It doesn’t take a genius to work out that, if you can afford a good accountant, you can pass off some, most or all of your income as capital gains.

Thanks to Julie Christie, this is possible only for a very specific set of circumstances. And measures announced in today’s Budget (but trailed beforehand) make it even trickier.

Trickier should hardly be applauded, eh?

‘But surely there must have been a major UK national political party to represent you progressives, daddy?’

‘Well, you would have thought [I'd have noticed], wouldn’t you? {But I was so blinkered I completely ignored the Liberal Democrats]

Corrected for truth there.

Am I the only [Labour supporter] who finds this embarrassing?

Those of us paying attentionknew the Lib Dems, especially Vince, had this as clearly stated policy objectives for a long time, the current tax policy announced this week is an update of the one I voted for at conference in 2007, for example.

The media, and it seems a lot of ‘the left’ want to ignore the Lib Dems–Vince has pushed his credibility and media rating up now so that that isn’t possible, but he’s not actually saying much that the party as a whole has been saying for a long time.

(yes, this is your regularly scheduled “join us” comment from the site’s resident “I did it in 2006 for all the reasons you’re posting about” contributor)

Can I just throw the phrase PR in now.

Had Labour honoured the pledge of ‘our’ former leader John Smith to hold a referendum on this – and the vote been carried – then the British parliamentary arithmetic over the last 10 years would have be quite different: Labour and the Tories would have had fewer seats, the Liberals would have had more and there would probably be at least one party to the left and right of the big three (depending on thresholds, etc.) for those of a more purist ideological mind-set. Labour would probably have relied on the LibDems for its parliamentary majority, which would have made the attacks on civil liberties, support for the invasion of Iraq, etc. much less likely. We could have also had Vince Cable in the government.

There is a broad left of centre majority in Britain which could be mobilised in favour of what this article outlines, but it is split between two parties.

Matt,

When you picture a rich person who arranges things so as to take their income in the form of a capital gain, what do you imagine this person doing? What’s the capital gain on? How is the capital gain created?

I’m woefully ignorant about this … i don’t know how dividends are taxed. Half the people I know are self-employed and set themselves up as companies, pay themselves low salaries and take income as dividends, to reduce their tax bill*. If you raise CGT are you going to hit the self-employed who do that? (Maybe rightly so, for all I know). I’d be interested to know how large that set of people is.

Matt, what can you tell us about the consequences for entrepreneurialism and investment, resulting from increases in CGT? The standard argument is that anybody considering an investment will think, how much will it cost me and how much do I expect to get back from it? If capital returns** are taxed at a higher rate, investment will fall. And lower investment ultimately means lower real wages, on the reasonable assumption productivity levels depends on investment levels. So workers (non-capital owners) suffer, so the argument goes.

I’m not necessarily suggesting that the consequences are dire enough to justify keeping CGT where it is, but you need to have a view on the implications for investment (capital accumulation) and what that means – if you are going to advocate raising CGT, you need to be able to say that the benefits outweigh the costs, and you don’t deal with this in your post.

* while still thinking of themselves as lefties and complaining about tax avoidance by corporations – but that’s another matter

** either dividends or capital gains – that’s what I’m not clear on

MattGB: Has it occurred to you that there are two reasons for your complaint. One reason probably IS the media, but the other is Nick Clegg.

Lee> for the avoidance of doubt, making it as tricky as possible is a good thing – as someone who likes to think of themselves as a fairly good tax accountant, it’s not as easy as people think…

Yeah Conor but it shouldn’t be thought that Lib Dem supporters in toto – or even a majority of them – are necessarily left of centre. (Nor their MPs and certainly not their councillors.) And given that that party has a tax policy that was specifically brought in to appeal for Tory votes, it’s not evident that they think it’s where their support lies, either.

There are good reasons to be sceptical of PR. Personally I’m agnostic on the question but I happen to live in a country, Spain, which doesn’t have FPTP and instead operates PR according to a party list system. It’s my view that this makes politics rather more distant, rather less personal and rather more corrupt than the British system. The fact that you can’t vote for or against individuals, the fact that large numbers of PP and PSOE deputies are as untouchable (or more) as the holders of the safest of British seats and as anonymous as the most obscure backbencher….I don’t like them. I don’t think it leads to better government and for that matter I don’t think it leads to more representative government either.

