Nick Clegg’s recent ‘open society’ speech confirmed that increases taxes on wealth in some form is very much on the political agenda. However, the default party policy option – a mansion tax – was highly controversial in the party when it was introduced (which is rather a polite term for the rolling lesson in how to bungle a policy launch, annoy MPs, irritate party members and feed negative stories to the media all in one fell swoop).
In other words – now is a very good time for the party to be debating what form of wealth taxes it favours, especially after the opportunity was missed at the party’s autumn conference. As I wrote at the time in Tax: The missing ingredient from the Liberal Democrat conference agenda,
Conservatives by and large want to cut taxes and Liberal Democrats by and large want to increase taxes on wealth. There is therefore scope for a package which appeals to both wings of the coalition whilst also having whatever net fiscal effect that George Osborne and Danny Alexander agree is necessary.
That is just what happened last summer , when raising capital gains tax – normally an anathema to most Conservatives – was packaged up with increasing the income tax allowance to produce a bundle that everyone was willing to support.
The idea of a similar repeat package is already finding favour in Conservative Party ranks, such as in the recent op-ed for The Guardian penned by ConservativeHome’s Tim Mongtomerie: “We should be increasing taxes on wealth and pollution in order to afford cuts in taxes on families and employers”.
However, amongst Liberal Democrats the question of what wealth taxes to support is deeply controversial. There is no simple consensus in the way there was over capital gains tax.
Matters have not changed since. Nick Clegg said in his ‘open society’ speech:
Eighteen months ago, speaking as a guest of Demos then too, I argued that the liberal approach to tax distinguishes between earned income, and unearned wealth. That’s why we’ve put up capital gains tax while cutting income tax for ordinary working families. And, of course, I’d like to go further in pursuit of this fiscal liberalism. Lower taxes on work and effort, a greater contribution from the wealthy: an open society approach to tax.
The political benefits of wealth taxes
As with many other liberals, Nick Clegg is strongly motivated by the issue of fair taxation of wealth. In addition, pursuing the issue provides three neat political benefits. First, it offers a clear distinction from at least part of the Conservative Party and one on which, if done right, the Liberal Democrats will be on the popular side of the divide. Second, it raises money and so provides more scope for favoured tax cuts, averted spending cuts or even spending increases.
Third, it side-steps the internal debate in the Liberal Democrats between those who are primarily concerned about social mobility and those who are primarily concerned about social inequality. Although pretty much everyone in the party agrees the two are linked, there is a big difference of emphasis between those who believe that increasing mobility is the priority, and will anyway lead to reduced inequality, and those who want inequality reduction up front. Wealth taxes appeal to all sides in that debate.
What wealth taxes?
But, as I said at the start, what form of wealth taxes?
Property tax? But mansion tax or more bands on council tax in that case? The council tax bands case is particularly popular with many party members in Vince Cable’s own backyard in south west London, but he has not been won over by it.
Inheritance tax? As George Osborne demonstrated in 2007, it’s a remarkably unpopular tax given the number of people it catches. So what about a tax not on the giver but on the recipient, in the form of a lifetime transfers tax? The IFS’s Mirrlees tax review saw a lot of merit in such a tax – but also doubted its practicality.
Or what about returning to capital gains tax, looking to further equalise taxes on income and wealth?
Or taxing pensioners more heavily, at least the very richest? David Laws has clearly been thinking along these lines.
Or what about taxes on land, that long-standing Liberal Party policy? The nineteenth century theories could be given a twenty-first century sheen with a pro-growth and pro-green emphasis, for a land tax which pushes people to get derelict urban sites back into use can be dressed up in the language of either or both. Not to mention the successful example of the tax on increased property values that was used to part-fund the extension to the Jubilee Line in London. Tax wealth, help the environment and improve the public infrastructure. That, at least is the case for. The case against makes mansion taxes seem quite uncontroversial by comparison.
However, whichever options you prefer from the wealth tax menu, there is one simple political timing calculation: the Liberal Democrat spring conference is the time to get it debated and passed. So if wealth taxes are your thing, get motion writing for the deadline is in early January.