An urgent call for smarter taxes for the City
Angus McCrone calls for tax policies that make economic sense to the City.
A year ago, I predicted that the financial markets might come to have a say in the Scottish referendum. I was sort-of right – a downward lurch in the pound, and a wobble in the FTSE100 index, took place in the last fortnight of the campaign, particularly after a poll showed the "yes" camp moving ahead. The markets probably had very little effect on the result in the end, but they did provide mood music for the final, frenzied debates.
I feel on even safer ground in predicting now that the City of London and its investors will have a say in the UK general election campaign, due to reach a climax in just three months' time. As 2015 began, the result looked so uncertain that one bookmaker listed eight possible results – majorities, minorities, coalitions – all with similar odds. And we know that markets, famously, hate uncertainty.
There is one particular concern in the air in the Square Mile – quite apart from whether it is Cameron-Clegg, Miliband-Salmond or whatever after 7 May – and that is tax. It is always a noisy battleground for the parties, but the worry this time is that economic considerations are falling a long way behind political symbolism.
Capital gains tax
Take capital gains tax. The Conservative–Liberal Democrat coalition in 2010 raised the top rate of capital gains tax from 18 per cent to 28 per cent, supposedly to ensure that better-off people contributed more to reducing the deficit, and yet proceeds of the tax fell from a peak of £7.9bn in 2007-08 to £4.3bn in 2011/12, £3.9bn in 2012/13 and £3.9bn in 2013/14.
It could be argued that the financial crisis and stock market slump in 2008/09 gave investors a chance to sell holdings at low prices to minimise capital gains tax and recycle the proceeds into other shares, and therefore that
the tax take was likely to suffer for a while. However, this has become less persuasive as an explanation with the passage of time. Or take the chancellor's pledge in the Autumn Statement to introduce a "25 per cent tax on profits generated by multinationals from economic activity here in the UK which they then artificially shift out of the country". This diverted profits tax played well to the gallery, but there was almost no detail on how the government would decide what was artificially shifted and what was not.
John Cridland, CBI director-general, said: "International tax rules are in urgent need of updating, but the decision for the UK to go it alone, outside the OECD process, will be a concern for global businesses, and moving the goalposts on offsetting losses risks creating a worrying precedent."
The UK Government in December introduced new rates of stamp duty that will cut tax on inexpensive and average-priced properties, but increase it sharply on expensive ones. The removal of the "slab" system, in which tax is paid on the whole value if it moves slightly above certain levels, makes sense. But the punitive high rates (10 per cent above £925,000 and 12 per cent above £1.5bn) – the Scottish Government's new marginal rates are even more fearsome – may well just freeze the top of the market and reduce labour force mobility for professionals, business executives and entrepreneurs. How many high-fliers would want to move to a new city when it could mean blowing a lump sum of £100,000 to £200,000 on property tax? If the answer is "not many", then there is a clear economic cost.
Additional-rate income tax
This was introduced at 50 per cent in April 2010, with a view to raising £2.4bn a year. Later investigations by HM Revenue & Customs and others found that it actually raised less than £1bn, partly because high earners brought forward £16-18bn of income into the 2009/10 period to avoid it, and deferred another £5bn in 2012/13 ahead of the cut in additional rate to 45 per cent.
So investors will be nervous about a further deterioration in the effectiveness of UK tax policy under whatever government takes office in May. Personally, I would prefer to live in a society with greater income equality. But that objective is not addressed if governments design tax policies that fail to raise new money and may also impede the economy. It would be better for the parties to drop the symbolism and aim for "smart" tax policies that maximise the state's revenue, even if that means relatively low marginal rates.