Nor do I think that overall it’s <i<worse than FPTP, and I suspect that if you were starting from scratch you’d almost certainly select some kind of PR. But it’s not all it’s cracked up to be.

Um, 0.0? Clegg was elected leader at the end of 2007, the tax policy has basically remained the same in this area since the Kennedy era.

Then, I’m of the personal opinion that Clegg is by far the most effective of the leaders post-Ashdown, I understand somedisagree with this, but I don’t yet understand why.

Also? MatGB. Count the Ts, useful distinction in a post written by a Matt.

EJH, I’m not sure your critique of the Lib Dem membership is true, and certainly not the current tax policy, it’s a distinctly left wing move that asserts an intention of taxing the rich in order to reduce taxes on the poor. Unless you somehow think Tories are into redistribution these days?

I’m an avowed socialist with distinctly redistributionary leanings, but a lot of the older members keep accusing me of being too right wing–take from that what you will, but the membership overall is almost certainly left leaning and fairly liberal.

Also re PR, you’re right that party lists are horrible, I consider them worse than FPTP in most regards, which is why no serious reformer I’ve encountered proposes them for Westminster–I prefer the Irish/Australian STV system (as uses in Scottish local elections and the NI assembly as well), others prefer some variant of AMS as used in Wales and Scotland.

The reason I prefer STV is it makes it easier to vote for or against individuals, and abolishes rotten borough one-party seats completely.

(Conor, my post for today was intended to be on this very subject, it may or may not actually happen)

it’s a distinctly left wing move

And that’s why it was advocated by the Orange Book people, why the 4% tax cut happened in tandem with the dropping of the proposal to increase the top rate, why it came it after a long period in which Lib Dems complained that they weren’t winning seats where they were hoping for Tory votes and why that problem was explicitly raised at the time as one which the policy changes were trying to address.

You say one thing to one audience and the opposite to another.

“one thing to one audience…”

The Lib Dems??

Surely not!

And that’s why it was advocated by the Orange Book people,

No, it was advocated by the Tax Commission and put in under Campbell’s leadership, when that notorious right winger Vince Cable was in charge of treasury policy.

Who are these “Orange book people” anyway? Chris Huhne, Steve Webb and Lynne Featherstone are considered to be on the “left” of the party (and thus british politics), but wrote articles for the orange book–maybe you ought to read it before you attack it for something it’s not?

why the 4% tax cut happened in tandem with the dropping of the proposal to increase the top rate

Well yes, because the top rate tax was a mere figleaf that raised bugger all money. It was replaced by policies that would genuinely tax the wealthy more, including closing a huge number of loopholes and strengthening the intent to close the capital gains abueses highlighted in this post.

You can believe whatever you feel like, but the fact are the facts, and youre comment doesn’t seem to take any actual facts into account.

You say one thing to one audience and the opposite to another.

I, personally, do? I think not, I might use different phraseology, but it’s always the same message. But I’m not a party spokesman.

If you go back and look at the speeches being made by Vince, Ming and Nick at the time, you’ll find they stated all these things clearly.

That the media chose to highlight the bits they liked is reflected by your choice of media outlets. The speeches are all online and a matter of public record.

But if you’re in Spain, maybe you prefer immitating Don Quijote?

the top rate tax was a mere figleaf that raised bugger all money

What tosh. It was got rid of because you thought it was frightening Tory voters whose votes you wanted. And that’s why (with remarkably poor timing) you knocked 4% off the proposed rate of income tax.

That’s the story you told them. And you told a different story to a different audience.

“I’m an avowed socialist with distinctly redistributionary leanings”

Me too.
That’s why I left the Labour Party and vote LibDem.

(@MatGB: Before you ask, I won’t be interested in joining your party until it accepts that a fair, caring and sustainable society is incompatible with capitalism.)

Except to be able to fund the policy of tax cuts for the poor (where it is needed) the amount needed to be raised is significantly more than the money that can be gained from a 50% tax rate. Whether it was done because it was appeasing to Tories as well is neither here nor there since the fact is that it also wouldn’t raise the required funds by itself.

