From each according to their means

From each according to their means

A discussion pamphlet on essential tax reforms for a Left progressive programme

A Communist Party Pamphlet

Britain’s Road to Socialism

Published by the Communist Party December 2014 Copyright © Communist Party 2014.

The latest edition of the CP’s programme - presents and analyses capitalism and imperialism in its current form; answers the questions of how a revolutionary transformation might be brought about in 21st Century Britain; and what a socialist and communist society in Britain might look like.

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The first edition was published in 1951 after nearly six years of discussion and debate across the CP, labour movement and working class. Over its 8 editions it has sold more than a million copies in Britain and helped to shape and develop the struggle of the working class for more than half a century.

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From each according to their means A discussion pamphlet on essential tax reforms for a Left progressive programme

by the CP Economics Commission

Contents Introduction

4

1.

Tax Evasion

8

2.

Tax Havens

12

3.

Corporation Tax

15

4.

Personal Income Tax and Capital Gains Tax

20

5.

National Insurance Contributions

25

6.

Property and Land Taxes

31

7.

Wealth Tax

36

8.

Indirect Taxes

39

9.

Environmental Taxes

41

10. Financial Transaction Taxes

44

11. Taxation and Revenue Redistribution within a Federal Britain

47

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From each according Introduction

This pamphlet summarises a longer report by the Economics Commission of the Communist Party of Britain.1 The full report, which identifies the data on which the conclusions rely, and provides in more detail the arguments underpinning the recommendations, may be found at www.communist-party.org.uk/ EconomicCommissionTaxReport.

The object was not to look for a set of tax policies that would reform capitalism in Britain. Capitalism is a system of exploitation that creates crisis, inequality, corruption, environmental degradation and war. It cannot be reformed, only replaced. Nor was it to consider how government expenditure under socialism should be paid for. This can only be carried out democratically when the time comes. What the Economics Commission set out to do was to take a detailed look at the present British tax system as a whole and to recommend how to change it – recommendations around which progressive forces, including trade unions, could unite. Ultimately, of course, we are a revolutionary party and regard a left progressive government not as an end in itself but as a stepping stone on the road to a communist society.

Some indication of what this taxation policy might look like has already been set out in the Communist Party programme, Britain’s Road to Socialism. This identified the following possibilities: ■ increased rates of tax on the highest incomes ■ wealth tax on the richest section of the population ■ ‘Robin Hood’ tax on City financial transactions ■ increased taxes on corporate profits ■ closure of tax havens under British jurisdiction ■ cuts in VAT on essential goods and services ■ replacement of Council Tax with local income, wealth, land and property taxes based clearly on the ability to pay ■ the development of appropriate capital controls to prevent ‘capital flight’.

These and other possibilities need, however, careful study and consideration, including how they would interact with each other.

How Britain’s tax system has failed

Britain is an increasingly unequal country. This is not solely due to the changes to the tax system begun in 1979 by the Thatcher government, and continued under New Labour. As Andrew Fisher has persuasively argued, it is the political decisions of successive governments since then that have wrecked the economy and brought us to levels of inequality not seen since Victorian times.2 These decisions included cuts in public services and overall public spending, the undermining of trade unions, privatisation, deregulation of the housing p4

From each according to their means

to their means market, and the sale of council houses, the fragmentation and gradual privatisation of the NHS, and the deregulation of private industry, including, with disastrous consequences, the banks and finance sector. Taxation policy has, however, played a significant part in bringing us to our current parlous state.

Taxation efficiency and the question of who pays

Taxes can take many forms. Some, however, are more efficient than others. Efficiency in this context means minimising the cost per pound of tax revenue raised. These costs comprise not only the cost of assessment, collection and compliance incurred by both the taxpayer and by the taxing authority, but also the deadweight loss associated with the tax. This is the extent to which a tax acts as a disincentive for people or society to work, invest or consume, and which therefore has an adverse impact on welfare. The concept of deadweight loss is useful, but neo-liberal economic theory has merged it with the market equilibrium hypothesis to develop complex models of ‘optimal taxation’ that are, by their very nature, hostile to the concept of redistributive taxation.3 They take no account of who bears the cost. Thus £1 lost by a worker on the average wage is held to be adequately compensated by £1 gained by a millionaire. In doing this, neo-liberal economists reflect the ideology of the ruling class and, consciously or unconsciously, serve the interests of that class.

Meanwhile, it should be pointed out that the incidence or burden of a tax does not necessarily fall on those nominally paying it. Businesses will always seek to pass on higher taxes in the form of higher prices. Even Income Tax, though nominally paid by workers, can act as a tax on businesses if they have to pay higher wages to compensate for the taxes that workers have to pay.

To a considerable extent, therefore, who pays depends on the relative bargaining positions of workers and consumers, relative to business. And when the bargaining position of workers is weak, as now, the burden increasingly falls on ordinary working people and their families. Furthermore, the regressive character of some taxes is greatly exaggerated when inequality of income is great as is the case now. Thus, taxation policy needs to operate side by side with such measures as raising the minimum wage, pensions and benefits, as well as redistributing the tax burden to higher income groups.

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Taxation criteria

Even under capitalism it is possible to devise a tax structure that does not place the entire burden of taxation on ordinary working people and their families, but it requires an unapologetically class-based analysis, which is what is adopted in this pamphlet. The criteria employed by the Economics Commission were that taxes should be: ■ Redistributive4 ■ Capable of promoting ‘social justice’ ■ Reflective of the ability to pay; ■ Simple to understand; ■ Predictable; ■ Unavoidable; ■ Compatible with each other and free from legitimate concerns about double taxation; ■ Objective to assess; ■ Transparent – not only should taxpayers understand their own tax liability, they must, if redistribution and social justice is to be achieved, be in a position to observe and understand everyone else’s tax liability; ■ Free from interference by those hostile to the interests of the working class, including parliamentary lobbyists, senior civil servants and the judiciary.

Some of those criteria, on occasion, may run counter to each other, thus necessitating a trade-off. ‘Social justice’ is a comprehensive but imprecise criterion. The quote marks are included as it is not possible to achieve a truly just society under capitalism. It is, however, possible to reduce the level of injustice, for example, by requiring those who gained most under the bubble preceding the current economic crisis and those who were negligent and responsible for the crash itself to make the biggest fiscal contribution to the recovery.

In addition, taxation should be employed, where appropriate, to address specific social problems, even if it raises not much revenue.

