On 27 November, PEF hosted a workshop analysing the manifestos of the major parties and their costings documents. The event was introduced and chaired by Patrick Allen and featured contributions from Avinash Persaud (Chair, Intelligence Capital), Carys Roberts (Chief Economist, IPPR), Robert Palmer (Executive Director, Tax Justice UK), Alfie Stirling (Head of Economics, NEF) and Prem Sikka (Emeritus Professor of Accounting, University of Essex).
Alfie Stirling (NEF) began by summarising key changes to taxes on labour income. He noted that the Labour income tax changes are likely to raise at least £6 billion. He then considered the Conservatives’ national insurance changes, noting the “quite regressive outcome” from the Conservative proposals. Overall, Labour and the Liberal Democrats are proposing to increase tax progressivity, including because of Universal Credit. He commented that, though widening universal services will require more universal taxation eventually, “it makes sense to start with taxes that are much more progressive” and focused on the highest earners. By historical standards all parties are proposing lower marginal tax rates than the UK has had in the past.
Turning to corporation tax, Stirling criticised the Conservative and Liberal Democrats’ expansion of the R&D tax credits base because of the high deadweight loss – relief goes to firms that would have made R&D investments anyway. He considered how each party’s plans compared internationally. Labour’s headline rate proposals would move us to a G7 norm; all the other parties’ plans keep us at a lower rate than the OECD. On distributional effects, Stirling noted that “anyone who says they know where the burden will fall is unlikely to be accurate.” Shareholders, workers, and consumers could be affected in different ways, but neither survey data nor academic literature gives us a clear steer. There is high variability across time, place, and policy settings. Other policies do matter, including minimum wages, workers on boards, and labour market regulation. None of the proposal takes us out of the G7 range, let alone the OECD.
Avinash Persaud (Intelligence Capital) commented that the financial sector is currently under-taxed. We do not put VAT on financial transactions. There are social costs, too: Global Financial Crisis also cost $20 trillion worldwide. A financial transactions tax corrects this and can help to curb the growth of fast finance. Too much fast finance is not a good thing. If you want to change something, you need to change incentives. A financial transactions tax helps to incentivise the long-term over the short-term. Existing stamp duty is “one of the hardest taxes to avoid and one of the cheapest to collect,” Persaud said.
Labour is proposing to tighten the loopholes on taxation of financial transactions. Around half of investors pay stamp duty and around half use the market maker exemption. Removing and reforming the market-making exemption can raise £1 billion. The problems with the Swedish financial transactions tax can be avoided through requiring a financial transaction tax to be paid by UK tax residents. UK tax residents pay overseas capital gains and income using the same principle. He noted that extending stamp duty to corporate bonds, credit and equity derivatives, forex assets, and commodity derivatives could raise well over £8 billion. The estimates are very conservative. Persaud then considered the cost of a financial transaction tax. The average cost of a financial transaction is 1.7%. This is a rebuttal to those who claim a financial transaction tax will scare off investment: the taxes proposed, and adopted by Labour, are a fraction of those existing total costs. A financial transactions tax is a tax on churn: the people who will pay the tax least are ordinary retail investors, ordinary pension funds, ordinary insurance companies. A financial transactions tax would lead to the UK becoming a “citadel of long-term finance”.
Carys Roberts (IPPR) considered taxes on wealth and taxes on dividends. All of the parties have something to say on this topic. Currently income from wealth is taxed much less than income from work. The IPPR view is that this is unfair and also contributes to income-shifting. Taxes on income, capital gains, and dividends need to be seen together.
The Conservative and the Labour manifestos both agree that Entrepreneurs’ Relief is a terrible relief. Sir Edward Troupe, formerly head of HMRC, has noted it provides no incentive for real entrepreneurship; the Resolution Foundation has showed it does not encourage investment. The Liberal Democrats do not comment on this. On capital gains tax rates and allowances: the Conservatives have said nothing on this; the Lib Dems would remove the separate capital gains tax allowance, which is welcome (though this seems to retreat on an earlier pledge to equalise rates); the Labour and Green manifestos pledge to equalise rates. There is more detail from Labour than the Greens. Labour has included a de minimis amount and some detailed costings. Labour and the Greens would put dividend income into the main income tax schedule. Roberts noted that this would be expected to raise revenue. Equalising capital gains and income tax was last done by Nigel Lawson, Chancellor of the Exchequer under Thatcher, (albeit with a large allowance). On how much revenue this would raise: this is an extremely difficult question. IPPR estimated that, after behavioural effects, this would raise £9 billion in 2023-2024. Roberts noted that she was quite pleased that Labour added in a certain amount for uncertainty, taking off £4 billion for estimates. Overall, Roberts was glad to see income from wealth is on the agenda.
Prem Sikka (University of Sheffield and University of Essex) commented that the Conservative manifesto initially appears to be a masterpiece of style. But it is quickly clear that it is full of bluster and empty promises, in particular on housing. The Labour manifesto is more substantive. Sikka addressed the £35 billion tax gap (estimated as higher by some). The UK “has become a centre of dirty money”. He commended the Labour Party for adopting a general anti-avoidance rule, tax transparency rules, reforms to legal privilege in tax cases, and an Offshore Company Property Levy. He commented on a Conservative proposal for a surcharge on foreign buyers’ purchase of UK property, and noted this might detrimentally affect skilled workers. He supported Labour proposals for an inquiry into the finance sector. He concluded by criticising the inadequate regulatory architecture and welcomed Labour proposals for regulatory reform.
Robert Palmer (Tax Justice UK) said he was pleased to see a focus on tax evasion and avoidance in the Conservative, Labour, and Lib Dem manifestos. “The difference in ambition is remarkable when it comes to the manifestos,” said Palmer. Conservative measures on tax avoidance would bring in £200m. The Conservative manifesto mentions a Digital Services Tax, already announced; this is said to raise £440m. £640m comes from Conservative efforts to crack down on tax avoidance and evasion. Labour should be commended for not just trying to curb individual problems. Labour is addressing a 100-year-old approach to taxing multinationals – and replacing it with unitary taxation. Labour has proposed taxing a proportion of a company’s global profits, looking at the sales, assets, and staff of the UK to determine that proportion. This is “much simpler”, “much harder to avoid”, and better than the Tories’ “sticking plaster”. Other measures include targeted audits and an Offshore Company Property Levy. [“on top of £12 billion there is more money that might be raised.”] The Liberal Democrats say they might raise £5.7 billion. The Lib Dems would increase the rate of the Digital Services Tax. The Lib Dems then have just a paragraph on tax avoidance and evasion. They call for a stronger General Anti-Abuse Rule. “There are very different levels of ambition here.” The Tories largely have a sticking plaster; Labour has fundamental reform on the agenda; the Lib Dems are somewhere in between; the SNP manifesto is more vague and concentrates on reviewing the existing rules.