“Before you ask, I won’t be interested in joining your party until it accepts that a fair, caring and sustainable society is incompatible [with reality]”

I’ve fixed that up for you ceedee

“Before you ask, I won’t be interested in joining your party until it accepts that a fair, caring and sustainable society is incompatible [with reality]”

I’ve fixed that up for you ceedee

Gee, thanks Lee.
If you’ve removed those basic aims from your core beliefs, what do you have left to strive for? Other than power, influence and riches obviously…

I think the tax figures quoted in the main article don’t tell the whole story

They state, correctly though perhaps disingenuously, that the tax rate for income is 20% whereas only 18% for CGT.

This disparity exists as previously one could adjust the cost of an asset bought by the inflation rate or a similar relief to arrive at the profit figure – now it is a much more straightforward calculation – what you sold it for less what you paid for it.

The reduced rate of taxation is compensation for the removal of the indexation allowance and the loss of purchasing power parity given by the sales proceeds.

@5 people who set themselves up as shareholders in PLCs do so so that they may be paid by dividends rather salaries.

Investment income (eg dividends) is not subject to NI for either the employee or the company so in theory you save the company some money and you pay less tax (NI) as an individual.

The rate of coporation tax paid by small companies was changed, i.e. increased, recently to stop this wheeze.

Agree with MatGB. The Lib Dems are THE progressive party, and have been since the early nineties at least.

CeeDee, Lee’s not a member, just another voter (unless that’s changed Lee?), but regardless…

The nature of the first past the post electoral system is that every party needs to be a broad church coalition, Labour and the Conservatives both clearly are, both have liberal elements overwhelmed by authoritarian nutbags of left or right. The Lib Dem constitution, especially the bit on the back of every membership card, is bloody good on the principles.

So, until we’ve changed the electoral system, there can’t and won’t be a party that both has everything we want and has a chance of getting a significant number of MPs elected. I think the latter is more important than the former, so am working to increase the number of MPs in order to change the system. At that point, the party system will start to change (and I really do need to write the post I have planned on this).

EJH, you can continue to tilt at windmills as much as you like, the old 50% tax band raised bugger all money (as will Darlings upper rate proposed today), much much better to actually raise money from the rich.

The 4% basic rate cut was designed to help the lowest paid specifically—the Tax Commission I referred to above made it clear that the ultimate objective would be to remove the lowest paid (ie minimum wagers) from the income tax system entirely, and make the whole setup a lot more progressive.

I want to take the poorest in this country out of the income tax system, it’s utterly absurd to be paying people to collect taxes from people, then paying different people to pay them tax credits back, there’s a better way, and the Lib Dem policies are a move towards that. The party has objectives for a first term (as reflected by the policies that are in place for inclusion in the manifesto) and then medium to long term objectives that would be achieved after a period in office (ie a 2nd or 3rd term manifesto).

The objective is to both decrease the basic rate and raise the threshold, paid for primarily by taxing the wealthiest and through taxes on the environmentally damaging.

You can repeat this ‘myth’ that the party says different things all the time, but all of these facts are on the party website, and every single policy is subject to open debate at conference, with motions and results fully published.

Now, if you’ll excuse me all, I have stuff to do, and hopefully a post to write, if EJH wants to continue tilting at windmills I’m going to ignore him unless he actually makes a substantiated point instead of regurgitating myths and half truths.

I’m not a member, no, I just think that aspiring for people to believe that people can live a fair, caring and sustainable life regardless of whichever economic system society employs is…well…a joke.

“I just think that aspiring for people to believe that people can live a fair, caring and sustainable life [...] is…well…a joke.”

Oh I see.
Normally I’d politely ask what on earth you *do* believe in (and perhaps, why you bother reading left / liberal blogs) but I’m pretty certain there won’t be any common ground.

Oh I believe that individuals can be…many of them in fact, but your claim was about society, and that’s a different and impossible kettle of fish. The idea that capitalism is alone the thing that stands in the way of people all embracing each other and not being complete arseholes to each other is interesting, considering it is usually prejudice, selfishness, greed and fear that drive us away from that ideal…and they all exist regardless of which economic system you employ.

instead of regurgitating myths and half truths.

