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Not such a capital idea

By Andy Mayer
May 30th, 2010 at 1:24 am | 1 Comment | Posted in Uncategorized

At the moment we don’t know exactly what the Coalition’s plans are for changing capital gains tax, so the various campaigns against it are speculative. However in principle we understand non-business capital gains will rise to either income tax or near income tax levels from their current rate of 18%; potentially 40 or 50%. Capital gains on business activity may also rise, but not as much. Allowances may be cut. All changes likely next April, rather than June.

The principle behind the change is that capital gain is like income and so should be taxed like income. The problem with the principle is that most capital gains are not like income, capital investments have downside risk.

If for example you invest in shares, a second home, or a new business venture, you bear the entire risk of losing that asset should market conditions deteriorate. You cannot offset capital loss against income tax.

Capital Gains Tax though means the state shares any upside. Higher rates reduce the incentive to invest, particularly in high risk but valuable economic activity like employing people. The IEA have a good example on this and why the income comparison is erroneous.

Historically we used to have indexation relief then taper relief as methods of treating capital gain differently. The thinking here was to reward holding assets for a long time and discourage short-term or speculative behaviours which are assumed to have a social cost. Both though were complex and hard to administrate. It is also not clear such incentives reduce systemic risk.

The solution tried by Labour was to cut CGT to a single rate of 18% and scrap taper relief. Done for reasons of simplicity and in respect of international competition. Most capital, unlike most income can move around the world with ease. Several countries don’t have CGT, and those that do all have rates below 30%. At 40% Britain’s rate would be the highest in the Western world.

They also retained a form of pro-small business discrimination with Entrepreneurs relief, which reduced the rate to 10% for the first £1m of gain.

So any changes in the emergency budget towards levels of income tax run the risk of increasing complexity, reducing investment incentives, and increasing avoidance including encouraging mobile capital abroad. All of this would reduce the tax return from CGT, fail to provide returns the government can use to raise personal allowances, (the intent of the change), and do little to tackle the deficit.

A counter-argument to this, deployed by Nigel Lawson and Ronald Reagan in the 1980s is that big differences in rates between income and CGT encourage a different kind of avoidance, declaring income as capital gain. For example contractors setting themselves up as companies, or saliariate becoming contractors to do so. But this is very small beer and arguably entrepreneurial.

There is less of a case against raising CGT on second homes, although doing so will encourage flipping, housing gain is more reliant on supply shortages than investment.  An unrelated, simple, but less counter-productive reform with redistributive intent would involve replacing stamp duty with a low level of CGT on home sales. This would benefit the young and asset poor and reduce disincentives to invest in homes in downturns.

So it will be interesting to see what the proposals actually are on June 22nd. Big rises will be a mistake encouraging capital flight and avoidance.  More complexity will be a mistake extending the tax code. Targeting second homes will seize up part of the housing market. Not an easy challenge to get right.


David Laws – Your country needs you

By Angela Harbutt
May 29th, 2010 at 11:13 pm | 16 Comments | Posted in Uncategorized

As much as David Laws may hate me expanding on Andy’s timely but short post I cannot let this matter pass without adding my own views.

David Laws’ resignation is nothing short of a disaster for this country.

It was his vision, his fine mind, his sheer brilliance that brought such a shine to the coalition. It will be a much poorer Government for his leaving it.

I am confident that the Parliamentary Standards Commission will find that the definition of “partner” was indeed ambiguous and open to interpretation – and David Laws will get a clean bill of health. Why?

1)It is very clear to any that worked in and around the Lib Dems that David Laws DID NOT share a social life with Mr Lundie. 2)David Laws has said that they have separate financial arrangements. 3)They had not undertaken any ceremony of any sort celebrating their “union”.

From what I can see, therefore David Laws has a very strong case that the rule was badly phrased and open to interpretation. In David Laws view, Mr Lundie was not his partner as laid down in the rules. I cannot see how David Laws is anything other than “technically” correct – on this matter.

In these “whiter than white days” . We also have to ask however did he flout the “spirit” of the rules?

Here I say Yes perhaps he did – but with huge mitigating circumstances.

1. The rule about renting from (rather feebly defined) “partners” only came into effect in 2006. So the figure of £40,000 is almost certainly wrong.

2) I understand that he claimed considerably less than he was entitled to claim.

3) Most importantly we should consider the motivation of the man. This was a man – not seeking to personally enrich himself – he did that in the city many moons ago. This was a man seeking to keep his private life – private.

Between 2001 and 2006 his claim was entirely legitimate. And he claimed.  When the rules changed in 2006 had he suddenly ceased to claim rent from Mr Lundie – any low grade idiot would have put two and two together and drawn the inevitable conclusion about the nature of his relationship with Mr Lundie. The idea that David Laws could have “confidentially”asked for clarification from the claims office ( as some have suggested he should have done) is to show ignorance of the system. Be in no doubt that had he ceased his claims in 2006 when the change of rules occurred -( or indeed even raised it with the wrong person “confidentially”)  the rumour mill of Westminster would have been in overdrive. He would, in old-fashioned terms, “been outed” there and then. So he almost certainly maintained the status quo on his claims to protect his privacy.

This is not a typical “expenses scandal”. He claimed less than he could and sits sat in cabinet amongst many who had committed much worse “errors of judgement” over their expenses and got re-elected by their constituents.

This is about a man’s decision on how to manage his privacy.

I say again. I think it is a disaster that he has resigned. I hope this has not caused him to turn his back on public life. I trust he will return to this position as soon as he has been cleared by the PCS. I pray that his return is not too late. And I fear that even a few weeks or months away , may be too long.