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From each according to their means

The proposals of the Economic Commission’s proposals would help address such social problems as: ■ The corrosive influence of private education; ■ The prohibitively high cost to ordinary working people of further education; ■ The disappearance of decent occupational pension schemes; ■ The destabilisation of the NHS by private sector healthcare providers.

However, it should be emphasised that taxation alone cannot achieve such aims without the adoption of other measures, consideration of which are beyond the scope of this investigation.

Taxes must, of course, be capable of generating sufficient revenue to maintain public services and to service the cost of, and where appropriate, reduce the level of, public borrowing and must be consistent with promoting full employment and providing other necessary fiscal stimulus to the economy. The recommendations of the Economics Commission are not inconsistent with this objective, but no attempt has been made to propose a budget as such. This can only be undertaken in the light of a comprehensive spending review that prioritises the needs of ordinary working families and discounts imperialist pretensions and other interests favouring the rich and powerful.

Some of the above criteria conflict with the rules and regulations of the European Union. Attention is drawn to such conflicts, but no attempt is made to tailor recommendations to meet them. Withdrawal from the EU is the appropriate response and is, of course, already the policy of the Communist Party.

Who pays what

Taxes are conventionally analysed in terms of whether they are direct or indirect – that is whether they are levied on an individual or corporation or on an activity such as consumption. However, some caution is called for with such classifications. As noted above, taxes levied on producers can be passed on to consumers and, vice versa. Furthermore classifying a tax as a consumption tax can conceal its true nature.

The full report gives an analysis of current government revenue and expenditure. But what it does not show is the massive shift from direct to indirect taxes that began under the Thatcher government elected in 1979, and continued by its successors. Value Added Tax, introduced in 1973 when Britain joined what was then the European Economic Community, was initially set at 10 per cent. This was reduced the following year by Labour to 8 per cent, but with a higher rate of 12.5 per cent for petrol and certain luxury goods, later raised to 25 per cent. The Thatcher government abolished the higher rate, but raised the standard rate to 15 per cent. It has since been raised to 20 per cent. Meanwhile, the standard rate of Income Tax has been steadily reduced from 30 per cent to 20 per cent today, and top rates have been slashed. As a result, the poorest 10 per cent of the population have seen the percentage of their gross income paid as tax go up from 35 per cent in 1979 to 43 per cent in 2010, whereas the richest 10 per cent have seen theirs decline from 37 per cent to 33 per cent.5 A major priority, as a matter of ‘social justice’, therefore, is to rapidly reverse that development.

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1. Tax Evasion RECOMMENDATIONS 1 Introduce a robust, broadly-based general anti-avoidance rule which actually ‘does what it says on the tin’ and which includes serious financial or other penalties for those found to have broken the law.

2 Take radical action to squeeze or close down tax havens, which are used by the super-rich and transnational corporations to siphon off $billions from national economies (more detail on this issue in Chapter 2).

3 Support the tax transparency proposals contained in the Private Members’ Bill introduced by Michael Meacher, MP, in September 2013.

4 Radically simplify Britain’s tax code to minimise the number of ‘grey areas’ and reduce the scope for tax avoidance.

5 Reverse the recent fall in numbers of staff at HM Revenue & Customs (HMRC) – which has declined by around 40 per cent since 2005 – to ensure that it is properly resourced to challenge the aggressive tax avoidance advice given by the ‘Big Four’ accountancy firms and others to companies and individuals.

6 End the pro big business ‘customer relationship’ operational model of HMRC. 7 Take the following steps to curb the malign influence within government of the large accountancy firms: ■ Ban on the revolving door between HMRC and the ‘Big Four’ accountancy firms so that specialist HMRC tax expertise does not leach to the private sector and on major accountancy firms working on tax policy.

■ End secondments between the Civil Service and banks and the ‘Big Four’ accountancy firms without prior consultation with the Civil Service unions and specific formal parliamentary approval.

■ Ban government contracts going to leading tax/accountancy specialists who devise aggressive tax avoidance strategies for the super-rich and the corporate sector.

■ Introduce legislation for abolition of limited liability partnerships.

■ Require complete separation between statutory auditors and accounting firms offering consultancy and other advice and require those newly independent auditors to report on transfer pricing.

■ Require large partnerships to publish accounts with the same level of disclosure as public companies.

8 Consider restrictions on residence or operation in Britain of individuals or corporations who actively practice tax avoidance.

9 Consider options to tighten up corporate law to reduce the scope for tax evasions and money laundering and other criminal activity.

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From each according to their means

BACKGROUND TO RECOMMENDATIONS

It is estimated by the tax justice specialist Richard Murphy that tax avoidance and evasion costs Britain at least £120 billion a year. This is a huge sum. Recovering even a small proportion of this lost revenue would go a long way to dealing with the deficit, protecting the welfare state and investing in manufacturing, jobs and housing. But this needs political recognition of the scale of the problem and the will to do something tangible about it. Unsurprisingly, parliamentary rhetoric notwithstanding, both are palpably lacking in the three main parties, though Labour is starting to show signs that it might develop a bit more backbone in this area. It remains to be seen how effective this tough talk might prove once in government as corporate lobbyists swing into action and neuter anything which smacks of substance.

A distinction is often made between tax evasion and tax avoidance. Evasion is condemned, but avoidance is presented as an apparently legitimate effort to reduce tax liability, via, for example, use of loopholes or gaps in the law in ways not anticipated in the legislation and against its intent. But both evasion and avoidance constitute a significant contribution to growing levels of inequality, and undermine the ability of national governments to raise revenue. And they exacerbate the general shift of wealth from labour to capital and contributes to the recurring crisis of capitalism as the burden of tax collection falls on those least able to afford it.

Both Conservative and Labour governments are not only out-manoeuvred and out-gunned by tax evaders and avoiders, with their armies of lawyers and accountants who run rings round HMRC, but have actively connived in the tax avoidance industry for many years, turning a blind eye to all but the most egregious examples of this behaviour. It was New Labour that cut capital gains tax for private equity from 40 per cent to 10 per cent in 2000, enabling the super-rich to class income as capital gains and dramatically reduce their tax burden. And it was New Labour that exempted from tax the profits returned to Britain from overseas subsidiaries, encouraging corporations to send income offshore. It was also New Labour that initiated a significant reduction in HMRC staff numbers.

The current Con-Dem Government took things to the next stage by reducing Corporation Tax from 23 per cent to a maximum of 5.25 per cent for corporations that opened a subsidiary in a tax haven. This was achieved by taking an axe to the ‘controlled foreign companies’. The impact of these changes was expected to result in most transnational corporations paying little or no UK Corporation Tax.6 We are encouraged to believe that all this is in the name of introducing a level playing field for British corporations with their competitors based in tax havens. In reality, it is a race to the bottom, which fuels the shadow economy in the EU and which seriously undermines the revenue-raising ability of the Government.

