This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Deputy Prime Minister Nick Clegg gave a speech at the Institute for Government on tax and fairness.
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In one of my first speeches as Deputy Prime Minister I suggested that we were already seeing the contours of a distinctly liberal approach to tax.
It was following the Government’s first Budget, in June 2010. The personal allowance threshold - the point at which people begin paying income tax - had been increased by £1000. For higher rate taxpayers, Capital Gains Tax had been increased by a full ten percentage points - to 28% - and the Coalition had set a strong, early direction of travel: confronting the imbalances in our tax system; shifting the burden away from earned income onto unearned wealth; we would endeavour to make tax fair.
This purpose - fair taxation - has been a thread running through the last two and half years. It has guided our tax reforms; it has shaped my personal priorities in government. Indeed, fairer tax has been a theme at the heart of the stronger economy and fairer society we want to build, enabling everyone to get on in life.
Given the continued pressure on household incomes, fairness in tax has been increasingly at the forefront of the public consciousness, too. Don’t get me wrong - tax injustice has always lit a fire in this nation’s belly. The poll tax drove thousands onto the streets. Fuel duty had lorry drivers and farmers taking over the roads. It wasn’t that long ago that, on doorsteps up and down the country, the mere mention of council tax would see local tempers soar.
But, over the past few years, against the backdrop of severe belt-tightening and difficult cuts to state services we have seen people become more alive than ever to the contributions they and others make through their wages, on company profits, on assets. And they are equally conscious of whether or not those contributions are fair.
This growing importance that we, as a society, attach to tax fairness is most evident in the acute public anger towards egregious corporate tax avoidance. It’s a sign of the times that people form views about their coffeehouses, search engines and booksellers on the basis of their tax returns. There is a growing sense that how you approach tax says something about who you are.
Liberals have always held that view. And, for me, the tax system is only fair if it can pass three tests. One, does it sufficiently reward effort and work? Two, does it deal effectively with wealthy individuals and big corporations who set up elaborate schemes to avoid tax? Three, does it allow local control, so that communities can benefit from the revenue they raise?
When I came into Government the tax system was failing on all three counts. Halfway through this parliament the Coalition has made major progress on each.
First, rewarding work. Clearly, it is to the benefit of any society when its tax system promotes industriousness, entrepreneurialism and sound business. Not least in these straitened times. Very early on the Coalition set an ambitious trajectory for UK corporation tax - in order to bring it down from 28-24%. Since then we have decided to go even further, bringing it down to 21% by the end of the parliament, giving the UK one of the most competitive corporate tax regimes in the world. And we have used our tax changes specifically to promote green industry too, simultaneously encouraging the growth that is good for our economy while discouraging the environmentally damaging behaviour that is bad for our world. Most significantly through the introduction of our Carbon Price Floor - levied on the power sector and aimed at investment in low carbon energy. Something we are the first country in the world to do.
But, for liberals, just as its right for the tax system to encourage good business, it’s equally important it rewards hardworking individuals. We believe that’s essential for encouraging citizens to flourish and fulfil their potential. And we believe it is empowering for people to keep more of the money they earn.
So we are transforming the tax system to make work pay. Not only did we raise the point at which ordinary workers begin paying income tax at our first Budget. We’ve also increased the personal allowance at every opportunity since. In just two months it will hit £9,440 - bringing us within touching distance of our target, where nobody pays a penny of income tax on the first £10,000 they earn. That was a promise written into the Coalition Agreement with the explicit guarantee that, for the duration of the Parliament, moves towards £10,000 would be prioritised over other tax cuts, including inheritance tax.
Come this April the personal allowance will be £2,965 higher than when I came to office. Over 20 million basic rate taxpayers will be - in total - £600 better off. 2.2 million low earners will have been taken out of income tax altogether. That makes me extremely proud. The reality so many families face today is one of higher fuel bills, higher food prices, a freeze or drop in their wages. In those circumstances, every penny counts. Once we hit the £10,000 target, a two-earner family will be £1400 better off, every year. And, given that we now know our economic recovery will take longer than anyone thought, I believe there is an even stronger case for helping hard-pressed families through the tax system.
