Labour MPs reject Lib Dem call for closure of tax loopholes used by the very wealthy

17 July 2007

Leading for the party at the Lib Dem opposition day debate on fair taxation of the wealthy, Shadow Chancellor Vince Cable called on the government to acknowledge the growing gap in wealth and income inequality since 1997, and proposed measures to tackle it.

Dr Cable highlighted that the complexities of the tax system allow wealthy individuals to utilise tax loopholes and that number of wealthy individuals who are non-domiciled for tax purposes has increased. For these reasons the Lib Dems proposed that the tax system should be amended to ensure that the wealthiest individuals pay their fair share.

Outlining the Lib Dem stance on taxation, Dr Cable said:

“We believe that within the current level of taxation it would be possible to have a system that is fairer, simpler and greener.”

Speaking on capital gains tax, Dr Cable said:

“The first of the major exemptions given by the government is in relation to capital gains tax. In 1997, the system inherited from the noble Lord Lawson had the merit of simplicity, as capital gains were taxed at the same rate as income. The system worked reasonably well and was accepted by businesses as providing reasonable incentives.”

“The key new concept was taper relief, whereby individuals and businesses should be granted relief depending on the length of time that they held on to their assets. That was severely criticised at the time, certainly by the Liberal Democrats, and, I believe, by the Conservatives too. The argument was advanced that the concession would prove to be very expensive, that businesses would find ways of collecting the relief without changing their behaviour, and that trying to use taxation in that way would eventually prove counter-productive. In retrospect, we know that businesses have taken enormous advantage of the taper relief rules in ways that are quite unconnected with the original intentions to encourage ventures and to encourage individuals to hold their assets for long periods to reduce what was called the “churning” of investment.”

Dr Cable went on to discuss tax measures relating to non-domiciled investors. He pointed out that “in many non-domicile cases, it seems that tax is not being paid that should have been paid, at least if the spirit of the system was being observed.”

“One of the technical aspects is the opportunity, which is increasingly being sought, for non-domiciles to accrue capital gains in the United Kingdom on which they do not pay tax. One of the reasons is that the tax avoidance principles do not apply to non-domiciles in relation to capital gains tax, and it is therefore relatively easy to shift capital gains tax into overseas trusts.”

“One reason why the Treasury ought to focus on this question is that it appears to be easy to get non-domiciled status.”

On stamp duty, Mr Cable said:

“Stamp duty is a tax on transactions rather than a wealth tax, but it does relate to property assets. Two elements of unfairness should be dealt with. The first involves what is technically known as the slab system. When a certain threshold is reached - £250,000 for the 3 per cent. Limit - the purchaser pays the full 3 per cent. on the total sum. Therefore, somebody who purchases what is nowadays quite a modest house pays £7,500. Somebody who buys a house worth £500,000 - in much of south-east England that would be a modest home - will pay 4 per cent. on that total, which amounts to a £20,000 tax bill in cash. That is an extremely onerous form of taxation and, moreover, it is not progressive.”

Summarising a few of the Liberal Democrats’ proposed steps to make the tax system fairer, Dr Cable said:

“First, it is clear that the reliefs on capital gains tax - such as taper relief - should go because they are expensive, unfair and reward wealth unsatisfactorily with no evidence that they produce significant economic change of behaviour.”

“Secondly, we propose some tightening up of the non-domicile rules. We do not want to abandon them, but we want to change the residency requirements, and to cut back on some of the provisions, particularly concerning capital gains tax.”

“Thirdly, we want to tighten the rules applying to corporates buying property and escaping stamp duty. We want to clamp down on inheritance tax avoidance by extending the seven-year rule on gifts to 15 years.”

On the issue of council tax, Dr Cable stressed that the Lib Dems want to “scrap it entirely” and to “replace it with a tax based on people’s ability to pay - their income.”

Lib Dem MP Steve Webb also spoke in the debate. He challenged the suggestion that Liberal Democrat proposals were not rigorously costed:

“Throughout the debate, there has been a suggestion that if we change anything people will flee the country, the City will tumble and we will lose money. The second that we produce a costing based on an assumption about changed behaviour, however, we get ridiculed for making it up. The only figures available are those given to us by the Treasury, and those are based on a static assumption. If the Treasury gives us written answers based on its best guess of the change in behaviour, we will use them. It does not do that, however, so we must take the static assumption as the basis for our proposals, which are meticulously costed, as is characteristic of my hon. Friend Dr. Cable.”

Mr Webb went on to say:

“Throughout the debate, it has been assumed that we somehow have the optimal tax system, which has been arrived at through Finance Acts, evolution and the response to short-term political pressures. When the new Chancellor next changes the system, he will justify it on the grounds that he is moving to a new optimal system. Whenever the government change the system, they tell us that they have realised that the previous system was not optimal and needs to be changed.”

Mr Webb concluded:

“All we are saying is that we have not got the balance right. It falls to the Liberal Democrats, as the only progressive party left in the House, to raise the issue of the fairness of the overall tax system.”

Summing up at the close of the debate, Lib Dem Shadow Chief Secretary to the Treasury Julia Goldsworthy highlighted that the Lib Dems are “trying to emphasise that there is a genuine need to look at the balance of where the burdens in the tax system lie.”

Explaining the current situation, Ms Goldsworthy said:

“Individuals in my constituency and across the country are struggling to afford a property, and when they do manage to buy one, they know that, with house prices increasing as they are, there is a very good chance that they will become liable for inheritance tax. Fear of inheritance tax is a massive concern for them. In contrast, there are some individuals who, provided that they can pay for the advice, minimise their tax contributions in a way that we do not feel is fair and balanced. We believe that there is a real need to reconsider such issues, even in relation to “non-doms”.

Concluding her speech Ms Goldsworthy said:

“We are more than happy to engage in a debate, but the government need to give us the information that they are clearly holding and assessing first. That is what today’s debate is all about. We do not think that there is anything wrong with the government acknowledging the need to consider how balanced the tax system is. We have made our proposals. Unfortunately the Conservatives have not done the same. The government have flattered us in the sincerest way by imitating our proposals from our last tax commission. I very much hope that the Chief Secretary will consider doing that again and look forward to seeing our proposals in next year’s Budget.”

Labour MPs voted against the Liberal Democrat motion calling for fair taxation of the wealthy, and Conservatives MP abstained. As a result the motion fell by 288 votes to 55. In a second vote, Lib Dem MPs voted against the government amendment to the motion, but it passed by 274 votes to 61.

Please click here to read Vince Cable’s speech in full

Please click here to read Steve Webb’s speech in full

Please click here to read Julia Goldsworthy’s speech in full

Applicability: this item refers to England and Wales. Due to devolution, detailed policy may be different in other areas of the UK.