In effect, we now have a situation where the payment of tax by the super-rich and transnational corporations is largely voluntary, and where corporations like Apple, Google, Starbucks and Tesco comply, on the face of it, with national governments’ tax rules but pay tax as and when it suits them.

To make matters worse, there is a revolving door between HMRC and the ‘Big Four’ accountancy firms,7 which deliberately recruit former tax inspectors to secure their expertise of how Government works and regularly advise HMRC on the formulation of tax policy. They then use this privileged knowledge to advise the super-rich and the major corporations on how best to minimise their tax obligations. This obvious conflict of interest is euphemistically known as ‘tax planning’ and viewed as a perfectly legitimate activity by the ‘Big Four’.

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p9

Furthermore, Private Finance Initiative (PFI) contracts are invariably structured to maximise tax reliefs of one sort of another, and lucrative ‘refinancing’ deals have emerged as well as a secondary market in PFI companies, which have enabled the extraction of extraordinary sums of money from these projects, usually routed via tax havens. In the process, the very viability of institutions such as NHS hospitals has been seriously undermined while taxpayers pay the price of what can best be described as an expensive form of hire purchase. It surpasses irony that public services have themselves become tax avoidance schemes. For example, 25 per cent of HM Treasury and HMRC headquarters are now owned by a company based in Jersey, while the entire regional network of HMRC tax offices are owned by a Bermuda-based company.8 Ultimately, the willingness of New Labour, the Tories and senior managers at HMRC to operate a ‘light touch’ tax regime for the super-rich and the larger corporations, whilst pursuing the ‘low-hanging fruit’ represented by small businesses and the working and middle classes is a sad indictment of any government’s claim to be operating in the interest of the many rather than the few.

The Public Accounts Committee recently turned its attention to the cosy relationship between HMRC and the ‘Big Four’. In its report it said: “We have seen what look like cases of poacher turned gamekeeper, turned poacher again, whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay. We are very concerned by the way that the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax”.9 These firms have grown rich and powerful through their monopoly provision of statutory audit services –services that failed to warn in advance of the financial crash in 2008 or help identify the miscreants responsible for the crash. The time has come to clip their wings. The six recommendations above are intended to do that.

The tax avoidance problem is aggravated by the proliferation in Britain of ‘brass plate’ companies, which act as vehicles for tax evasion as well as magnets for international organised crime and money launderers. As Private Eye has recently reported, the problem stems from the relaxation of British company law, regulation and policing since the 1980s. This was given recent expression in the ‘limited liability partnership’ corporate vehicles created in 2002, which not only minimise partners’ liability and permit filing of ‘abbreviated accounts’, but allow avoidance of tax both in Britain and in other jurisdictions.

To do its job effectively, HMRC needs to be properly resourced. It makes no sense to cut the part of government that brings money in. Increasing resources, ensuring staff are properly trained and that there is a professional infrastructure to support and retain them would clearly deliver significant results. It is estimated that such an approach would pay an investment return of around 20:1 (based on what is already achieved by senior HMRC professionals). As the late Ken Gill said: ‘You pay tax and you buy civilisation.’ This is a crucial point. Most people understand that taxes are a price we pay for a decent society. Some campaigning organisations, such as UKUncut and ActionAid, are doing some good work in this area. But the labour movement as a whole needs to raise its game and make the case for robust action to tackle tax evasion and avoidance. p 10 From each according to their means

The scope for a General Anti-Avoidance Rule

After some pressure, the Government is proposing to introduce a General Anti-Abuse Rule (GAAR). On the face of it, this is designed to prevent contrived tax avoidance schemes whose only purpose is the minimisation of the amount of tax due. But the rule is limited in scope, which undermines its claim to be ‘general’. It will only affect the most contrived of arrangements – that is, those that have no other purpose but to leave the Exchequer out of pocket. And it will not extend beyond Britain. Furthermore, it is designed in such a way that it is unlikely to meet its objectives, because it places the burden of proof on HMRC, and includes a ‘reasonableness’ test which favours the current avoidance culture. Moreover, it lacks an effective penalty regime.10 The solution is a General Anti-Tax Avoidance Principle Bill, such as was sponsored recently by Michael Meacher, MP This made it clear that ‘any scheme whose primary purpose is to avoid tax rather than any genuine economic transaction would be invalid at law and struck down with a sizeable penalty for attempting to subvert the will of Parliament’.11

Tax transparency

The promotion of tax transparency would undoubtedly assist efforts to tackle tax evasion and avoidance. Norway has operated such a system for some years, with tax authorities publishing details about individuals’ income and wealth, and the tax paid, on an annual basis. In Britain, Meacher’s Bill sought to ensure that the tax liabilities both of the wealthiest individuals and the biggest corporations (including their subsidiaries) are placed on public record and that the beneficial owners of companies who hide behind nominee shareholdings are also made known. This was an attempt to tackle the secrecy shielding the tax affairs of large companies and wealthy individuals, and would represent a significant step forwards in efforts to tackle tax abuse. The Bill would have granted HMRC the power to access a company’s bank account so that estimated tax assessments could be raised if the company had refused to supply accounts, and the directors and beneficial owners would then be responsible for paying the tax. These obligations would extend to the tax havens in UK Crown Dependencies and Overseas Territories.12 From each according to their means p 11

2. Tax Havens RECOMMENDATIONS 1 Britain to take unilateral action to end the special tax status of all tax havens under its control on a phased basis that would permit the realignment of local economic activity and the necessary democratic and constitutional reforms required to address the current, anachronistic, constitutional relationship with the sixteen Crown Dependencies and Overseas Territories.

2 Britain to press for coordinated international action via the Organisation for Economic Co-operation and Development (OECD) and the G8 to close other tax havens or at least render them effectively inoperable.

3 Consider the adoption of legislation similar to that in the United States’ Foreign Account Tax Compliance Act, which was introduced to combat offshore tax evasion and recoup Federal tax revenues, by requiring UK tax residents to report their financial accounts held outside of the country, and imposing a 30 per cent withholding tax on UK source income where this obligation is not fulfilled.

4 Take action to constrain the freedom of manoeuvre of non-British controlled tax havens and the transnational corporations that seek to use them, and campaign for the international adoption of unitary taxation and country-bycountry reporting (see Chapter 3), and for the introduction of automatic tax information exchange between countries to underpin effective taxation of the super-rich, making ‘wilful blindness’ by accountants, bankers and lawyers who assist money laundering a criminal offence.

