Commission on Social Justice: Minimum wage warning for Labour as party urged to adopt student loans: Tax

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New top-rate income tax band for high earners.

Lift low earners out of income tax.

Broaden tax base, covering spending, earnings, property and income.

Set minimum and maximum tax bills as proportion of income.

Tighten taxation of gifts and inheritance.

The Government should consider imposing a new top rate of income tax on high earners. But no one should lose more than half their income to tax and national insurance.

The commission argued that policymakers should aim for a tax system which was simple, well justified and acceptable to the public. However, its report deliberately shied away from making precise proposals, arguing that these would depend on the state of the economy and the Government's finances.

The commission said that as much of people's income and spending as possible should be taken into account when working out their tax liability. However, the report also criticised the Government's most recent move in this direction - the extension of VAT to domestic fuel. It said: 'By having a broad tax base, government can raise the same amount with lower tax rates.

But fairness sets a real limit to how far the tax base can be broadened in this way.'

The commission's equivocation on this topic reflects the political problem that voters tend to be more angry about the imposition of tax in new areas than grateful about reductions elsewhere. Extending VAT to food, children's clothing and the like would also increase the tax burden on the less well-off.

The commission said it was worried that people started paying income tax on earnings as low as pounds 66 a week for a single person. It argued that as many people as possible should be taken out of the income tax net by raising personal allowances. It said this would be simpler and more effective than a new lower rate.

Personal allowances could be turned into flat-rate credits, with tax then levied on all income. This means that allowances would be worth as much to lower-rate taxpayers as to high earners. The commission also urged the Government to continue phasing out tax relief on mortgage interest payments, although some analysts say this would continue to depress the housing market.

Taking people out of the tax net could be argued to increase upward pressure on public spending, as more people could vote for higher expenditure knowing they would not have to pay for it.

The commission also tackled the thorny issue of the upper earnings limit beyond which people no longer pay national insurance contributions. It stopped short of backing the late John Smith's proposal to abolish the limit, but recommended it rise in line with earnings rather than prices.

The economic argument for retaining an upper limit is weak, as there is no real case for reducing effective tax rates as incomes rise. But the political costs of hitting middle earners in this way are particularly high.

The commission's proposals are a partial compromise, to which many voters may not react badly.

Sir Gordon Borrie, the commission's chairman, would not be drawn on the precise level or rate of its proposed higher income tax band, which would be levied on bonuses and perks as well as basic earnings. But the report said it could affect the richest 1 or 2 per cent of the population, or people earning five times average earnings - pounds 85,000.

The commission asserted that a new higher rate could be introduced 'without damaging competitiveness'. The Conservatives argue that increasing higher tax rates reduces work incentives for some of the economy's most productive participants. But academic studies suggest that full-time, middle-income earners tend not to be influenced by the marginal tax rate in deciding how hard or long to work.

A minimum tax bill could be set for high earners to prevent them using tax breaks and allowances to reduce their payments to an unacceptably low proportion of income. But no person's tax bill should exceed 50 per cent of income.

The commission said bequests of agricultural and business property should no longer be exempt from inheritance tax, unless the beneficiary retained the property for at least seven years.

The commission also made proposals to change the way tax and public spending policy is formulated. The Chancellor should publish a 'Consultative Budget' each year setting out improvements to public sector investment and services, their cost and how they would be funded.

Every citizen should receive a statement of how their money was spent. The Central Statistical Office should produce a 'national balance sheet', comparing assets and liabilities. In theory this would be welcome, but measuring national assets and liabilities is difficult and academic estimates vary widely.

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