Tax and Social Justice

A progressive tax policy is needed to underpin social justice, localism and environmentalism, argues the Liberal Democrat Shadow Chancellor, Vince Cable.

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. The Liberal Democrats focussed on this issue at our annual conference. The Tories, too, but in much vaguer terms.

A good tax system, in the commission’s view, has several properties. It must be fair, involving redistribution of both income and wealth; simple, reducing the Byzantine complexity and bureaucracy of Gordon Brown's tax innovations; and "green", creating incentives for environmentally sustainable development. It should also recognise the economic impact on peoples' willingness to save, to work and take risks, and to compete internationally. And in any democracy, it must command the support of the electorate. Reconciling several objectives in this way is not easy and several tough decisions have been made. The Commission has produced a self contained and balanced "package" of tax changes, to be accomplished in a parliament and also set a longer term "direction of travel".

It is a long time since our party looked at taxation in the round. We have offered strong campaigning themes — one penny in the pound for education, "axe the tax"; fifty pence in the pound — which, in their context, have been valuable. But when Charles Kennedy proposed setting up the Tax Commission, under the Chairmanship of Mike Williams, it was with the aim of looking at tax policy afresh and comprehensively, albeit within the framework of our party's values.

The "package" was carefully constructed and costed and involves raising taxes on the wealthy and environmental taxes and using the revenue to cut national direct tax — income tax and national insurance — on low and middle income earners. More than two million low income tax payers would be lifted out of tax and NI altogether and middle class tax payers would gain from a lower national tax rate (20p rather than 22p) and higher allowances.

The proposals were debated at Conference in September and debate centred on several issues. Do they meet our "social justice" concerns? Actually they are 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 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 is available on the Party website. We are 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. (When this idea was raised, very tentatively, at Tory party conference, delegates opposed it).

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.

The Tax Commission report will shortly be sent out to conference delegates and will be available on the Party website. The title of the paper Greener, Fairer, Simpler reflects the values of the tax commission membership; indeed these are values long held by our Party. I believe this set of tax proposals provides a powerful basis for delivering the Liberal Democrat programme for government.

Vince Cable MP, Liberal Democrat Shadow Chancellor. Email tax@libdems.org.uk

Do you want to respond to this article? Send your comment to Alan Johnson, Social Democratic Futures editor. alanjohnsonsdf@aol.com

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