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Tuesday, July 19, 2005

 

What is going on?

Has Charles Kennedy unilaterally changed Liberal Democrat tax policy?

John Hemming MP raised this fear in a
blog posting this morning headed "It would be nice to be asked".

The confusion arises from a speech delivered by Kennedy yesterday to a meeting of the parliamentary party. The speech was reported in today's
Guardian, Independent, Scotsman and assorted Northcliffe-owned local papers (including the London Evening Standard). The Guardian and more especially the Independent (i.e. the two national dailies favoured by Liberal Democrat readers) suggested that Kennedy had made a pre-emptive strike.

The Independent story led with this angle:

Charles Kennedy has suggested that the Liberal Democrats will drop their policy of imposing a 50p top rate of tax on earnings above £100,000 a year.
The Guardian reported that Kennedy's

... comments on its tax commission hinted that he was willing to see the Lib Dems' commitment to a 50p rate for top earners dropped.
So, the impression has been created that the party will drop this policy. If true, such a statement by the party leader, though technically not a policy change in terms of formal constitutional procedure, would nevertheless effectively ditch the old policy and pre-empt any debate.

However, if you look at the actual
verbatim text of Kennedy's speech, his position is less clear. The relevant words (which do not occur until more than three-quarters of the way through the speech) read as follows:

We do not need and we should not seek a punitive taxation system. High taxes are not a moral good in themselves.

We were correct to point out at the general election that only 1% of all taxpayers would be affected by our proposals on top-rate taxation.

But we must not lose sight of those who aspire to achieve income levels which will bring them into the top rate taxation band in time to come.
These are thinner pickings than the press reports would suggest. And the press release issued in advance of the speech didn't mention top rate taxation at all.

If the Independent and the Guardian are placing a particular interpretation on Kennedy's remarks - and giving this topic much more emphasis than might a casual reader of the speech - there can be only one explanation. Someone in Kennedy's office - with or without the leader's blessing - has been putting a spin on it.

Regardless of what one thinks of the merits of the party's taxation policy, such spinning risks pre-empting the work of the party's Tax Commission. Elsewhere in his speech, Kennedy said,

I do not intend to prejudge the Tax Commission that is now beginning its work under Michael Williams, a former senior Treasury civil servant with over 30 years experience working at the heart of UK economic policy.
Either Kennedy was telling porkies or someone in his office has other ideas.

While we're on this subject, you may recall that Kennedy issued a statement in January announcing the policy review (the first of at least three occasions when he has "launched" this initiative). The
Times (31 January) reported, apropos of the policy review, that Kennedy wanted "more progressive tax plans to help the low-paid".

The party had two policies to achieve that goal; one of them, local income tax, came under heavy assault from some right-wingers in the party immediately after polling day, but has survived for the time being. The other, a higher rate of tax for high-earners, now has a less certain future.

It remains to be seen whether the Tax Commission can suggest any alternative forms of "more progressive tax plans" - or whether such intentions have been abandoned.

Comments:
I would have assumed that, since there is going be a review of tax policy, it would be a good idea to clear away existing tax policy before commencing the review. Kennedy didn't say that the new policy will necessarily be much different from the existing one, so I don't see what harm was done.

The 50p top rate of tax always struck me as an election pledge (which come and go) rather than a cast-iron ideological commitment (which should remain forever the same).
 
It's a bit of a fuss about nothing isn't it? We're having a policy review on taxation and Kennedy is entitled to stick his oar in as much as anyone else.
 
In reply to Rob:

"Clearing away" existing policy before the conclusions of either the policy review or the Tax Commission are published and agreed would leave the party in the absurd position of having no policy for the duration of both reviews (and possibly beyond). It was this potential absurdity that caused the party's Federal Policy Committee, at its first meeting after the general election, to repudiate the suggestion of a "Year Zero" approach to policy.

No-one is suggesting that the 50p top rate is a "cast-iron ideological commitment". It is no more sacrosanct than any other policy but, if we are going to change it, it should be done through the proper procedures.

