What the future holds for Liberal Democrat tax policies

More economically competent than Labour, fairer than the Conservatives – that’s what many at the top of the party hope the message will be come the next general election. If the economy is not doing well at the time of the next election [insert post-watershed phrase of choice]. However, if it is then the party will need the right combination of economic policies to support that proposition.

That is why people such as Danny Alexander are starting to sketch out possible tax policies for the next general election which will involve giving tax cuts to the least well off, paid for by taxing the richest more.

That combination worked well for the party’s £10,000 income tax allowance policy in 2010. The mix of cuts and increases not only made for a policy whose sums added up but also meant the policy appealed across the different wings of the party. The media often rather blunders into overdrawn and inaccurate characterisations of different views within the party, but in this area there are some clear differences between the instincts on tax of, say, David Laws and Simon Hughes. However, the £10,000 policy appealed both to those whose instincts were to cut general tax and also to those who instincts were much more about overall inequality.

Tax cuts for the poorest paid for by tax increases for the richest could repeat that unifying approach again. Moreover, with the party having already made very substantial (albeit largely unheralded) progress on bring tax on capital gains more into line with tax on income, the obvious place to look at next is other taxes on wealth – and that’s an area where there will almost certainly be plenty of scope for political difference from the Conservatives.

Moreover, higher taxes on wealth and tax cuts elsewhere could appeal both to Liberal Democrats concerned primarily about social mobility and also those more concerned about overall levels of inequality.

Quite what taxes on wealth should be is rather trickier as Vince Cable discovered with version one of his mansion tax proposals. Part of the problem with the original mansion tax plans was the lack of communication and discussion within the party in advance of the announcement. But there is also an inherent problem with such a tax on wealth, which is that some people, especially older people living in the south, have a large amount of wealth locked up in property but do not have much give in their income to pay for higher taxes. Inheritance tax used to be the answer to that, though these days it is often seen as politically untouchable – which is why the idea is being floated within the party at the moment of a property sales tax instead.

More popular amongst party members in areas such as South West London, though not in Whitehall, is the idea of adding extra property bands at the top end of Council Tax.

Despite the controversies around each of these policies, getting the tax cuts right at the other end of the scale may turn out to be the hardest, because if the income tax allowance is £10,000 by 2015, then further reductions in income tax become steadily less effective at helping the least well off as more and more of them are not in the income tax system.

Once the details of the welfare changes have be finalised (and expect plenty more debate in the Lords as the current bill makes its progress there), it may yet be that the tax cuts part of the package actually is better delivered in the form of increased spending – but that would open up the different tensions within the Liberal Democrats.

The practical implication for all of this for party members? Political predictions running years into the future have an extremely low success rate, but it’s likely that if you want to influence a key part of the party’s 2015 manifesto, it’s certainly not too early to start getting stuck into debates and policy making over tax at both ends of the spectrum.