Of course, tax fairness isn’t just about who pays less, it’s also about who pays more. In my view, that takes us to the heart of the biggest question in British politics today: when the public finances are so tight, and millions of families across Britain are feeling the squeeze, who do we ask to give a bit extra? For me, the answer is simple: those with the broadest shoulders should bear the biggest burden.
That’s why I continue to believe we should ask for what would be a modest contribution from the very wealthy, either in the form of a Mansion tax - a 1% levy on properties worth more than £2m - applied just to the value over and above £2m; my preferred option. Or, alternatively, we could introduce new council tax bands at the top end, again, affecting properties worth over £2m but integrated into an existing tax system. Right now there are properties for sale for tens of millions of pounds around Regents Park. Whoever buys them will pay the same in Council Tax as a family living in a three bed semi in Lewisham.
Both options - a mansion tax or new council tax bands at the top end - are based on a very simple principle, that we should ask a small number of very wealthy individuals to make a reasonable contribution in order to provide desperately needed help for millions of ordinary people. Nothing could do more to demonstrate a commitment to greater fairness in our tax system.
I will continue to make this argument, in this Coalition and beyond. My approach is simple: taxes on mansions; tax cuts for millions. An approach to tax that puts payslips before palaces, if you like.
This is the point of the speech at which I’d expect a heckler to shout ‘what about 50p?’ So let me take that head on.
At the last Budget, the Government took the decision to reduce the top rate of tax from 50p to 45p. It’s a totemic figure. That decision was bound to attract attention. But let’s just take a look at the facts.
Fact one: the same Budget took decisions that, together, raise five times as much money from the very wealthy as was previously raised by the 50p rate. Fives times as much. That comes from capping tax reliefs for very high earners, introducing a higher rate of stamp duty for expensive properties, and cracking down on the avoidance of stamp duty on residential property. Those figures have been confirmed by the Office of Budget Responsibility. The 50p rate may be symbolic, but I care more about what people actually pay.
Fact two, as confirmed yesterday by the IFS, the combination of the 45p income tax rate, the removal of the personal allowance for the highest earners and reductions in the tax free element of their pension pots together mean the wealthiest 10% of people are making the greatest contribution following the Government’s tax changes.
Fact three, in every single year of this Parliament the rich will pay a greater share of our nation’s tax revenues than in any one year of the last government.
Fact four: the 50p rate was only ever in place for 36 days.
Fact five: for most of the time the highest rate of tax under the previous government was 40p. Not 45p. Not 50p. 40p. 5p lower than this Government’s highest rate.
Fact six: thanks to cuts in Capital Gains Tax, under the previous Government a cleaner paid more on their wages than a hedge fund manager selling their shares.
We are correcting the grotesque unfairness in the tax system.
The second test for a fair tax system is how effectively it guards against abuse. Ensuring wealthy individuals and big firms adhere to the letter of the law as well as abiding by its spirit.
This isn’t about bashing big business. Many of our major firms are supportive of this agenda - they know that a level playing field is in everyone’s interest. But not all do, and when they don’t, British taxpayers pay the price. So the Coalition is taking an extremely vigorous approach, doing everything we can to make sure people pay their fair share.
As a result of our £1bn investment in tackling evasion and aggressive avoidance, by the end of the parliament, we expect to be raising additional revenues of £9bn per year. That will take the total money raised through compliance activity up from £13bn a year, to £22bn a year - a 70% increase.
Just last week HMRC received £342m from the Swiss Government, the first instalment of a deal that we have struck which will bring in over £5bn. The first time in our history that money due in taxes has flowed from Switzerland to the UK, instead of the other way round.
