Fair Taxation of the Wealthy

Part of Opposition Day — [17th allotted day] – in the House of Commons at 8:49 pm on 16 July 2007.

Alert me about debates like this

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 8:49, 16 July 2007

If the hon. Gentleman listens carefully, he will hear my views over the coming 10 or 15 minutes.

The original title of the Lib Dem motion was "Taxation of the Super-Rich", which has now been changed to "Taxation of the Wealthy". That leads one to speculate on whether, if the debate had been delayed by another week or so, it would have become "Taxation of the Moderately Well-Off". Evidently even the Lib Dems have recoiled at the absurdity of describing as "super-rich" people whose incomes leave them still eligible for tax credits. One of the Sunday newspapers pointed out that while £46,000 a year for a single earner household may be a very comfortable income in many parts of the country, it is hardly David Beckham territory.

I note, too, that there is no proposal in the Liberal Democrats' tax document to reintroduce the 10p income tax band, despite their attack on its removal in the Budget. They seem keen to leave out of their calculations their long-term aspiration to increase the income tax threshold to £10,000, at a cost of £30 billion. The truth is that someone on a very low income, just falling into income tax, will still be worse off under the Liberal Democrats' income tax proposals than they would have been before the Prime Minister's Budget stealth taxes abolished the 10p rate.

The question that we need to ask ourselves, first in response to the Liberal Democrats' paper last week, and then to their motion today, is whether their plans add up. They cost them at £22.2 billion, or £52.2 billion if we include the £10,000 threshold. Leaving aside for a moment the question of whether the replacement of council tax with a local income tax would be fiscally neutral, as they claim, how do they plan to pay for their cuts, and do those plans add up? The Chief Secretary focused on the broader picture. I want to look more specifically at three areas where the Liberal Democrats propose to raise taxes in order to pay for their proposed cut in the basic rate of income tax by addressing what they call the tax treatment of the rich, with new taxes on capital gains, a clampdown on non-domiciled residence, and a new tax on pension contributions. The latter has not been mentioned in any detail so far, and I would like to talk about it first.

The Lib Dems propose to scrap higher rate relief on contributions to pensions. In many ways, that epitomises their whole document—ill advised, ill timed and technically flawed. It would be hugely damaging to pension savings, it would not work, and it would not deliver the increase in tax revenue that they suggest. That means that there is already a great hole in their numbers. I think that they are saying that the proposal will contribute £7.5 billion to their funding challenge, but they do not seem to be quite sure what the number is. The document that they published last August, which also proposed abolishing the higher rate pension contribution relief, said that that would produce £4.3 billion, but the document they published last week says that exactly the same policy would produce £7.5 billion. That is a piece of Lib Dem economics for us to analyse. Whichever way, the savings ratio has slumped to an almost 50-year low—just 2.1 per cent. compared with 10 per cent. in 1997. Against that backdrop, and against that of a cross-party consensus that long-term saving for retirement needs to be encouraged, it seems deeply irresponsible to propose anything that would reduce pension saving still further.

There is an even more fundamental objection to the Lib Dem proposal—that it cannot be done. When Lord Turner's Pensions Commission considered the possibility of scrapping higher rate tax relief on pension contributions, he concluded that as long as defined benefit pensions remain a significant part of our provision, in both the public and private sectors, it was not practical to abolish higher rate relief, because when an employer pays contributions into a defined benefit scheme he does not need to attribute them to individual scheme members. None of those contributions generates tax liabilities for an individual member of the scheme, so they simply go in as a contribution by the employer.

Under the Lib Dems' proposals, every single employer contribution would have to be apportioned and a tax liability assessed for each member of the scheme. Even if that could be done, a greater problem would arise, where an employer makes up scheme deficits at the behest of the pensions regulator. In some cases, companies are putting in hundreds of millions of pounds to make up deficits in their pension schemes. Are the Lib Dems proposing that employees, who might be blissfully unaware that such contributions are being made to make good the deficit, should suddenly be landed with a tax bill for the contribution that had been paid on their behalf? The consequences of that are all too easy to predict.

The problem in the public sector is even worse. There is no fund, so there are no deficits, just a totally unfunded obligation that independent actuaries estimate at up to £1 trillion. How are public sector pension promises to be valued, and how is the cost of meeting them to be defined? Some public sector schemes already have notional employer contributions at a level of 27 or 28 per cent. of the total salary bill. If the calculation at individual level could effectively be made, NHS professionals, police officers, school headmasters, civil servants and others would be subject to a significant new tax charge on the contribution that the employer has made. That would shrink disposable incomes, and have a very understandable effect on long-term saving patterns. The proposal will not work technically, and if it did, it would have devastating consequences.

There is a big hole in the sums concerning the pension tax proposal, but what about capital gains tax changes? They risk resembling a cynical exploitation of the sense of outrage that has been whipped up by the media and the unions concerning the taxation of carried interests in private equity funds. In my party, we recognise the need for fairness in the tax system to maintain public confidence, and the Government's amendment gets it right in its reference to the need for balance. Responsible politicians must be prepared to explain the dynamic effects of tax changes that may otherwise appear superficially attractive when presented in a static model. Ignoring the behavioural changes that can be expected to flow from a given tax change is to deceive as to the likely overall consequences. We must all be willing to argue the case for what is best for Britain's economy, jobs and prosperity in the long term, even where that might mean resisting the temptation to change the tax treatment of a superficially tempting and politically vulnerable target.

Let me be clear: there is a case for looking carefully at the tax treatment of private equity. That is why the Conservative party has established a proper review of private equity and venture capital, including taxation treatment, which is being carried out for us by the European School of Management. Our objective in doing so is not to demonise an important industry, but to ensure that the tax treatment provided is appropriate to maintain the UK's competitiveness as an environment for globally important business.

No one should be under any illusion that the delivery of a tax-competitive environment is some act of altruism directed at the operators of whatever business appears to benefit. It is, rather, an act of the utmost self-interest, and our objective, which I assume the Government share, will be to set the tax regime at exactly the point that optimises investment, maintains international competitiveness and maximises the return to the UK economy as a whole.