Political parties and tax policies

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With the general election just weeks away, Stephen Herring considers the future of taxation policy

Now the general election campaign has started in earnest, I thought it would be interesting to speculate what might be the outcome if taxation policy were to be taken beyond the current political soundbites.

Would it be possible for a reasonable consensus to be reached on tax policy if there is not a conclusive political outcome in the May election? Tax policy is, of course, embedded within the core of the value judgements made by political parties, so any form of consensus might seem to be remote.

Although the political pollsters all appear to be predicting some form of coalition or minority government emerging after the general election, few are predicting the least likely outcome of some form of grand coalition between the Conservative and Labour parties such as the coalition which currently holds office in Germany between the Christian Democrat Union / Christian Social Union and the Social Democratic Party .

In even as unlikely (but not impossible) election outcome such as this, it would still be necessary to introduce a budget and enact a finance bill. This will require compromises on tax policies to be reached between the government parties. From a tax policy perspective, this would be more difficult to achieve than has been the case for the two parties in the current coalition government. However, it ought not to be impossible as the UK seeks to eliminate its annual fiscal deficit while maintaining acceptable taxation and public spending policies.

To reach a compromise on tax policy would require both the Conservatives and Labour parties to secure agreement to some measures they would like to enact but also to abandon some policies which are not acceptable to its coalition partner. I have suggested below a package of measures below which, I am entirely certain, neither the Conservative or Labour parties would want individually but might be acceptable as a package for the price of being part of the government in challenging fiscal times:

  • The income tax personal allowance and all income tax bands to be ‘triple-locked’ (as is already the case for the single-tier state pension) to the highest of consumer price inflation, earnings and 2.5 per cent per annum
  • The threshold for the additional rate of income tax to be increased from £150,000 to £500,000 but the rate to be increased by 5 per cent to 50 per cent
  • The clawback of the income tax personal allowance for those earning over £100,000 to be removed
  • The clawback of the child benefit through income tax for those earning over £50,000 to be removed
  • Relief for pension contributions to be fixed for all taxpayers at an effective rate of 25 per cent  with the existing annual and lifetime caps fixed for the next parliament
  • An occasion of charge to capital gains tax at a rate of 10 per cent to be introduced at death on the difference between the probate value and the deceased’s acquisition cost
  • As a quid pro quo for the introduction of a capital gains tax liability upon death alongside the existing capital gains tax liability for lifetime gains realised, inheritance tax to be abolished
  • A mansion tax at one per cent to be introduced but at a fixed one per cent rate on residential property portfolios to the extent to which they exceed £5m in aggregate
  • Diverted profits tax (DPT) to be postponed until, say, 2017/18 when the outcomes from the OECD/G20’s base erosion and profit shifting (Beps) initiative become clear
  • Corporation tax to be fixed at a rate of 20 per cent for the next parliament
  • The cap for the annual investment allowances (AIAs) to be increased to, but fixed at, £1m for the next parliament
  • The introduction in the UK of the successful ‘S-Corporation’ elective regime (which treats company profits as assessable upon the shareholders) which has been available to US owner-managed companies for over 40 years

Of the above package, only the ‘triple locking’ of tax bands, the postponement of DPT, the AIA increase, the merger of IHT into CGT and the introduction of S-Corporation legislation represent tax policies for which the IoD has lobbied but an incoming grand coalition government would need to secure a consensus on tax policy which satisfies a sufficient number of its tax priorities.

Unfortunately, not all of these measures would be the business-friendly tax reforms which we would support but at least most would result in overdue simplification of the UK’s increasingly complex tax code.

Stephen Herring is the IoD’s head of taxation

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Stephen Herring

Stephen Herring

Stephen Herring is head of taxation at the IoD

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