Instead of regurgitating the actual debate that took place in your own party and the actual arguments put forward at the time about which voters that party most needed to appeal to.

There are good reasons to be sceptical of PR. Personally I’m agnostic on the question but I happen to live in a country, Spain, which doesn’t have FPTP and instead operates PR according to a party list system. It’s my view that this makes politics rather more distant, rather less personal and rather more corrupt than the British system.

PR makes national Government focus on the big issues only. Lots of small parties, each with it’s own singular platform such as the Green’s environmentalism, or the Piratpartiet’s liberalisation of copyright. All internal matters like roads, hospitals and schools are dealt with at the local level by local government, which is far more accountable to the general populace than a monolithic central government. PR only looks distant because you’re voting directly, or near directly, for single issues rather than for a person, or large political party.

Looking at the PR system, you can see how it’s far superior to our own, local government is directly accountable and deals with day to day issues. Central government is made up of a lot of small parties all with very distinct platform where you know what you are getting when you vote for them.

We might have created modern democracy, but we haven’t improved on the idea one jot, where other more progressive nations have, and that’s our shame.

@Lee

There ya go.
Told you there’d be no common ground…

Akhelios—you’re conflating a number of different points. The US doesn’t have PR, but does have a very devolved system where local issues are decided locally, etc. That’s federalism/localism in action.

List PR as used in many countries does make Govts concentrate on purely national stuff and a splintering of parties, sometimes that can be good (Sweden, Spain), other times really really really bad (Israel, Italy). Different systems have different effects—Germany has a weird compromise arrangement that I both love and loath equally, for example.

Our local Govt is answerable first to the central authority, and isn’t really independently accountable. The way votes are counted for Westminster elections wouldn’t directly change that, but there are many that want to change it (the Tories say they do but in some weird way, the Lib Dems have been committed to it since foundation).

Essentially, when you say:

Looking at the PR system

The political scientist in me wants to hit me head against a wall, there are so many different PR systems, and so many different ways of organising local authority affairs, that the statement that “it’s superior” just can’t be true.

I believe that there are many many different better ways to improve the way we’re governed, I have my preferences but will accept a fair few more than that. You can’t just say “PR=Good”, you’ll get demolished by the anti-brigade far too easily.

All internal matters like roads, hospitals and schools are dealt with at the local level by local government, which is far more accountable to the general populace than a monolithic central government.

Well, this isn’t really right because there are local councils in the UK too: these have less autonomy than (say) the regional government of Aragón but then again they’re smaller entities. In other words it’s not a Pr question, it’s a regionalisation question. (Politically possible in Spain because regions are considered far more important – someone here is as likely to call themselves Aragonese as Spanish, which wouldn’t happen in ,say, East Anglia.)

As for these local councils – well, I’m afraid they’re more corrupt and less politically responsive than British councils. And whether or not “you know what you’re getting when you vote for them” – a questionable thesis, as it goes – you don’tm kniow who you’re getting. Because further down the list than the PP or PSOE number one ad two, nobody’s got a clue who these people are. And they’re totally dependent, not on the voters (because numbers three and four will always get in) but on party patronage. They’re anonymous to everyone but their party and untouchable by anyone but their party.

Well, it’s wonderful this piece created such vigorous debate (though on a slight tangent).

To Luis Enrique, I believe the method of paying oneself in dividend means that, if on the lower-rate of income tax (dividends are classed as income), you get a 10% tax credit until you become a higher-rate tax payer when you get taxed at 22.5%, making a total tax liability of 32.5%. Somewhat bizarre and perhaps one for another debate altogether?

With regards to passing off income as CGT, the concept is that you claim income as disposal of assets. I believe that Preachy Preach, as a tax accountant, would be far more knowledgeable on this matter than I would and I understand that many loopholes have been tightened. The practice is still common, however.

On the Lib Dems, I can only say I’m a big fan of Vince. There’s just the unfortunate side-effects of him resembling Nick Clegg’s babysitter and the Orange Book gang.

Otherwise, an interesting budget today that goes some way in setting out the dividing lines for the next election.

