Let me offer a little marriage guidance to the new Coalition. Tax is something Conservatives and Lib Dems could fall out over. It is, however, an accident that need not happen.
Deep in Lib Dem DNA is the Robin Hood principle – tax the rich and give to the poor. It is superfically popular, and gives believers a feeling of moral superiority.
Deep in Conservative DNA is the belief that society and the economy work better if you allow people to be successful and to pay their own bills. Conservatives do not see financial success as a crime which the state needs to punish.
These two have in the past come to blows over tax. So can we find a way through today?
The most important tax proposal to the Lib Dems is fortunately a tax cut. They want to take everyone earning less than £10,000 out of Income Tax. They claim this helps the poorest. It does not, as the poorest are on benefits and will suffer benefit withdrawal as they enjoy their tax cut.
However, the good news is that most Conservatives are keen cutters of Income Tax, and will happily accept Income Tax cuts through raising the threshold for the sake of the political marriage. One Income Tax cut can serve as well as another.
The problem comes with the other Lib Dem tax proposal, to partly pay for the first. They wish to increase Capital Gains Tax to 50% for the rich, and to higher rates for everyone else. This is anathema to most Conservatives.
So let’s go back to first principles. Although Mr Hood was a common armed robber, I do understand his hero status. I have always said during this crisis we need to tax the rich more, to help us out of the financial chaos Labour gave us.
The best way to tax the rich more is to cut tax rates. If we put up CGT on enterprise, business and investment, it will deter talent, send people abroad, put off new people with businesses coming here, help rich accountants and lawyers with schemes to avoid it. It will change people’s attitude to financial risk, at a time when we need people to venture more, not less.
Last night a group of MPs and peers worked into the night on how we might come up with a solution to the political problem facing the Coalition. The first thing we all agreed was there is a big difference between longer term capital gains on investments, and short term gains made by speculators. We can see the case for a gain made in less than a year being taxed as income, to assist the Treasury purists and the Lib Dem Robin Hoods.
The second thing we agreed was the old CGT regime when the rate was higher included generous reliefs to avoid taxing inflationary and longer term gains to excess. If the new regime is to have no such Indexation relief, and a much smaller tax free amount, then it needs to recognise the difference between a longer term and shorter term gain.
We ended up with the following proposal. Tax gains under one year at a person’s marginal Income rate – this should be no more than 40% but is temporarily 50% thanks to Labour’s last penal phase.
Exempt all gains of over five years from CGT altogether. These are long term investments which are good for the UK. This would make us more tax competitive.
Tax two year gains at 30%, three year gains at 20% and four year gains at 10%.
Robin Hood has the scalp of the market speculator. The UK is a more attractive place for anyone wanting to create jobs, provide houses, make other worthwhile investments. Long term savers for their families and for a rainy day could sleep easy in their beds. It would raise more revenue than the 40-50% scheme currently being mooted, over any reasonable time scale.