What we are learning is that you have to concentrate not just on the battle, but the war. It is tempting to be driven by the short-term wins. Getting to grips with the latest scheme; getting on top of this tax haven, closing that loophole. But the very nature of this problem is that it evolves, adapts. And what we are dealing with - in some parts of our economy - is a cultural acceptance of abuse. So we are taking a strategic approach, putting the right inspection and enforcement regimes in place. Investing in the technology, the professionals and the expertise needed to transform HMRC’s capacity, as well as its approach.
This year we’re introducing the UK’s first ever General Anti-Abuse Rule. Instead of HMRC doing all the running, we’re shifting the burden of proof so that it’s up to companies to explain why they’re doing whatever it is they’re doing, demonstrating it’s all above board.
And, crucially, we are finding new, more effective ways to cooperate with our international partners. Aggressive tax avoidance schemes cross borders; we have to work together. The Coalition has signed an agreement with the United States - the first of its kind - to significantly increase the amount of information exchanged between us, setting a new international standard in tax transparency. Based on the UK/US agreement we’ll be concluding an agreement with the Isle of Man and we’re in similar discussions with the other Crown Dependencies and Overseas Territories.
We are working closely with developing nations too. This problem is one of the world’s great levellers. Yes, developed nations have better protections in place, but there are individuals and multi-nationals gaming all of our systems, seeking to play us all for fools. And when developing nations lose revenues, undermining their health systems, their education systems, their stability, that carries a global cost. Christian Aid has put the cost of those lost revenues at an estimated $160Bn per year - competing with the amount the world spends on international aid.
These issues will be at the top of my agenda when I travel to Southern and Eastern Africa next week. And the Coalition is making tax transparency a cornerstone of our presidency of the G8 this year. As the Prime Minister has pointed out, as a group of eight major economies, together we have an opportunity to galvanise collective international action. We can lead the way in sharing information. We can encourage more countries to sign up to the international standards. We can - and we will - look honestly and openly, at whether those standards are really tough enough.
The third and final test for a fair tax system brings us much closer to home: local control. Liberals believe in decentralisation within the tax system. Communities are empowered when they have more autonomy over the taxes they raise and spend. Local people have a greater stake in local prosperity. Think about how debilitating our overcentralised tax system is.
If central government simply sweeps up locally raised revenues only to then recycle that money to other parts of the country, what incentive do communities have to draw in business and create their own tax-boosting growth? When councils are so beholden to Whitehall funding formulas why would they bother building up their own economies, when it’s more lucrative to lobby mandarins instead? That dependency helps no one and in the present circumstances, when money is tight, it’s more important than ever that communities have the flexibility and freedom to innovate.
So the Coalition Government is decentralising more economic control. Currently around half of local authority income is raised locally. When our reforms kick in that will rise to 70%. We are giving local communities two new tax powers - the first is the right to retain 50% of local Business Rate Revenues, creating a massive incentive to attract business, boosting local jobs; the second is the introduction of Tax Increment Financing - or TIF - under which, working with local businesses, councils can borrow against future business rate revenues using that money to invest in the infrastructure that, in turn, boosts growth. This is probably one of the least remarked upon areas of government reform but over time it may prove one of the most significant. It’s part of a wider approach - which looks not just a tax but at the bigger problem of economic over-centralisation in the UK.
We’ve also introduced City Deals - giving cities much greater economic autonomy, and I’ll be announcing the second wave of deals in a few weeks. And we’ll shortly be responding to Michael Heseltine’s review into unlocking economic growth, which pushes government to go further on economic decentralisation. All part of a quiet revolution to give communities greater freedom and power to drive their own prosperity and success.
So, rewarding work; tackling aggressive abuse; restoring a link between communities and their taxes. Three tests for tax fairness. A distinctly liberal approach. Halfway through this parliament and the Coalition is scoring well on each of those tests. Halfway through and our progress has me even more convinced that we can and must do more.
The British people are right to think that your approach to tax says something about who you are. It says everything about who you are. And we are people who believe that our tax system should empower Britain’s communities, reward its hardworking citizens and, above all, make sure that everyone pays their fair share. Fair taxes to help build a stronger economy and a fairer society, enabling everyone to get on in life.