Cicero Policy Briefer

Issue 5, October 2006

The Liberal Democrats and Taxation: A Debate Worth Watching

By Jacob Coy

The manner by which government collects money is frequently one of the most contentious debates in any democratic society. Nearly everyone agrees that taxes should be ‘fair’, but finding common agreement as to what ‘fair’ means is often quite a challenge. Most countries fall back upon a philosophy of ‘progressive’ taxation, meaning those who earn or own less pay less. Recently, however, the Liberal Democrats have provided us with a slightly different angle on the debate.

“The Liberal Democrats have made their first significant contribution to the debate on taxes”

Taxes take all forms and guises. Some are taxes on consumption. Some are taxes on income. Still others are taxes on the valuation of assets. Taxes have significant impacts on the macro economy—countries’ GDP can accelerate rapidly or shrink drastically in response to movements in tax rates. Individuals and particularly businesses are sensitive to tax. Many people agree that taxes are a good way for the Government to encourage certain activities (through tax reliefs on pensions, ISAs, property and certain new businesses) while discouraging undesirable activities (such as alcohol and tobacco consumption).

Political parties’ respective positions on tax usually define them as much as any other single policy. There is increasing reason to believe that tax will become an issue of great debate amongst policy makers as the parties look to the next General Election. The Government will be considering its revenue in the context of the Comprehensive Spending Review, while the Conservatives are toiling away at their own tax review, due to be published this week. This makes the Liberal Democrats the only party to have put their head above the parapet.

The Liberal Democrat’s tax paper, Fairer, Simpler, Greener, was published in mid-August to the great interest of those waiting to see in which direction Sir Menzies Campbell’s leadership would take the party. Previously, the issue of tax had been one of the policy areas most revealing of the party’s fissures between the economic liberals and the more left-leaning portion of the party.

The resulting proposals appeal strongly to the economic liberal wing of the party—the top rate of tax is 40 per cent, though this does not affect earners until they earn £50,000 (the current level is £32,400). The proposals would also abolish the bottom rate of tax, lifting 2 million Britons out of the tax regime. However, with these sweeteners come trade-offs and targeted taxes on other elements: overall, the tax proposals put forward are revenue neutral. For instance, the Liberal Democrats advocate ending taper relief on capital gains tax and ending the pensions tax relief at the top rate of earnings.

Additionally, the party offers what are commonly known as ‘green’ taxes—targeted levies on energy expenditure and emissions. For instance, larger, less efficient cars will be taxed more significantly for excise duties than smaller, fuel efficient or hybrid cars.

These proposals proved a success at the party’s autumn conference. While there were a variety of views presented in the debate on the conference floor, the motion passed overwhelmingly. The Liberal Democrats have made their first significant contribution to the debate on taxes; no doubt the Conservatives and the Government will have their say as well in due course.

Jacob Coy can be contacted on +44 (0)20 7665 9535 or click here to email.

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