BACKGROUND TO RECOMMENDATIONS

It is widely known that tax havens play a major role in facilitating tax evasion. But the scale, and precise nature of this role, is less well understood. It is conservatively estimated that between $21 trillion and $32 trillion of unrecorded, secret offshore financial wealth exists in the world, almost all held by the top 1 per cent of the world’s population. These are huge sums, which are not included in assessments of the growing gap between rich and poor.

On top of that, Christian Aid estimates that poor countries lose $160 billion per year to corporate tax dodging. Together, this illicit wealth could end extreme global poverty twice over and significantly reduce the reliance of developing countries on economic aid.

But the story goes beyond tax evasion. A helpful definition of a tax haven is a ‘place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere’.13 As Shaxson illustrates, the term ‘tax haven’ is somewhat misleading as their purpose is far wider than simply the avoidance of tax.14 Their key characteristics are secrecy, combined with a reluctance or outright refusal to cooperate with other countries’ financial and tax authorities, low or zero tax rates for non-residents (residents are often taxed at higher rates), and capture of p 12 From each according to their means

local political institutions by financial interests and severe restrictions on the exercise of democratic politics.

Their power to undermine national economies is significant. It is estimated that well over half of world trade passes through tax havens. Clearly, this needs to change. A failure to act will further entrench the power of finance capitalism, embed inequality and seriously undermine national governments.

A plan for action

Any action against tax havens would not be easy, particularly by any one country acting alone. Coordinated international action to close tax havens or render them effectively inoperable would clearly be preferable. In the absence of credible action at a global level, there are still steps Britain could take unilaterally, not least because of the number of tax havens which are controlled by Britain and the role of the City of London (which is the world’s second biggest tax haven after Switzerland) as a money-laundering mechanism and conduit for the vast sums of money that move to and from these locations. The recommendations above are intended to achieve this.

Of Britain’s sixteen Crown Dependencies and Overseas Territories, half operate primarily as tax havens. Those within the British Isles – the Isle of Man and the Channel Islands – should be brought within the representative system of the British parliament, with fully democratic systems of local government, all ‘feudal’ jurisdictions abolished and special tax privileges removed. The 47th Congress of the Communist Party of Britain argued that these territories should be incorporated within a democratic federal structure alongside the other nations of Britain.

Photo: ActionAid

From each according to their means p 13

There are five Caribbean possessions that operate principally as tax havens, namely Anguilla, Bermuda, British Virgin Islands, Cayman Islands, and the Turks and Caicos Islands. Immediate steps should be taken to end the special tax status of these territories on a phased basis to permit the realignment of economic activity towards tourism and other sustainable sectors. Dates should be set for referenda to determine the constitutional future of each territory under UN jurisdiction.

Gibraltar is also dependent on its operation as a tax haven. Ending its special tax status and harmonising its tax arrangements with Spain would not only remove a tax haven, but also smooth the way towards a harmonious resolution of the dispute over Gibraltarian sovereignty and encourage its residents to recognise where their best interests lie.

The resistance to these moves that will undoubtedly occur can be undermined by the simple announcement that Britain is determined to address the anachronistic constitutional arrangements that govern its relationship with its Crown Dependencies and Overseas Territories and will no longer act as a guarantor of last resort for the banks and financial systems of these territories.

In the meantime, there are a number of practical measures that could be taken to restrict the freedom of manoeuvre of non-British controlled tax havens and the transnational corporations that seek to use them, including: ■ Pressing for international adoption of unitary taxation and country-by-country reporting (see Chapter 3) ■ Introduction of automatic tax information exchange. Replace the current OECD system of information exchange – which is fundamentally flawed because of the various technical obstacles placed in the way of information retrieval – with a robust mechanism for comprehensive automatic information exchange would open the way to effective taxation of the super-rich.

■ Making ‘wilful blindness’ a criminal offence. Unlike, for example, drugs trafficking, tax evasion is not a money laundering offence, even though it is a criminal offence in most countries. It is the tax evaders that potentially face the criminal sanctions, not the tax haven accountants, lawyers and bankers who helped them commit these crimes. Harsh penalties should be introduced against the people who help the tax evaders and the IMF and other bodies dealing with money-laundering must officially make tax evasion a money-laundering offence Tax havens would be required to sign up to these measures or expect to face defensive countermeasures, including making trade with corporate affiliates in tax havens illegal, blocking tax havens from access to international institutions and implementing political and economic sanctions.

p 14 From each according to their means

3. Corporation Tax RECOMMENDATIONS 1 Restore the rate of Corporation Tax to between 30 per cent and 40 per cent, perhaps stepped up to 50 per cent beyond a certain threshold for the largest companies.

2 Adopt a system of unitary taxation under which transnational corporations pay Corporation Tax according to where they actually do business, where their workforce is based and where their assets are held.

3 Introduce country-by-country reporting to provide tax authorities with a clear view of the operation of transnational corporations, with increased disclosure requirements based on publication of consolidated accounts at the national level showing line of business data and detail on the transactions conducted with group companies outside this consolidation.

4 Abolish all tax exemptions and allowances, including offsetting interest payments against tax, except those which have a clear, socially useful, investment purpose to help underpin appropriate policy decisions on support for manufacturing, small businesses, green investment, and the like.

5 Restore a form of Advance Corporation Tax to reduce the incentive for corporations to pursue tax avoidance strategies.

6 Introduce a windfall tax of 10-30 per cent on the recent super-profits of the banks, energy companies, water companies and rail companies, pending a return to public ownership.

7 Introduce a one-off tax on current corporate cash piles, to support social investment.

8 Develop a clear strategy for the introduction of capital controls and other defensive counter-measures to minimise the scope for corporations to evade progressive taxation measures by shifting capital outside Britain.

BACKGROUND TO RECOMMENDATIONS

Corporation tax has hit the headlines recently on a number of occasions, including revelations that Starbucks paid no Corporation Tax between 2011 and 2013, while Amazon, Facebook, Ikea and others paid only minimal amounts in comparison with their profits generated in Britain. Public anger about the situation is palpable, and organisations like UK Uncut have done good work to highlight this mockery of social justice.

It clearly is a tax that is not fit for purpose. It is based on an international system developed around a hundred years ago, and fails to reflect how transnational corporations operate in the 21st century. In particular, it fosters tax avoidance by allowing the artificial creation of subsidiaries in low tax jurisdictions and does nothing to prevent tax evasion through transfer pricing.