Thanks for the response Matt,

I suppose the most substantive point I made / question I asked concerned your views about the linkages between the rate of capital gains tax, levels of investment, productivity and the real wage. Are you concerned about the consequences for investment?

if preachy preach is around, I would be interested to learn how it’s possible to transform income that would otherwise be attracting ordinary income tax, into a capital gain. Not, sadly, because I am ever going to be in a position to exploit it.

‘Well son, I was a member of the progressive, liberal Left.’

“So you decided that I should my first decade in work paying off the debt that you ran up?”

There’s just the unfortunate side-effects of him resembling Nick Clegg’s babysitter

Oooh…

Nick said hi to me at Conference in Harrogate last month (I interviewed him once for this site, never finished the write up), and I had to bite my tongue and tell him off for his new haircut, it makes him look even younger. So I get that.

Thing is, he’s very very competent, and much more effective, especially in person, than Davey boy.

and the Orange Book gang.

Ah, the mythical orange book gang.

Please see my comments to EJH above on this one, the only problem I had in the OB waas David Laws stuff, and David was flying a kite for an idea he knew to be a bit extreme anyway, the rest of it is mostly perfectly sound.

Unless you’re using “orange book” as a shortcut for that non-existent band of right wingers who’ve decided to hijack a different party even though the Tories are in the electoral ascendent right now?

Seriously, if the “orange bookers” lived up to this myth that people keep repeating, thy’d be thick as pig shit to be Lib Dem members, why bother when they could be in the Tories and be in office in a year?

Sorry, it’s one of my little triggers, I keep seeing the meme bandied about, and it’s always completely contentless tosh.

““So you decided that I should my first decade in work paying off the debt that you ran up?””

I do hope those currently without the vote decide in future that they agree with the J2000 campaign and the concept of odius debt.

Are we to understand from your opening paragraph that you think Britain’s choice to honour its alliance with France and its guarantee to Belgium was a mistake? Why exactly is it sad that WWI recruitment posters worked?

Who are these “Orange book people” anyway?

Alas, probably just a ghostly promise of commonsensical economics.

I, for one, might be a lot more comfortable with Vince Cable if I knew a bit more about what he thinks about the death of Ken Saro-Wiwa.

He was a senior Shell exec at the time (the dates look like he might even have started as Chief Economist – Ken Saro-Wiwa was killed in November 1995, the year Cable got the Chief Economist job) and I find it very hard to laud someone who was so senior in a company widely regarded as culpable in the death of pro-democracy activists.

It bothers me. It also bothers me that I can’t find any discussion of what, to me, is a pretty big potential skeleton in Cable’s closet.

There is such silence from all around (friend and foe) on the subject that I assume it’s all been cleared up and I’ve just missed something. Tell me I have and that there hasn’t been a massive failure of collective scrutiny?

I almost don’t know what would be worse – to find Cable did have this unpleasant secret, or that, in 14 years, nobody had actually asked him about it.

I’m all for collective responsibility for those managing multinationals but I wonder how many people worked for Shell in the mid-90s?
Or even how many “senior” execs?

Describing it as a potentially “unpleasant secret” is rather over-blown.

To Luis Enrique, I believe the method of paying oneself in dividend means that, if on the lower-rate of income tax (dividends are classed as income), you get a 10% tax credit until you become a higher-rate tax payer when you get taxed at 22.5%, making a total tax liability of 32.5%. Somewhat bizarre and perhaps one for another debate altogether?

Not really – dividends aren’t deductible against the profits of the company (unlike salaries normally are) – the personal tax rate on dividends is set such that a higher rate taxpayer receiving dividends from a company paying corporation tax at the maximum nominal rate of 28% should pay tax at an overall rate of c. 40% on the underlying profits of the company. Of course, back at the start of the decade, the government briefly introduced a 0% rate for small companies. Its shock that lots of sole traders (the plumbers, taxi drivers, freelance journalists) then incorporated to take advantage of a c. 15% tax saving seems slightly disingenuous…

Expanding on the turning income into capital point – because of battle-hardened anti-avoidance legislation dating back to the 70s (infamously introduced in response to Julie Christie selling off her future film fees in return for a capital lump sum), it’s next to impossible for a normal trading business to do this. From a technical perspective, this legislation was only tightened further yesterday, in a fairly novel way for the UK tax system (broadly looking at the effect, not the legal structure or intentions of the parties involved).

