Ed Miliband proposes double taxation of incomes

This is a woefully bad policy proposal from Ed Miliband:

The Labour leader pledged to cut tuition fees from £9,000 a year to £6,000 from September 2016.

It will apply to students mid-way through their courses, meaning a student in their first year of university today will pay less in their third and fourth years.

The programme will be funded by a £2.9 billion raid on middle class pensioners, and by making graduates earning over £42,000 pay a higher rate of interest on their loans.

We’ve struggled for a number of decades to encourage people to save for their own old age. The current debates are surrounded by plaintive cries of how we’re going to pay for all of that care that the elderly are going to need in the future. So then someone proposes to reduce the amount people save for the future by taxing it more?

Come along now, it’s not April 1st yet.

Pensions experts have criticised proposals from the Labour leader Ed Miliband to cut the tax-free amount Britons can contribute to their pensions in order to fund a reduction in tuition fees to £6,000 a year.

Mr Miliband said that he would cut the lifetime limit on tax-free pension savings from £1.25m to £1m, and reduce the tax-free sum saved per year from £40,000 to £30,000 a year, if he wins the general election.

For savers earning more than £150,000 a year, Mr Miliband proposed cutting the pension tax relief from 45pc, the same rate they would pay on earnings, down to the basic income tax rate of 20pc. The Labour leader said these measures would raise £2.7bn to fund the pledge on tuition fees.

But the real problem is not that it’s a deeply stupid idea. It’s that it’s a deeply unfair one.

There is in fact no such thing as “tax relief” upon pensions savings. What there is is “tax deferral”. Your pension contributions come from your gross income, before tax. Your investment gains within the pensions wrapper are tax free at the time they are made. But the income you derive from your pension pot pays income tax just like any other income. You do not therefore get “relief” from the taxation, you get deferral of it.

Which is, of course, why that tax “relief” has to be at whatever the marginal income tax rate on income is. Because, and yes this is obviously so, those who do manage to save up to that limit are going to be enjoying pensions that pay one or other of the higher rates of tax. But they will have had that “relief” only at the standard rate.

They are, therefore, paying income tax twice on that same income, once when earned and saved for a pension and again when drawn down as a pension.

It’s deeply stupid to dissuade people from saving for their own old ages. But it’s grossly unfair to insist that the same income pays income tax twice.

All of us here have our own ideas about party politics but as an organisation we are not, and resolutely so, party political. But of the ideas thought up to gain support at this coming election for one or other political party we’d award this our coveted “worst we’ve seen yet” prize. Admittedly, we’ve not yet read the Green Manifesto but seriously, double income tax for those who save for their own pensions?

Absurd.

Today’s crazed loon idea

So, we know very well that the government is spending very much more than it is raking in in taxes. There should be some solution to this at some point. At least we hope there will be. But perhaps not this solution:

What might be fairer would be to treat capital gains in houses just like any other financial asset and tax it at 28pc.

Given the turnover of the UK housing market and the gains built into it, it isn’t fanciful to think that, in a good year, the Government could raise £20bn to £30bn a year alone from this source.

For those inflamed by the inequities of the North-South divide, they will be pleased to know that the bulk of anything raised in this way would hit the south east of England hardest.

How wonderful: increase the taxation of the most successful part of the economy. And it’s worth pointing out that the SE already pays much more tax: because the higher salaries earned there are taxed under national income tax rates, not regional ones. but then this is just mad:

As far as pension funds go, a simple 1pc levy on the value of schemes would be easy to administer and collect. This would raise an additional £20bn each year and given that pension fund contributions are subject to income tax relief, it doesn’t seem unreasonable to pay some of those investment gains back to the nation.

We specifically grant income tax relief because we want people to save for their old age. So now we’re going to charge a wealth levy on people who save for their old age? Even knowing that wealth taxes have much larger deadweight costs than income taxes (or consumption ones)? Meaning that if you think pensions savings are undertaxed then it would be more economically efficient to simply reduce the income tax benefits of doing so rather than instituting a wealth tax.

Of course what’s really interesting about the proposals is that no one at all believes that government could ever just curt back its spending to the amount of tax revenue that it has available. Sadly.

What we need to do is obvious

This piece could equally well be titled “Interesting things we learn in The Guardian”. For we find out that Britain has the longest tax code in the world:

The question is: why does the UK have the longest tax code in the world? The Hong Kong tax code, widely held by tax lawyers to be the most admirably efficient in the world, is 276 pages long. The British tax code, rapidly beginning to look like the most disingenuous in the world, is currently in excess of 17,000 pages. It has more than trebled in size since 1997.

And what was it that happened in 1997? Ah, yes, Gordon Brown.

We also find out something else very interesting:

A couple of tax lawyers eventually told me that a 276-page tax code could generate the same if not more revenue in the UK….

So, umm, given that a 276 page code would both reduce the amount wasted on dodging around the systemn and also provide the same or more revenue (in itself the primary purpose of a tax system), why don’t we have a nice bonfire and get ourselves a 276 page tax system? One that might actually be comprehensible to some mere mortal? We can’t really see any argument against it.

