Tax Proposals

Written by Dr. Vincent Cable MP, Liberal Democrat Shadow Chancellor and published in House Magazine on Tue 22nd Aug 2006

Dr. Vincent Cable MP, Lib Dem Shadow Chancellor

Tax is important, politically. In the otherwise abstract world of political slogans and 'isms, tax consistently brings home to voters in simple cash terms what parties stand for and what they will cost to elect.

A good tax system, in the Liberal Democrats' view, has several properties - fair, involving redistribution of both income and wealth; simple, reducing the Byzantine complexity and bureaucracy of Gordon Brown's tax innovations; 'green', creating incentives for environmentally sustainable development; but recognising, also, the economic impact on peoples' willingness to save, work and take risks, and compete internationally. Reconciling several objectives in this way is not easy and in producing the set of proposals to be debated at our autumn conference several tough decisions have been made. Our proposals offer a self contained and balanced 'package' of tax changes, to be accomplished in a parliament and also set a longer term 'direction of travel'.

In the past Liberal Democrats have offered strong campaigning themes through our tax policy- 1p in the £ for education, 'axe the tax'; the 50p rate of income tax - which, in their context, have been valuable. But we have looked at tax policy afresh and comprehensively within the framework of our party's values.

Does it meet the 'social justice' concerns of the party? Actually it is more radical than the original 50p top rate, raising over three times as much from wealthy people in several different ways: on income (roughly 45p after LIT is imposed), on wealth through capital gains on shares and property and by withdrawing general higher rate tax relief on contributions to pension pots. The 50p rate is, we argue, no longer necessary and to retain it would unbalance what is currently a balanced package.

Our proposals reinforce our commitment to localism, with a bigger tax gathering role for local and devolved government. We do not yet know how the current Lyons review of local government funding will deal with the unfairness and regressivity of the council tax and we shall continue to campaign to replace council tax with one based on ability to pay.

And are the proposals 'green'? The rationale for green taxation is set out in a paper by Chris Huhne and myself entitled "The Green Switch" and available on the Party website. We shall be the first party to have campaigned strongly on the need to curb emissions from aviation by taxing, in particular, the most polluting and least utilised aircraft.

One final comment: how far can a 'tax neutral' package of the kind we have devised be reconciled with a wish to make additional specific spending commitments, as we already have with the citizens' pension and for students? We are, in parallel with the tax exercise looking at government spending with a view to identifying £15bn a year in low priority spending which can be cut and reallocated. There are some big potential savings from ID cards, industrial subsidies, big defence contracts like Eurofighter and bureaucracy like that involved in the control and monitoring of local government.

We are working towards a manifesto for the next election which will involve a radical shift in tax and spending priorities, but within a framework of financial discipline and responsibility.