From each according to their means p 15

The current position

Corporation Tax was introduced by a Labour Government on 1 April 1965 at a rate of 40 per cent. At its peak, it was set at 50 per cent for distributed profits and 10 per cent for undistributed profits. The Con-Dem government has cut Corporation Tax four times since coming to power, culminating in a new low rate of 20 per cent that was announced in the Spring 2013 Budget, which is due to come into force in April 2015. This is expected to cost the Exchequer £750 million per year.

This is the lowest rate of any major Western economy. When announcing the change in his Budget day statement, George Osborne, the Chancellor of the Exchequer, boasted: ‘I want to send a message to anyone [emphasis added] that wants to set up business here, or create jobs here, that Britain is open for business.’ This sort of ‘beggar thy neighbour’ tax competition with other countries is deliberately designed to prepare the ground for further rate reductions in Britain when the opportunity arises. But governments do not have to play this sort of ‘tax arbitrage’ game, allowing transnational corporations to play one country off against another. If they so chose, they could co-operate with one other via practical initiatives on minimum tax rates, accounting conventions, treatment of tax reliefs, and other initiatives.

In 2011-12, Corporation Tax raised approximately £43 billion. This represented nearly 8 per cent of total tax receipts. To put this into context, VAT raised £98 billion and Income Tax £153 billion in the same period. A significantly higher rate would, of course, provide the opportunity to recalibrate the proportion of taxation raised by different taxes.

It is instructive to consider rates of Corporation Tax in other developed (and not so developed) countries. In descending order, the United States operates a rate of 40 per cent; Japan, 38 per cent; Brazil, 34 per cent; Venezuela, 34 per cent; Belgium, 33.99 per cent; Italy, 31.4 per cent; France, 33.33 per cent; Australia, 30 per cent; Norway, 28 per cent; Germany, 29 per cent; Luxembourg, 21 per cent; and Ireland 12.5 per cent. This clearly places Britain in a minority and at the lower end of the scale.15

Arguments for increasing Corporation Tax

We have no illusion that lowering rates of Corporate Tax would feed through to higher wages. Corporation tax is, nevertheless, a straightforward, easily understood mechanism for the government to tax capital, ensure it is not allowed to transfer its external costs to the state and require corporations to ‘pay their way’. In the process, it has the potential to send a clear signal to the public that the tax system can be used to promote social justice and redistribution. Reducing the tax on business simply shifts the burden onto personal, consumption and other taxes, which may well be regressive or which are not suitable for high levels of revenue generation.

Advocates of a low rate of Corporation Tax argue that it is a cost effective method of stimulating employment and investment by business. Yet British businesses are currently sitting on vast piles of cash as they wait for a turnaround in the economy. These derive from their ability to maintain, or increase profits, while squeezing down wages, ending up with limited investment opportunities because they have reduced wages too much to provide a market for their goods and services. The Financial Times in early 2014 reported that the total cash pile among FTSE 100 companies amounted to £168 billion, while for all firms, according to Ernst & Young it was £754 billion. A cut in Corporation Tax simply adds to that pile. The most effective types of fiscal stimulus are those that direct money to where it is likely to be spent quickly – that is, to people on lower incomes or benefits. And a one-off tax on these cash piles, which, after all, are accumulated from the surplus value generated by workers, would be a credible way of generating revenue for the Government.

Corporations frequently make threats about relocating to lower tax jurisdictions, but p 16 From each according to their means

these rarely translate into practice. Corporations seek to do business in Britain because of the opportunities to make money in a significant Western economy. Thus, there is always room for national governments to take action, whilst seeking international agreements as appropriate. This includes making use of capital controls, and taking over businesses threatening to relocate and turning them into worker-owned enterprises.

Capital controls

It is natural that any attempt to change taxation policy to favour workers at the expense of those who own or control capital will be opposed. This will be especially true for changes to corporate taxation as proposed here. Any government committed to such a change will therefore need to look to its defences. Prime amongst these will be capital controls.

It is nonsense to argue that capital controls are no longer appropriate or practicable. Most belligerents operated some form of capital controls during the two world wars, and a set of robust and wide-ranging capital controls were implemented as part of the new ‘Bretton Woods’ system after World War Two. Capital controls work by limiting capital flows into or out of a country and can take the form of taxes, price or quantity controls, or outright prohibitions on international trade in assets and loans. They significantly reduce the risk of ‘capital flight’ by corporations seeking to evade taxation, or in pursuit of higher returns in other countries at the expense of investment where they are based. However, in the late 1960 and 1970s, those capital controls were increasingly undermined through collusion among banks and transnational corporations making use of holding companies and affiliates in offshore tax havens, such that they became increasingly ineffective. In Britain, one of the first measures taken by the newly elected Thatcher government in 1979 was to abolish capital controls.

It is self-evident that capital controls reduce the scope for mobile capital or ‘hot money’ to distort national economies, thus helping to improve macro-economic stability. Several countries recently – including Argentina, India and Iceland – have demonstrated the scope for implementing workable capital controls on both individuals and corporations. Even the IMF now recognises the merits of limited capital controls in particular circumstances.

Abolishing offshore tax havens, or making dealings with them illegal, as proposed above, would greatly facilitate the re-introduction of capital controls, which would not only eliminate or reduce tax evasion, but also help to underpin a new economic and political strategy of any newly elected Left Wing or progressive government.

Tax avoidance mechanisms

Corporations use a number of artificial and abusive practices to reduce their tax liability.

They include: ■ Transfer pricing between high and low tax jurisdictions. Transnational corporations arrange for profits to accumulate in their subsidiaries based in low tax jurisdictions, irrespective of where the productive activity is taking place. This may be achieved by channelling payments for over-invoiced imported input or under-invoiced exports through subsidiaries or holding companies based in offshore tax havens or other low tax jurisdictions. Today, more than 60 per cent of all international trade takes place within transnational corporations, so the opportunities for such practices are almost limitless.

■ Loading or ‘gearing up’ companies with large quantities of debt. Companies take advantage of the concession that enables them to offset interest payments against tax (only available to companies, not individuals!). Thus, a transnational corporation arranges for its subsidiary in Britain, say, to borrow from another subsidiary in an offshore tax haven at a high rate of interest. The subsidiary in Britain ends up with little or no profit, because of the high interest payments due, and therefore pays no From each according to their means p 17

tax. The profits all end up offshore, where they are not subject to tax. This practice is almost universal.