Hedge funds, PE houses and the like find it easier to some degree, as the nature of the investment activities they carry out means that it is possible to structure the renumeration packages of their principals such that chunks of the payments made to them are genuinely capital in nature, and so taxed at 18%. (The infamous carried interest, for example).There’s no free lunch though – doing this does mean that the business’s owners have higher taxable profits. Of course, if they don’t pay UK tax, what do they care? There’s no universal principle here, sadly…

Interesting stuff, Preachy, thanks.

I like the idea of taxing hedge fund and private equity big shots more heavily, but if that’s mainly what CGT will achieve in terms of social justice (as opposed to just raising more money from capital income, which it will do by definition), that’s not much to offset the (possible) damaging consequences of high CGT for investment incentives across the broader economy (small businesses etc.)

A friend (a sole trader) has just been advised by her accountant to do the becoming a company thing, and lots of her fellow contractors already have, so presumably there’s still some tax advantage to taking income as dividends.

National Insurance savings, basically. The issue’s a bit complex (mainly due to interaction with the minimum wage), but there’s a small National Insurance saving achievable in most cases.

Also, customers like it, as, if there’s any doubt about your employment/self-employment status, it puts the associated tax risk (PAYE, Employer’s NI etc.) on the contractor, not whoever hires them.

“It bothers me. It also bothers me that I can’t find any discussion of what, to me, is a pretty big potential skeleton in Cable’s closet.”

Or maybe there’s nothing to discuss. Maybe no-one has asked Vince about the crazy conspiracy theory because it’s a crazy conspiracy theory.

“Maybe no-one has asked Vince about the crazy conspiracy theory because it’s a crazy conspiracy theory”

Actually, Alex, I’m doing Vince a disservice. This site has a now-dead link to an interview with him (when he was still at Shell) about Saro-Wiwa: http://ecojustice.net/audio/.
Unfortunately, can’t hear it. Still, conspiracy theory, eh?

Still, conspiracy theory, eh?

Unless you’re suggesting that Vince Cable has somehow taken http://www.oneworld.org (once a huge human rights website) offline, surely the evidence that he in fact did give (at least) one interview about Ken Saro-Wiwa, drastically reduces the likelihood that there’s any conspiracy.

Ha ha! I’m not (and never have been) suggesting any conspiracy.

It’s just I’d like to see Cable actually asked a question like ‘You seem very proud of your career with Shell. How did you feel, as Chief Economist, when your employers were accused of culpability in the internationally condemned death of human rights activist Ken Saro-Wiwa?’

Obviously at some point he was considered sufficiently senior in Shell to be asked about it. Saro-Wiwa’s death was a serious international issue. Nigeria was suspended from the Commonwealth for 4 years as a result. It’s the kind of thing I’d hope liberals would be a bit more curious about in their senior representatives. I’m sure someone has been – it’s just I’d like to find some record of it.

EJH @29:

Well, this isn’t really right because there are local councils in the UK too: these have less autonomy than (say) the regional government of Aragón but then again they’re smaller entities.

Since you like looking at British party-political history, I can’t help but pick you up on this. The local councils in the UK have been politically and budgetarily irrelevant for twenty years. One of the reasons I hoped Labour would win in 1997 (I did not vote for them, I should add: I helped elect Martin Bell) is precisely that I hoped they’d reverse the vast power-grab from Westminster that marked the 80s. Instead they not only perpetuated it, they made it worse.

Ken:

Why don’t you ask Vince yourself? His contact details are here:

http://www.vincentcable.com/contact/

“One for the benefit for the many; the other for the few”

Here’s a thought for the left-wingers amongst us:

If you really believe in this “for the few” rubbish, how do you account for the electoral success of right-wing parties? Nearly everybody is right-wing if right-wing means you believe in private ownership rather than collectivism.

The “few” simply don’t have the votes to gain an electoral majority.

To me, “One for the benefit for the many; the other for the few” just looks like “aren’t I lovely” and is very unattractive.