Liberal Vision

Mansion Tax Nouveau

Our party at times, is rather like the French wine industry, a purveyor of great things, sometimes the best in the world, but rather loathe to change our traditional bad habits.

The mansion tax in many forms is now vintage bad policy about which we have written previously. The party in principle supports simple fair taxes, we have a history of supporting land taxation. The mansion tax is neither.

Annual percentile taxes on estimated property values are hard to calculate, distort markets, have no sensible ‘fair’ threshold. They would be widely avoided.

That Nick Clegg is now talking (£) about ditching the vintage for something bubbly is cheering, but his options so far are rather flat, and abstinance from token tax innovation might be better.

The worst option is ‘reforming’ i.e. increasing stamp duty.

Stamp Duty on main homes has got to go. Whilst it is reasonable to tax individuals and businesses for capital gain, consistent with other assets; taxing the full value of the property on the buyer, not the seller is entirely unfair, and a huge market distortion.  

Reforming Stamp Duty would involve replacing it with a 5-10% level of Capital Gains Tax across the board, zero-rated at the same level Stamp Duty is zero-rated. There is no need to have multiple progressive bands. There is certainly no need to introduce some super rate on very high property values. That very rich people want to live and spend their money in Britian is a good thing not a social problem.

CGT is already applied to second homes and business transactions. Ditching Stamp Duty would then be a tax simplification.

Introducing new Council Tax bands is an old idea of unclear purpose. I happen to like Council Tax. It’s the nearest thing we’ve got to a fair land tax. I might even concede new bands could be helpful in some areas. But this should be a local decision and introduced slowly, or part of a wider land tax reform.

The problem I have with it is that there is no obvious reason why larger houses should pay dramatically more than they already do for the same local services as smaller houses. Nick appears to be suggesting a local tax reform could be used to pay for a national tax deficit. I’m not sure that sits at all well with the party and coalition’s localism agenda.

If the issue is taxing monopoly ownership of land, then let’s start calling Council Tax, local land tax and apply it evenly to different land classes through one simple integrated system with busines rates. Let local areas compete with each other to attract residents and businesses through the rates they set. Too much national interference and redistribution encourages waste and entrenches poverty through public sector crowding out.

The general problem however is the positioning of this policy as a way of paying for ending the 50p income tax rate. That policy is being reviewed on the basis of complexity and revenue. If it damages growth, penalising entrepreneurship and encouraging avoidance, it will fall on its own merits.

It does not need a plan B to appease the left.

The ‘Fairness Insurance’ opportunity for Clegg

Liberal Democrats policies have made their mark on the Coalition. The most significant being the AV referendum, raising the income tax threshold, introducing the pupil premium, and “green investment”.

However, these items seem thin  by comparison with Conservative reforms such as academies, NHS decentralisation, and the universal welfare credit.

Nick Clegg needs similar major achievements to his name in 2015 if he wishes to maximise Liberal Democrat chances of success in the election.

‘Alarm-Clock Britain‘ has not caught on. Cameron’s vision of the “Big Society”, appears to drive Coalition strategy for now. It’s time for Clegg to initiate his own radical vision and big ideas.

One potential area might involve reforming National Insurance and the State Pension; the Liberal Party’s greatest achievements in the 20th century.

With the introduction of the Universal Credit the system is in flux, leaving National Insurance and the State Pension open for reform. NI was originally based on the contributory principle, and provided in the event of unemployment, ill health, accidents, injuries, or loss of a spouse.

However, a recent CPS report has shown how NI contributions have become a stealth tax on earned income. They inhibit job creation, penalise low income earners, and fail to fund the state’s pension liabilities. NIC’s will lose all justification if Steve Webb’s plan for a flat rate pension is introduced.

If Clegg could address this issue then we would see a clear demonstration of Lib Dem influence and a significant achievement to be proud of in 2015.

An alternative “Fairness Insurance” could replace NIC’s with a voluntary flat rate National Insurance Tax set at 10% income, with a 10% cut to the basic rate of income tax to compensate for low income earners. This would effectively integrate National Insurance into Income Tax and shift the burden onto individuals, rather than employers, as the CPS proposed.

If an individual chose to pay the tax then the revenue would go into a Personal Savings Account (PSA) which could then be used by the individual to insure for unemployment, healthcare, and other savings. This would simplify the system by abolishing the National Insurance Fund and the complicated method of collecting NIC revenue.

In addition to this, the new Citizen’s Pension should be based on a more sustainable basis as proposed by the recent IEA paper “Sharing the Burden”. This would restore the contributory principle, tackle the problem of pension liabilities, and provide a safety net for the poor.

However, an individual who chooses not to pay the National Insurance Tax would be able to organise their own private insurance plans, retirement funds, and savings.

Such a reform to National Insurance would be a bold stroke by Clegg. Thus far, Clegg has used ambitious rhetoric with his call for “the biggest shake up of our democracy since 1832”. Yet the Protection of Freedoms Bill has failed to live up to expectations, especially with its failure to scrap control orders, and the cost of living has continued to rise drastically.

Clegg has to have policies to match the rhetoric he has been using, otherwise he risks ridicule. This will show in 2015 if he has few major achievements. David Cameron’s rhetoric has also been overblown but he will likely be credited with a balanced budget, economic growth, and significant reforms.

The tuition fees debacle, failure to scrap Trident, and support for spending cuts has alienated the Liberal Democrats’ largely social democratic/protest vote/local interest electoral base. Clegg has started to pursue the C1’s and C2’s (i.e. “Alarm-Clock Britons”) who elected Thatcher.

If he is serious about expanding his party’s electoral base then reforming National Insurance will be a crucial first step as it will demonstrate his influence, secure economic growth, and establish a reputation as a champion of the less well off. This will help tackle the disillusionment which has accompanied Clegg’s Deputy Premiership.

 Guest post from David Cowan, an intern at the Institute for Economic Affairs, writing in personal capacity