■ Artificial royalty fees and service charges. Transnational corporations arrange for patents, trademarks and the registration of brands, and units providing services for the whole group, including legal services, accountancy, and sometimes research and development activities, to be ‘owned’ by subsidiaries or affiliates based in offshore tax havens. Subsidiaries in high tax jurisdictions, where the productive activities are actually taking place, are then charged high prices for those services, including royalty fees for the use of trademarks, and so on, thus allowing profits to be transferred offshore, and therefore not liable to tax.

■ Switching contracts to affiliates based offshore. Upon completion or fulfilment of a contract, a company may claim it has been undertaken by an affiliate based in an offshore tax haven, and then artificially attributes the bulk of a particular business activity to that affiliate, even though all productive activities up to that final stage had taken place in Britain.

■ Exploiting opportunities to set historic losses against tax. The rules in this respect are significantly more favourable in Britain than in comparable Western economies.

While certain tax deductions or allowances may have been introduced for apparently laudable reasons, the reality is that they offer ready-made vehicles for transnational corporations to exploit the rules to reduce their tax exposure. The complexity of the rules, on the one hand, and the ability of transnational corporations to game the system, on the other, makes the payment of Corporation Tax a largely voluntary affair.

The case for introducing a system of unitary taxation and country-by-country reporting

The current international system of taxing transnational corporations is fundamentally broken. Transnational corporations are treated as though they were loose collections of separate, nationally-based companies, which enables them to exploit the weak coordination between tax authorities for their own ends, through the mechanisms just described. (See also the chapters above on tax evasion and tax havens.)

Under a unitary taxation system, transnational corporations would be taxed according to the genuine economic substance of what they do and where they do it. This would not only be of considerable benefit to national exchequers, but would underpin the legitimacy of the system and be significantly easier to manage. Transnational corporations would be required to submit a single set of worldwide, consolidated accounts, apportioning global profits to the countries where it has a genuine economic presence according to a weighted formula. National tax jurisdictions would then have the discretion to tax their proportion of profits at a rate of their choosing.

The parallel introduction of a statutory requirement for country-by-country reporting would underpin this move by forcing transnational corporations to break their information down by country of operation, thus providing tax authorities with a clear view of the activities of transnational corporations.

Experience already exists of how to operate a unitary taxation system successfully from the United States, where some states apply unitary taxation systems. The EU is also considering adopting such a system. Although there would be a number of technical issues to resolve, it would relatively easy to develop a managed transition to unitary taxation, and country-by-country reporting, once the political will was there. It would be a huge step forward for governments worldwide to increase their tax take.16 p 18 From each according to their means

Advance Corporation Tax

Since the 1970s, Corporation Tax had been charged when a company paid out a dividend.

This charge, known as Advance Corporation Tax, averaged around 20 per cent of the dividends paid and could be set against a company’s final Corporation Tax bill. For large, publicly-listed companies, Advance Corporation Tax was all but impossible to avoid. It meant that if a company paid out all its post-tax profits as dividends, it had already paid a minimum 20 per cent tax, thereby reducing the incentive to avoid tax as only a limited proportion of profits could be sheltered from tax. This scheme was abolished in 1999, which, intentionally or otherwise, actually encouraged companies to avoid tax. The solution is to restore the system without delay.

Small companies

The current corporate tax system applies a ‘small profits’ rate of 20 per cent up to a threshold of £300,000 (with marginal relief available up to £1.5 million). From 1 April 2015, the small profits rate will be unified with the main rate at the standard rate of 20 per cent. It is self-evident that large corporations, national or transnational, are capable of paying more tax than smaller companies because of the additional profits generated by their market dominance, monopoly position or predatory behaviour against competitors. In the context of proposals to restore higher rates of Corporation Tax for larger companies, it needs to be considered whether the current threshold for small companies is set at the right level or would benefit from an upward or downward shift. Political considerations might suggest retaining the current threshold at least for now, and focusing on the bigger players that generate the most revenue.

From each according to their means p 19

4. Personal Income Tax and Capital Gains Tax RECOMMENDATIONS 1 Raise the threshold for Income Tax on earned income to £20,000 per annum, and in stages later, to £30,000, retaining the basic rate of tax at 20 per cent.

2 Raise basic rate of tax for unearned income under £40,000 per annum to 30 per cent.

3 Retain the 40 per cent rate of tax for earned income over £40,000 and under £60,000 per annum, and introduce a new 50 per cent rate for unearned income between £40,000 and £60,000 per annum 4 Introduce a new 60 per cent rate of tax for earned income over £60,000 per annum, and a 70 per cent rate for unearned income over £60,000 per annum 5 Retain a Capital Gains Tax at the same rates as for Income Tax, with the same thresholds, as for unearned income.

6 Retain the Child Benefit, but at a higher rate to correspond with the true costs of raising children, and make it taxable at the basic rate for unearned income, thus giving it a redistributive element.

7 Abolish all allowances and tax credits for charitable donations.

BACKGROUND TO RECOMMENDATIONS

Up to 1939, Income Tax was essentially a class tax in that the liability was confined to a small and affluent minority – about 4 million taxpayers in a working population of 20 million. But the decision that the World War Two should be financed from taxes changed this situation radically. Tax rates were increased and thresholds lowered at a time when money wages were rising rapidly. The number of taxpayers soon exceeded 12 million, so that the majority of working people came within the ambit of the tax. This meant that the only practical way of enforcing tax liabilities was by deduction from wages before they were received. By 1960, virtually the whole of the working population was covered by Income Tax. In the 1960s, the basic rate of Income Tax was 30 per cent, with lower rates for different bands up to certain income thresholds, after various personal allowances for individuals and children that were tax-free had been taken into account. And higher earnings beyond certain thresholds (as in most other advanced capitalist countries at the time) were subjected to rates as high as 83 per cent per cent, or in the case of unearned income, as high as 95 per cent. However, the Thatcher government, which came to power in 1979, reduced the top rate to 40 per cent, and the basic rate to 25 per cent, which has been further reduced in stages to 20 per cent, as mentioned already, compensated by a sharp increase in VAT rates.