And if we were to take the Hong Kong example seriously we might want to take two more things from them. One being that there’s no with holding in their system. In order to pay your taxes you’ve actually got to go and pay your taxes, there’s no salami slicing of that wedge from each and every paycheque. This physical act of having to hand over the money obviously puts a certain pressure downwards on tax rates as people actually see how much government is costing them. And while we’d never actually reach the second defining feature of the Hong Kong system, their low rates, we would obviously get closer if that pressure were to exist.

Entrepreneurs’ Relief is worth defending

Defenders of Entrepreneurs’ Relief are on the back foot. In the corridors of power, rumblings have been heard that this tax relief is under threat. As entrepreneur Guy Mucklow writes in City A.M.:

Originally introduced by Labour seven years ago, the Entrepreneurs’ relief lifetime allowance was doubled by the coalition government to £10m in March 2011. However, according to a report by the National Audit Office in November 2014, the cost of the relief has increased to almost £3bn. Subsequent political scrutiny could put its future in jeopardy.

Entrepreneurs’ Relief offers business owners a lifetime allowance of £10m of gain taxed at the reduced rate of 10% for individual shareholdings of over 5%. Since its introduction in 2008 – when it replaced Taper Relief – the allowance has been raised to £2m, 5m, and finally its current level of £10m.

Its success may well contribute to its downfall. The £3bn has been “lost” because entrepreneurship is flourishing in the UK – partly because successive government have realised how vital entrepreneurs are and therefore offered people tax incentives to take the leap. If the idea is to encourage entrepreneurs, it is short-sighted to bemoan the loss of tax revenue (an inevitable by-product of the policy’s success).

In our Manifesto, Tim Hames of the BVCA argued forcefully that we should be extending Entrepreneurs’ Relief:

If the Government were to discard the 5% requirement, lure business angels yet further into the start-up scene and eliminate the current cap altogether, it would revolutionise the tax treatment of entrepreneurs in Britain. The howls of anguish from the likes of Berlin, Dublin and Luxembourg would be audible in the Treasury.

Getting rid of the 5% equity requirement should be prioritised in any move pushing for its extension. It may be pushing entrepreneurs to exit their companies or not take on extra funding in case they get diluted below the 5% threshold. Labour may be amenable. Its March 2013 Small Business Taskforce report stated:

Extend entrepreneurs’ relief beyond capital gains to dividends, in order to remove the incentive for entrepreneurs to dispose of their businesses rather than grow them. Reduce the 5% threshold for entrepreneurs’ relief to 1% or below to allow more employees to benefit from investing in the high growth companies they work for.

In contrast, the Liberal Democrats’ 2013 autumn conference, a policy paper entitled Fairer Taxes, Policies for the Reform of Taxation was endorsed by the party. It included the following statement:

We wish to focus Entrepreneurs’ Relief to better serve the purpose for which it is intended; incentivising entrepreneurs and start-up business owners, and prevent it from simply being used as a way for wealthy investors to reduce their tax bills. We would therefore increase the shareholding requirement to 25%.

Extending it to 25% would definitely incentivise entrepreneurs to exit their companies early. There is no earthly reason why it should be raised from 5% and every reason why is should be cut. Britain is backing entrepreneurs – now isn’t the time to take the foot off the pedal.

One way to narrow the North-South divide

We all know there’s a North-South divide, but from a policymakers perspective it’s not clear what – if anything – we should be doing about it.

To a significant degree, the relative economic success of London and the South East is due to factors beyond the powers of politicians to rebalance (without simply dragging the country’s capital down). The decline of manufacturing, the rise of London and Cambridge as tech hubs, and the cultural pull of the metropolis cannot be overturned – no matter how much money the government throws at it.

But even though we can’t turn the country upside-down, given that most of us would prefer wealth and opportunity to be a little more evenly distributed, we should try to identify instances where we are prejudicing the South at the expense of the North. Here, one thing stands out above all others: the decision to postpone the revaluation of business rates.

As Simon Danczuk MP wrote a few years ago in the Guardian: “The problem is in my constituency – and no doubt many others – some commercial property values have fallen by up to 40 per cent since 2008.” For Danczuk’s Rochdale constituency, the FT reported that “a study by Liverpool university showed that if business rates were set using up-to-date property values, shops in Rochdale would experience a 65 per cent fall in rates bills.” In contrast, London shops would see a 52 per cent increase.

These costs weigh heavily on the North. Of the top 10 town centres with the greatest percentage of empty shops, seven are in the North East or North West. The Daily Mail reported last year that the North West is suffering from 16.9 per cent empty shop space, versus London’s 7.9 per cent. In Hartlepool, County Durham, 27.3 per cent of stores in the town are up for rent.

Demanding regular revaluations shouldn’t be confused with a call to cut business rates. As has been argued forcefully on this blog, business rates are about the least worst form of taxation: “Repeated taxes on property, that is business rates, have the lowest deadweight costs of any form of tax. The only one that could be better is a proper land value tax.” Nevertheless, landlords and the entrepreneurs that want to use the abandoned spaces deserve rates that reflect the value of the land – the first step of a Northern regeneration should be a revaluation.

Philip Salter is director of The Entrepreneurs Network.