Election `97: Bold pledges to tax rich, but numbers do not add up

Manifesto analysis: Strategy confronts painful truths about the limits of government and fiscal policy
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The Liberal Democrats' manifesto presents economic policies that appear to have the courage of Labour's convictions.

Here is an ostentatiously honest economic strategy that confronts the painful truths about the limits on government and which makes some difficult choices about taxing the rich in order to alleviate the lot of the poor.

So, yesterday's manifesto promised independence for the Bank of England, in the context of membership of the single European currency.

Interest rate decisions would be taken out of the political sphere, subject to the Bank's accountability to Parliament for delivering low inflation.

The document also committed the Liberal Democrats, like Labour, to the tough "golden rule" for public borrowing.

Government spending would only be allowed to exceed revenues, on average over the course of the business cycle, by an amount which was equal to public-sector investment.

Setting such admirably clear rules for interest rates and government borrowing leaves the party with no option but to make a virtue of raising taxes, in order to spend more money on its priority - education and training.

The Liberal Democrats are the only party to say unequivocally that they would raise income tax.

A penny on the basic rate, taking it to 24p, would raise just under pounds 2bn a year. A married taxpayer on average pay would have to fork out an extra pounds 4 a week.

Full marks to Paddy Ashdown for honesty in saying that taxes will have to rise, but the near-pounds 2bn a year in extra revenues would not go far in the education system.

Nor has the party - any more than Labour - spelt out how it would fill the pounds 1.5bn gap in public finances which will be opened up by halting the privatisation programme.

Yesterday's manifesto went a step further, by promising income redistribution, a theme addressed more explicitly here than in Labour's manifesto.

What it does not do is spell out the limits to reducing inequality through the tax system: the Liberal Democrats' painful truths turn out to be less honest than Labour's more modest proposals.

The Liberal Democrats would introduce a top rate of tax of 50p in the pound for people earning more than pounds 100,000 a year, to pay for increased income tax thresholds that would take some low-paid people out of the tax net altogether and reduce income tax for the majority of taxpayers.

It sounds radical stuff, until you crunch through the numbers. According to the Institute for Fiscal Studies, the poorest tenth of households in the country would gain on average 5 pence a week from the these tax proposals, and the next four-tenths up would gain between 10p and 20p. Everybody in the top half of the income distribution would lose out between 5 pence a week near the middle up to pounds 11 a week at the very top.

Paul Johnson, a researcher at the IFS, says: "You would have to spend an awful lot of money to make people at the bottom of the income distribution significantly better off." There are tens of millions of people on low incomes compared with the 140,000 taxpayers on more than pounds 100,000 a year who would be expected to stump up.

The Liberal Democrats have one other tax wheeze - switching the burden of taxation from jobs and spending to pollution and the depletion of natural resources. They also promise to use new national indicators of well-being, which include measures of the quality of life and environmental sustainability.

It is hard to argue with such painless environmentalism - reduce tax on individuals and let the polluter pay. But here again, the manifesto ignores the problems of scale.

The taxes that raise the most government revenues - income tax, VAT and corporation tax - draw on an enormous tax base. Green tax rates would need to be exorbitantly high to raise a similar amount of revenue, because we spend far less on polluting activities, such as driving, than the consumer spending total on which VAT is levied, for instance.

There is nothing wrong with environmentally-friendly taxation. But Liberal Democrats stretch their honesty to breaking point when they pretend their proposal for a long-term shift from taxing wealth-creation to taxing pollution- creation would mark a radical transformation of the tax system.