Thus, whereas in the 1960s, Income Tax accounted for over 35 per cent of government revenue by 2013, it had dropped to just over 25 per cent. p 20 From each according to their means

Today, approximately 30 million adults in Britain have some form of Income Tax liability. The top 10 percent of taxpayers, with earnings above £50,000, account for 56 per cent of government revenue from Income Tax, half of which came from incomes above £150,000. The next 45 per cent of taxpayers, with earnings between £20,000 and £50,000 accounted for 35 per cent of revenue, and the bottom 45 per cent of taxpayers, earning between £8,105 and £20,000 accounted for just under 9 per cent. About 40 per cent of adults, with incomes below the £8,105 threshold pay no Income Tax. The high proportion of Income Tax paid by those earning above £50,000 surely lays to rest the right wing argument coming from such bodies as the Taxpayers’ Alliance for a flat tax (that is a single rate of income tax), which, at the lower rates that they are proposing would result in a marked reduction in the revenue from Income Tax.

Pros and cons of Income Tax

First, from a government’s point of view, Income Tax is relatively cheap and easy to administer in that employers have the major responsibility for collecting it. And unearned income, such as from interest or dividends, is now mainly taxed at source (but only at the basic rate).

Second, Income Tax is normally regarded as a fair tax because – at least nominally – it is based on an individual’s ability to pay. Moreover, the extent to which Income Tax is a progressive tax, especially as people with earnings beyond certain thresholds are subject to higher rates of tax, means that it has a significant redistributive element in terms of access to public services. Furthermore, it is easier to make adjustments when a person’s ability to pay is affected by other circumstances, such as the number of dependants he or she has to support, or incomes from different sources, than is the case with other taxes.

The argument for charging a higher rate of tax for unearned income is that it does not attract National Insurance Contributions, and to a large extent it derives from other people’s labour.

Meanwhile, it should be noted that income is not always an accurate measure of a person’s ability to pay, since it depends on how income is defined. For instance, changes in net worth arising from gifts, bequests and other gratuitous transfers are hard to include in the taxable income of individuals. At one time, redefining income as a capital gain was a widespread practice for avoiding Income Tax. This was one of the reasons for the introduction of a Capital Gains Tax by the Labour in 1965 (see below).

Another source of inequity are the numerous schemes, facilitated by accountants or ‘tax planners’, that are available to understate income, thus enabling some of the more privileged taxpayers to avoid paying their fair share of tax. This ranges from the selfemployed and landlords being paid ‘cash in hand’, to, on a much larger scale, the wealthy making use of various accounting devices, such as anonymous trusts and nominee companies, spread around the world’s offshore tax havens (see Chapters 1 and 2).

Finally, higher rates of Income Tax, it is often argued, tend to act as a disincentive to work. This is more likely to be the case for people subject to high marginal rates of tax due to the withdrawal of means tested benefits as people’s earnings start to improve. However, this is more a function of the benefits system, and the availability of decently paid jobs, which is beyond the scope of this report. It may also affect, perhaps, the self-employed.

Otherwise, most people in employment do not have a choice in the hours they work, and will likely be little affected by the tax they have to pay. It is possible that higher rates of tax may act as a deterrent to perform overtime, but they may just as likely lead to workers seeking more overtime to compensate for the extra tax, and to maintain their established standard of living.

From each according to their means p 21

Child Benefit

The extra costs to families with children, used to be dealt with through a children’s allowance added to the personal allowance before income was taxed. In addition, each family was entitled to a Family Allowance, based on the number of children. However, in 1977, the children’s allowance was abolished, and replaced by Child Benefit, which also incorporated the old Family Allowance. The Child Benefit was normally paid to the mother on the basis that the child was more likely to benefit than the old system of giving the children’s allowance against Income Tax, normally received by the father, which, it was argued, might not necessarily benefit the children. Also, the children’s allowance against Income Tax benefited people with higher earnings more than those with lower incomes, because the former received tax relief at a higher rate. The new system was therefore deemed more equitable.

Currently, families receive £20.30 per week (£1,056 per annum) for the first child, and £13.40 per week (£696 per annum) for each additional child (which is fixed until April 2014). Since January 2013, any householder with at least one person with prescribed income over £50,000 loses Child Benefit by a taper which removes it altogether when the income reaches £60,000. This issue of those on high incomes claiming Child Benefit when they do not really need it – which arguably would be more important if Child Benefit were raised more in line with the true costs of raising children, as proposed here – could be dealt with more efficiently simply by subjecting it to tax.

Capital Gains Tax (CGT)

Until 1965, capital gains were not subject to tax. This allowed many people to avoid Income Tax by converting (taxable) income into (tax free) capital gains. A capital gain is the profit made from selling an asset, such as property, shares, and other investments, such as antiques and fine art, for more than it was bought. A capital gain may also be deemed to have been made when certain assets are given away, or otherwise disposed of without being sold.

Initially, the rate of tax was set at 30 per cent, which, in 1965, was the same rate as the prevailing basic rate of Income Tax. And the threshold before CGT became due was set at £9,500 (£135,000 in today’s money). In the early 1980s, a period of high inflation, the benefit of stripping out inflation when calculating how much tax was due was introduced.

In 1988, when Income Tax for higher rate taxpayers was lowered to 40 per cent, and the basic rate to 25 per cent, CGT rates followed suit, with the threshold lowered to £5,000.

In 1998, under New Labour, the indexation was replaced with taper relief. The longer an asset had been held, the lower the rate of tax. If it had been owned for 10 years, the rate fell from 40 per cent to 24 per cent. Later, the dual rate of tax was scrapped, and also the taper relief, and a new lower, single rate of 18 per cent was introduced. This has since been raised to 28 per cent in most cases, once total income and gains exceed a threshold of £10,600 for individuals, and £5,300 for trusts. For individuals taxed only at the basic rate of Income Tax, CGT may be charged at the lower rate of 18 per cent. And a lower rate of 10 per cent applies to capital gains that qualify for Entrepreneurs’ Relief. (Limited companies do not pay CGT; instead they pay Corporation Tax on their chargeable gains, which qualify for fewer reliefs and exemptions than those available to individual taxpayers.) When the Entrepreneurs’ Relief was first introduced, there was a lifetime limit of £1 million for gains. It has since been increased in stages to £10 million. There are a number of qualifying conditions.

The main exemption from CGT is when people sell their principal private residence, p 22 From each according to their means

though there are restrictions, such as: if the house was not used only as a main residence throughout the period of ownership; the garden or grounds, including the site of the house are greater than 5,000 square metres (1.23 acres); part of the home was ever used exclusively for business purposes; or, all or part of the home has been rented out. The huge capital gains of people living in owner-occupied homes in the recent period, arising from the continuing huge escalation of property prices (due to various factors beyond the scope of the present discussion) has led to some calling for the introduction of CGT for all private residences when they are sold. However, a better solution, which would help resolve the current housing crisis, would be to prevent the escalation of house prices through the introduction of a land value tax, together with credit controls (see Chapter 6).

