million especially the 300,000 poorest.

• Popular - all the polling evidence showed that even on its own (without the benefits of what it would pay for being factored in) it was popular with voters as a whole, especially our voters and our target voters. It also led to views of us as principled, honest and straight-talking.

Related Link:

The text of the full tax motion is available here.