David Laws. Your country needs you.

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Laws broken, but he’ll be back

By Andy Mayer
May 29th, 2010 at 9:35 pm | 2 Comments | Posted in Uncategorized

David Laws has resigned from the Cabinet, but, pending the outcome of the Parliamentary Standards Commissioner ruling, he’ll likely be welcome back.

The absence of his fine mind in a role critical to cutting the deficit will be a loss to the Coalition. However I would be very surprised if the new appointee, Danny Alexander, doesn’t use him as an adviser, so perhaps not entirely.

Meanwhile David seeks to restore something of the privacy that has cost him his job. So let us leave it at that.

Breaking Laws?

By Andy Mayer
May 29th, 2010 at 10:55 am | 8 Comments | Posted in Liberal Democrats, Uncategorized

David Laws is trouble with the Telegraph over his expenses. He stands accused of claiming for rent from his long-term partner which may be against rules against paying rent to a spouse or equivalent. He has accepted a degree of fault, offered to pay money back, given an explanation based on protecting his privacy, and referred himself to the Parliamentary Standards Commissioner. His future as a minister must be considered uncertain. 

There are two issues within the Laws story. The first is what level of privacy it is reasonable for someone to expect in public life. Here his behaviour looks understandable if naive and anachronistic. Not a resigning issue, but if you want complete privacy don’t claim public money that depends on honest disclosure of your personal relationships.

The second issue is familial benefit. Did his arrangements mean either he or his partner gained at the taxpayer’s expense? That is the point of the rule in question. Here he may be in trouble on the decision to rent from his partner, the amount, and whether his claim that their relationship was not akin to that of spouses stacks up. That accounting and legal headache is for him and the investigating Commissioner.

Can he survive? The view of most commentators so far is yes he can. On beliefs and ability alone  this blog would rather he did. His decisions look foolish not self-enriching, and Julian Glover’s analogy with Lord Browne of BP is apt, but it will depend on what the Commissioner rules.

His reputation though, and that of the Coalition is damaged.

Politically part of the Liberal Democrat narrative in the last election was that none of our MPs had broken the rules, carefully avoiding any mention of the other place, or the motives behind some claims, but still holier than though. It was unwise then, it is defunct now.

Our policy was that those in serious breach of the rules could be subject to a recall ballot by their constituents. I believe some form of that will still be a part of the Parliamentary Reform proposals.

The logical conclusion, depending on the timing of the legislation and what the Commissioner’s actually rules, is that Yeovil might see the first test. If that happens David Laws would be wise to welcome the process. The Commissioner will influence whether he gets to remain a minister. His constituents are the best judges of his longer-term political future.

Do we need a Deputy Leader?

By Andy Mayer
May 28th, 2010 at 11:39 pm | 1 Comment | Posted in Uncategorized

The Liberal Democrat Deputy Leadership contest looks over almost over before it’s started. My local MP, Simon Hughes already claims 25 supporters, and with 29 required to win. Tim Farron’s challenge, however exciting and different, looks rather more Henley than Brent East.

But the notable qualifications of both these individuals aside, there is a rather more fundamental question to ask about the job itself.

Part of the Coalition’s mission is to eliminate duplication and waste in government. The Liberal Democrat party could do the same to itself, and this role is a prime candidate.

In opposition the position had a clear remit. When Mrs. Clegg ordered Nick to go on holiday and leave the leaflets at home, Vince Cable would stand in at PMQs and chair meetings of the Parliamentary Party.

When that happens today the new Deputy Leader does not then become the Deputy Prime Minister. Government positions are not party positions.

Nor does the stand-in leader of a party in government have any special Parliamentary privilege. The DL can ask questions of the government. They do not have unique rights to do so though, any more than the Conservative chair of the 1922 committee. They are just another MP.

Inside the Party, ‘Lanson Boy’ highlights the confusion further, describing the role as “joint head (with the Party President) of the rubber chicken circuit”. Do we need a two-headed chicken?

If elected Simon Hughes has grand plans to clarify all this. In Parliament he wants to create roles for non-government Liberal Democrat MPs to shadow ministries with Conservative ministers. He wants the Speaker to grant them special rights to ask questions. He wants these spokespeople and ministers to meet weekly as a shadow cabinet. Internally his remark “we have to be really strong in our policy positions” suggests he sees some role for the DL leading on policy formation.

Personally I think he’s wrong on all counts. If Liberal Democrats outside the government wish to show their independent identities and think that will help the party, they can do so by being MPs and asking awkward questions.

Government never stopped Labour backbenchers from finding their voice and what Simon appears to be suggesting is that he and his shadow ministers act as a filter for ‘official party dissent’ as opposed to the regular unofficial kind any MP can pursue by speaking their mind. This is neither necessary nor very helpful. If team Simon and team Nick disagree who is speaking for the party? Or does it depend which one is on holiday?

The Speaker should refuse his special privileges request, Parliament has no business changing their arrangements to suit the communication preferences of party factions.

His ‘shadows and cabinet’ meeting idea makes little sense other than as a sounding board. As a group they have no remit. There are already full meetings of all the MPs to share ideas, and if backbenchers want a specific talking shop they should lower themselves to copy the Tories and set up a 2010 committee.

Within the party we don’t need two Presidents, or a special policy role for a deputy leader of the parliamentary party. There are already quite enough poorly defined over-lapping jobs on all the various internal committees without adding another layer of confusion.

Which leaves the new DL with the occasional job of chairing meetings of the MPs as holiday temp cover.  

Do we really need a grand sounding official role for that job, or can be left to old-fashioned delegation?