Jeremy Warner's Outlook: Tax breaks for the wealthy but more tax for the rest. What's the Chancellor playing at?

MacTaggart: ITV Allen's swansong
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The Independent Online

According to reports, Revenue & Customs (as we must now learn to call the Inland Revenue) has backed away from threats to tax the share allocations of private equity managers as income. The industry fears that this is only a temporary respite, and that the Chancellor will be back for a second bite at the private equity cherry in the next Budget.

I'm not so sure, and if this seems like a somewhat esoteric subject for a Saturday read, I'll tell you why. Private equity enjoys a number of significant tax advantages over the listed, publicly quoted sector. One of them is that privately held business assets are subject to only 10 per cent capital gains tax, against 40 per cent for listed stock. Private equity has been able to take full advantage of this tax break, originally intended to encourage entrepreneurs, by paying executives in the shares of the companies they manage.

If these awards were taxed as income, they would pay 40 per cent. Taxed as capital, they pay only 10 per cent. At first blush, it seems like a form of tax avoidance which makes an obvious target for the Chancellor. In any case, the mechanism is extensively used in private equity to help enrich managers.

Yet there is good reason why the Chancellor might want to leave well alone. The original tax guidance on this matter, which seemed to sanction the favourable treatment of share allocations, was the result of power lobbying by some of the industry's top players. Why would Labour want to do this? Why would the Government want to give the already extraordinarily wealthy such a generous tax perk?

The answer lies in a paradox which goes to the heart of the Chancellor's taxation policies. From the start of its tenure, New Labour has wooed the City in a manner worthy of some of the most rabidly right-wing Tory governments of the past. This is partly for reasons of self preservation; all governments need the support of the capital markets to survive. But it is also because financial services, now far and away Britain's most successful industry, have become one of the Chancellor's most important sources of tax revenue.

Part of what makes the City such a success is a favourable tax regime, which through legitimate forms of tax avoidance encourages a legion of top financiers to choose London in preference to the rival financial centres of Europe, America and the Far East.

The City is a delicate flower, which the Chancellor meddles with at his peril. Without it, the public finances would be a busted flush. The irony is that in order to ensure and grow this cash cow for the Exchequer, the Chancellor must tolerate a much lower burden of taxation on the wholesale financial sector and its senior participants than he applies to the economy as a whole. If he doesn't, he risks a mass exodus from the City and a diminished overall tax take. It is better to have the wealthy paying some tax than no tax at all.

The Chancellor needs the City to fund his social agenda. At the same time, this one rule for the already well off and another for the rest of us is in danger of becoming a real electoral liability for Labour. One of its manifestations is in the current debate about inheritance tax, which for the super rich has long been entirely voluntary. For them, it is easily avoided through timely use of the seven-year rule and of offshore trusts.

For ordinary middle-class people, on the other hand, caught by the tax because of rapidly rising house prices, the loopholes are fast being closed, making it progressively harder to avoid even among those with the foresight to seek tax advice.

While the tax burden on ordinary working people rises, the Government seems perfectly willing to tolerate the charade under which the recently ennobled retail entrepreneur Sir Philip Green pays himself billions of pounds in tax-free dividends by virtue of the fact that his assets are owned offshore by his wife.

The dilemma modern governments face in this regard - that they must allow the super rich to live essentially tax-free because of the benefit they bring to the wider economy - makes one of the strongest arguments there is for flat, or at least flatter, taxes.

The progressive case for a tax regime which takes the low paid out of the tax net altogether is already well established, but it is not just to the bottom of the social pile that we must look for support in arguing for equity in taxation policy.

In countries with flat taxes, the rich pay their way alongside everyone else. The present system of targeted tax reliefs and tolerated forms of avoidance is not just complicated, it also makes for a particularly invidious, potentially corrupt, outcome. As for the chances of the Chancellor adopting my advice, I'm not holding my breath.

MacTaggart: ITV Allen's swansong

Charles Allen, the outgoing chief executive of ITV, began his MacTaggart lecture at the annual Edinburgh TV festival yesterday by saying that even if there were vacancies for other big jobs in UK TV, he's so much in love with his present one that he honestly wouldn't want them. Few seem to share his enthusiasm for what many think of as a poisoned chalice.

Ever since Mr Allen first announced he was standing down, the air has been thick with the sound of likely candidates angrily denying their interest. Tony Ball, former chief executive of BSkyB and now effectively a tax exile, was the first to rule himself out. Then in the past week we've had Andy Duncan, chief executive of Channel 4, as well as one of his predecessors, Michael Jackson, who now works in the US.

One of the few who has not so far denied her interest is Dawn Airey, managing director of Sky TV, and, perhaps significantly, the person who as chair of the Edinburgh festival introduced Mr Allen as the speaker. The other is Stephen Carter, who this summer stood down early as chief executive of Ofcom. Having contributed to all the big regulatory decisions that have influenced ITV's affairs over the past three years, it might seem too early for the gamekeeper to turn poacher.

The only person who we know for sure wants the job - Greg Dyke, former director general of the BBC - is pretty much ruled out by the board, though for the record this is denied by ITV. He was a large part of ITV's nemesis while at the BBC. Old wounds are not so easily healed.

In any case, my money is still on Mr Carter, despite the breach of etiquette the appointment would seem to involve. Whether he actually wants the job is again another matter. As the former regulator, he'll understand the structural challenges faced by ITV almost as well as Mr Allen.

While at Ofcom, he deliberately attempted to bolster the company's position first by lobbying hard for the creation of a single ITV and then by ordering big cuts in both the company's licence fee and public service broadcasting obligations. This wasn't because he one day hoped to get the job, but because in a fast changing media landscape he wanted to give ITV a fighting chance of becoming a reasonably resourced foil to the BBC.

That the benefits of these concessions have gone largely to shareholders, rather than into programming, is a source of complaint Mr Allen failed to address in his lecture last night. Yet where Mr Carter might find common cause is in Mr Allen's insistence that the playing field is still far from level.

On the one hand, there is the licence fee-funded BBC with a growing liking for the pursuit of the overtly commercial. On the other there is Channel 4, commercially funded but state-owned and apparently unconstrained by what limited public service broadcasting obligations it has. With no outside shareholders to serve, it can plough all its profits back into programming.

Mr Allen wants the BBC to be broken up and for Channel 4 either to be privatised or confined to its original remit. Whether Mr Carter shared these sentiments as a regulator or not, he soon will should he take up the challenge of ITV.

j.warner@independent.co.uk

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