In reply to James:

It is all very well saying Kennedy is "entitled to stick his oar in". The trouble is that, as party leader, his remarks can be interpreted as a pre-emptive strike, as Tuesday's press reports showed. Kennedy was quite right to say that he did not wish to prejudge the Tax Commission - let's hope this commssion produces a set of recommendations that has not been prejudiced by the mischief of anonymous spinners.
 
Kennedy’s remarks about those who ‘aspire’ to the top rate mirrors the 1992 Tory strategy to convince working-class voters to reject tax-raising policies on the rich. Are we simply to give in and follow this line of argument? And the desire to ‘strip away complicated allowances’ must surely be a hint at a flat-rate tax system, otherwise what is to happen to low-paid workers who will lose these allowances?

I do not necessarily follow conspiracy theories about shady people in Kennedy’s office: political analysts in the press are bound to reach their own conclusions and make up their own spin.
 
Simon: I don't see much wrong in having "no policy" until the review is completed. In fact, it would seem strange to maintain a policy even when it's likely to be replaced or modified. Since there isn't likely to be another Westminster election for 4 or so years, we can afford to step back and think about the issue in more depth. I think Kennedy is right to recognise that it would be untenable to be left saying "this is our policy now, but it will probably change by the time you [the public] get to vote on it". Acknowledging that policy may be changing is a perfectly sensible step.

The flat tax issue is an interesting one. If it works as well as its advocates suggest (and I'm certainly not convinced yet) then it has the potential to meet our aims as a policy that helps the poorest (through generous allowances) without punishing the richest. A simpler system would also make tax avoidance much more difficult and would cost less to administer.

Does all of this add up to a policy that meets our aims? I don't claim to know, but I think it's an option worth considering. Given that flat-tax regimes are a reality in parts of Europe now, it's worth looking at how well they are performing.
 
Rob - The argument about having no policy applies to all policies, not just tax. Existing policy in no way precludes a review or prejudices it. Nor does existing policy affect the likelihood of changes to policy between now and the next general election. But wiping the slate clean before the two reviews are concluded (the key debates will not occur until the September 2006 party conference) unnecessarily handicaps the party's ability to express any view in the meantime, other than the purely personal views of parliamentary spokespeople. This is why the Federal Policy Committee rejected the "year zero" approach.

Regarding a 'flat tax', it is causing some excitement at the moment because of its application in several Eastern European states. I would recommend you read this recent analysis of Slovakia's experience, which suggests that is not the panacea its fans would have us believe. One also has to ask how it is that the Nordic countries, the highest taxed in Europe, nevertheless tend to score highest on any index of competitiveness. You may find this neutral review of flat tax (and the assorted links) useful.
 
Flat tax can, of course, be set at a high rate - though admittedly it seems to be associated with low tax regimes. What makes it socially progressive (if not a 'progressive' system) or not is the level at which zero tax is paid. If no-one paid tax on the first £14,000 of earnings it would certainly be to the greatest advantage of the poor and those on lower-middle incomes even if above that level they paid the same as everyone else. If tax were levied from £1 upwards it would be problematic.

Nevertheless, I quite like flat tax because of its intuitive simplicity and proportionate fairness. It also undermines the assumption within progressive taxation systems that government is better at (and justified in) disposing of the increased rewards of higher earning than the people who earn the salaries themselves. I am unconvinced that the curtailment of liberty required to do this is either necessary or justified. However....

Estimating tax revenues is a vague matter. Note the current row over when the economic cycle started. Also, the Treasury admits that they don't know the macro-economic effects of changes to tax levels - and Gordon's Brown's use of tax credits has complicated matters enormously. I doubt that anyone has a clear idea of what both the economic and fiscal effects of switching to flat-tax might be. This uncertainty is compounded by the fact that no economy of similar size and type to Britain's has made the switch.

Are we brave enough? Hmmmm...
 
Oh, for the avoidance of confusion, that last post was by a different Simon to Simon Titley. As is this one.
 
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