King's College London

The Policy Institute is producing a series of comment pieces analysing election manifesto pledges from the different parties across a range of policy areas. Read the full series  here.  

Income tax and national insurance

Lacking ambitious spending commitments, the Conservative manifesto has no need of a substantial revenue-raising manoeuvre and offers only relatively modest adjustments to the National Insurance regime. Labour and the Liberal Democrats by contrast each promise an income tax increase, and the difference between the two proposals highlights the sheer gulf between the two parties in their attitude towards the distributional impact of tax measures. The Liberal Democrats propose a 1p-in-the-pound increase in income tax (hypothecated to NHS and social care spending) for everyone within the income tax net. Meanwhile, Labour’s approach is a significant move towards a more progressive income tax regime, involving larger increases, but (as has been widely reported, and queried, in the media) only for those earning above £80,000.

Unearned income and capital gains

There is a degree of overlap in this area between the parties: both the Conservatives and Labour propose reforming or abolishing the much-derided and expensive Entrepreneurs’ Relief (indeed it is surprising that the Liberal Democrats do not do so too), and both Labour and the Liberal Democrats propose to do away with the annual capital gains tax allowance.

The most innovative proposal in this area, and another revenue-raising one, is Labour’s pledge to conform both (a) the income tax rate on dividends and (b) the rate of capital gains tax, with the general regime of income tax rates. As regards capital gains, this is a simple and welcome improvement: there is little justification for capital gains attracting a lower rate of tax than income. As regards the taxation of dividends, it is a more complex change because of the interaction with corporation tax and national insurance contributions, in the case of owner-managed businesses.

VAT

All three parties have a single VAT tweak to offer, and in each case the policy seems to be a reasonable or even positively desirable one when considered individually, although viewed side-by-side they draw attention to the arbitrariness of VAT reliefs and exemptions more generally. The Conservatives propose abolishing VAT on menstrual products, the Liberal Democrats want to reduce VAT on electric vehicles, and Labour pledge to impose VAT on private-school fees.

Corporation tax

The UK’s corporation tax rate under the current government has been progressively reduced from 28 per cent in 2010 to 19 per cent today. In their manifesto, the Conservatives propose continuing this reduction, the Liberal Democrats propose raising the rate slightly, to 20 per cent, and Labour proposes gradually raising the rate to 26 per cent (or 21 per cent in the case of small businesses).

26 per cent is by no means a punitive rate of tax, and (given levels of inequality domestically and globally) a reversal of the trend of increasingly “competitive” rates of corporation tax. Of course, in the case of corporation tax (as with capital gains tax) the headline rate is only part of the story because of the availability of generous targeted relief and credit regimes. Both the Conservatives and the Liberal Democrats promise to extend tax credits for research and development to investments in cloud computing and data, whereas Labour, in marked contrast, propose to put the whole system of reliefs under review on the basis that it is expensive, regressive, and inadequately scrutinised from the point of view of its intended benefits.

Property

Labour and the Conservatives both have proposals to do with the taxation of land which are geared towards wider policy objectives: the Conservatives propose to give a boost to independent high-street retailers, bars, venues and the like through business-rate reductions, and Labour proposes increased taxes in respect of land not put to use. In addition, both Labour and the Conservatives target land as a proxy for wealth, with the Conservatives proposing further increases on Stamp Duty Land Tax for non-resident buyers and Labour proposing a tax on second homes. The most radical promise under this heading comes from the Liberal Democrats, however, who propose to replace business rates with that holy grail of tax reformers for generations: the land value tax.

Multinational enterprises

The Conservatives promise unspecified “further measures” in respect of tax-avoiding multinational companies, while the Liberal Democrats and Labour show distinct signs of having taken this issue very seriously indeed. In the case of the Liberal Democrats, they propose a triple-pronged approach of reforming the definitions which give rise to a taxable presence in the UK, implementing the Digital Services Tax at an increased rate, and supporting OECD-based multilateral moves to allocate part of the profit of multinationals on the basis of sales rather than the location of profits. There is a degree of belt-and-braces here which is not necessarily a bad thing, and shows admirable engagement with the technicalities.

Labour, by contrast, are not only advocating radical reform of the entire global corporate tax system (ie replacing the “arm’s length principle” with the next-generation “unitary taxation by formulary apportionment”) but proposing to implement that reformed method unilaterally, whether the rest of the world agrees or not. Which is exciting, to the extent that manifesto promises on the subject of tax can be exciting, but also potentially awkward.

Clair Quentin Research Associate to the All-Party Parliamentary Group on Responsible Tax.