Rachel Reeves MP

Member of Parliament for Leeds West

Taxing questions for the Chancellor

Progress, 15 April 2016

http://www.progressonline.org.uk/2016/04/15/taxing-questions-for-the-chancellor/

 

The leaked Panama Papers shone a light on the murky world of tax havens and will have far-reaching implications across the world.

People are rightly angered that a super-rich elite strive to avoid or evade paying their taxes.

David Cameron’s use of an offshore trust was eventually dragged out of him when he published his tax return.

All this matters because the prime minister is responsible for clamping down on tax-avoidance, yet you cannot help feel that his heart is not in it.

In 2013, he personally intervened to prevent offshore trusts from being dragged into a European Union-wide crackdown on tax avoidance by sending a letter to the then president of the European council, Herman Van Rompuy, that called for trusts to be exempt from certain transparency requirements.

That is why Caroline Flint is right to lead calls for greater openness through her multinational enterprises (financial transparency) bill.

It is also why the prime minister must now put the issue of tax havens at the heart of his anti-corruption summit next month.

At a time of strained public finances and a time when families are struggling to make ends meet, it cannot be right that the wealthiest get away with not paying their fair share of tax.

And the last thing that the government should be doing is to cut taxes for the rich.

What British taxpayers want is a transparent system under which the wealthy contribute their fair share of tax here in the United Kingdom and are seen to do so.

The former secretary of state for work and pensions Iain Duncan Smith summed it up in his resignation speech when he condemned the government’s welfare cuts as ‘deeply unfair’ and ‘perceived to be unfair’.

No one believes Cameron and his chancellor’s tired old line that ‘we’re all in this together’ any more.

Under George Osborne’s latest budget, the tax system has become even more iniquitous, penalising the less well-off and lining the pockets of the rich.

I don’t have a problem with people doing well and making a lot of money – we should celebrate success – but at a time when the public finances are stretched and many people on modest incomes are struggling to make ends meet, prioritising tax cuts for the better-off just is not right.

The chancellor made a series of bad decisions in a budget that are patently unfair to millions of ordinary people. It is clear that more needs to be done to tackle the avoidance and evasion by having public records of beneficial membership – both in our crown dependencies and British overseas territories as well as including twists in transparency rules and resourcing HMRC to go after those who are not paying up. But other measures in the budget show the chancellor is privileging the better-off rather than those in the middle, let alone those at the bottom of the income distribution.

When it came to income tax, the chancellor could have done far more to help those on the lowest pay. Instead, he devised a package of measures that disproportionately helped the better-off with a package of badly targeted tax breaks.

For example, fewer than one in five taxpayers will gain from the £2bn cut to the higher rate of income tax. The same group also benefit most from the costly and poorly targeted increase in the personal tax allowance. Yet, the 4.6 million lowest earners get absolutely no benefit.

When it comes to capital gains tax the chancellor again showed he has his priorities wrong. The cut in CGT will cost taxpayers more than £2.7bn over the next five years, but directly benefit just a wealthy few. Government sources have admitted only 130,000 people will share the gains from this measure. Most will be higher-rate taxpayers.

It was the chancellor who argued in 2010 that it was the gap between rates of tax on income and capital gains that enabled ‘some of the richest people in this country … to pay less tax than the people who clean for them’.

The chancellor has now almost doubled this gap for all higher-rate taxpayers from 12 per cent to 20 per cent. He has delivered even bigger gains to top rate taxpayers who arrange their affairs to take advantage of the cut.

A third area where Osborne has shown his inability to come up with a fair solution is his changes to the Isa limits.

He chose to increase the amount a person can put in a tax-free savings account to £20,000 a year.

But this measure cannot be a priority when many do not even earn £20,000 in a year and struggle to make any savings at all.

Latest figures show that the average Isa subscription, for those who could afford to save, was under £4,000 a year. Fewer than one in 10 people who contributed to an Isa were able to save the maximum amount. And a disproportionate number of those who did so enjoyed an income above £100,000 a year.

We are increasingly seeing a smaller group of wealthier savers using Isas to minimise their tax liabilities in a move away from the Isa’s original purpose of helping a large number of people build a nest egg.

Another unfair and wrong-headed choice the chancellor made concerned pensions tax relief.

He could have introduced a new 33 per cent flat rate of relief that I have advocated. It would have been fiscally neutral and fairer to those on lower incomes.

It would have provided a powerful incentive to save, effectively offering people a simple two-for-one offer: for every £2 they put into their pension pot, the government would add another £1. At the moment two-thirds of pensions tax relief is enjoyed by higher-rate tax payers while only 10 per cent of the benefit is felt by those people earning £24,000 (average earning) or less.

This would have provided an incentive to save for millions of people. But he ducked the decision to reform tax relief on pensions.

A fifth key area where Osborne made the wrong call and exhibited his skewed sense of priorities was inheritance tax.

Of course, it is right that parents want to help their children get on. But the chancellor’s inheritance tax break is about helping rich families pass on homes worth up to £1m to their children entirely free of tax. Even the Treasury’s own leaked analysis confirmed this policy will ‘most likely benefit high income and wealthier households’ in London and the south-east. This money could and should be much better spent helping ordinary families who struggle to stay in work when their children are young by creating a universal childcare entitlement for children aged two.

With limited public funds I find it incredible that the government can find the money for tax breaks for people fortunate to have homes worth £1m but not to offer more help to those earning modest or low incomes.

The chancellor’s budget prioritised tax breaks for the wealthy while pulling vital support from the vulnerable and disadvantaged.

The Resolution Foundation calculated that the tax and benefit measures already taken by this chancellor since the election will cut the incomes of the poorest 30 per cent by £565 a year, while increasing those of the richest 30 per cent by £280 a year.

That is shocking and comes before any further cuts are factored in as the government battles to meet its cap on welfare spending and follows its U-turn over personal independence payments.

The chancellor had the chance to create a fairer tax system, but he careered off in the opposite direction and handed out tax breaks to the rich instead of helping ordinary families or the disabled or children in poverty – all of whom could do with more support from this government.

The chancellor could have created a more fair tax system, boosting jobs, social mobility and growth.

Instead, he blew the money looking after the few most able to look after themselves and ignoring the needs of the many and the need to rebalance our fragile economy.

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Rachel Reeves MP is a member of the Treasury select committee. She tweets @RachelReevesMP

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