CGT is often criticised (mainly among those who have to pay it) for collecting not much revenue – it was about 0.8 per cent of the total tax take (£5.1 billion) in 2013-14 – and for the high costs of collection and compliance. But it serves the important function of preventing those with the opportunity from shifting a part of their income to capital gains, which, without CGT, would avoid tax, as was the case before 1965.

Allowances and tax credits on charitable donations

Although supporting charities through tax relief might seem reasonable, given the important activities many charities perform to help people deal with various types of problems (more often than not arising from the capitalist/imperialist system under which we live), it is susceptible to a number of abuses.

At best, in effect, it diverts tax towards expenditure in those activities favoured personally by those wealthy enough to make such donations, at the expense of expenditure in areas of special need as determined by elected Members of Parliament. Most private schools, which play a key role in perpetuating the class system of exploitation, for instance, have charitable status, and depend on donations that can be set against tax – in effect, diverting tax revenues to private schools that might otherwise been used to fund the state education system.17 At worst, charitable donations attracting tax relief have been used simply as a device for straight tax evasion, with funds diverted to trusts and the like in offshore tax haven, without any evidence that they end up with a ‘good cause’.18 Applying the criteria stated earlier, we believe that ‘good causes’ should either be financed by government out of tax revenue as being socially useful or funded by individuals out of their taxed incomes and wealth. It is therefore recommended that all allowances and tax credits for charitable donations should be abolished.

From each according to their means p 23

Local income tax

The introduction of a local income tax has been proposed to replace the regressive Council Tax to finance local public services. In fact, currently, a large part of local public services in Britain is already financed out of Income Tax (and other taxes collected centrally), since that is what provides around half the revenue in the form of direct grants going to Local Authorities, and is what pays for other public services organised centrally, but which operate locally, such as police, fire, and local health services, road maintenance, and other things. A local income tax would be additional.

The major problem with a local income tax in the British context, apart from placing an additional burden on incomes already taxed, is that it would be more costly to collect compared with, say, the Council Tax, because so many people live in a local jurisdiction different from where they work, especially if it included unearned income not covered by PAYE. The Layfield Committee estimated that it would require a 15 per cent increase in staff and expenditure, compared with the then existing rate system, which in administrative terms would be similar to that required for the Council Tax.19 In addition, a local income tax would be inequitable because of the large differences between mean incomes in more affluent areas and in poor areas. This could be mitigated through some sort of equalisation mechanism that already exists, but it would be more complex to administer under a local income tax regime.20 As discussed in Chapter 6, a better option to finance public services at local level (which could be extended to national level later) would be to raise revenue from a different source – namely the unearned income or economic rent from land that currently is appropriated by landowners and, even more so, banks, through the introduction of a land value tax.

p 24 From each according to their means

5. National Insurance Contributions RECOMMENDATIONS 1 Retain National Insurance Contributions, and extend their scope to form the basis for re-introducing a State Earnings Related Pension Scheme (SERPS), similar to that introduced in 1978, but this time incorporating all private pensions schemes, consolidating them into an expanded National Insurance system catering for all workers, in which employees’ and employers’ contributions would be paid into workers’ Personal Pension Accounts held by a National Pensions Fund.

2 For workers to receive a pension approximately half their average pay, and a lump sum about three times that, it is estimated that employees’ contributions would need to be approximately 15 per cent of pay, and employers’ contributions about 20 per cent. For the low paid, it would be necessary to increase pay to ensure employees’ contributions were affordable. The unemployed would receive credits to their Personal Pension Accounts.

3 Apportion approximately 4 per cent of National Insurance Contributions to a National Contingency Fund that would be responsible for the payment of the Jobseekers Allowance, the Employment and Support Allowance (formerly Incapacity Benefit), the Bereavement Benefit and the Maternity Allowance.

4 End the policy of about 20 per cent of National Insurance Contributions going to fund the NHS. 5 Fund the NHS through a ring-fenced portion of the revenue from Income Tax, which would be paid into a National Health and Social Care Fund. At the current level of expenditure on the NHS, the amount hypothecated would need to be approximately 70 per cent of the revenue from Income Tax, but thereafter, would be set annually in arrears according to what was required.

BACKGROUND TO RECOMMENDATIONS

It is common to regard National Insurance Contributions (NICs), especially among neoliberal economists, as a form of income tax. Some have even advocated the merging of the two into a single income tax scheme. Employers, too, tend to think of NICs (especially the employers’ contributions) as a tax, since, in effect, they collect them together, and send a single cheque to HMRC, with the NICs often the greater component. However, the Economics Commission concluded that NICs should not be considered a tax at all, but part of a person’s deferred wages. Indeed, it is proposed that not only should NICs From each according to their means p 25

be treated as separate from Income Tax, but should be extended to provide for all state pensions as well as other contingencies (including unemployment, incapacity, pregnancy, and bereavement). About a fifth of NICs, are top sliced and paid directly to the NHS. It is proposed that this should end, and that the NHS be funded separately through a hypothecated portion of the revenue from Income Tax.

The current situation

Although HMRC collects NICs and Income Tax together, they are listed separately in the National Accounts. NICs accounted for 17 per cent of government revenue in 2013/14 (up from 13 per cent in 1964), or £106.7 billion. Of that, £20.6 billion or 19 per cent was hived off to the NHS before being paid into the National Insurance Fund (the rest of NHS funding coming out of general taxation). Apart from that going to the NHS, approximately 70 per cent of NICs collected go on state retirement pensions; about 6 per cent on Employment and Support Allowance (formerly Incapacity Benefit); 0.7 per cent on Jobseekers Allowance; 0.6 per cent on Bereavement Benefits; 0.3 per cent on Maternity Allowance; 0.1 per cent on Christmas bonus; and 4.3 per cent on other payments and administration.21 Contributions paid by employed earners and their employers (Class 1 Contributions) account for approximately 96 per cent of the revenue from NICs. The rest comes from selfemployed flat rate or earnings related contributions (Class 2 and Class 4), and voluntary contributions (Class 3).

Employees pay no NICs below the Lower Earnings Limit (£5,668 per annum at the time of writing), and do not qualify for any benefits based on contributions. Between the Lower Earnings Limit and the Primary Threshold (£7,755 per annum), employees are credited with NICs by the government. Between the Primary Threshold and the Upper Earnings Limit (£41,450 per annum), employees pay 12 per cent of their earnings. And above the Upper Earnings Limit, they pay 2 per cent. Employers pay NICs at 13.8 per cent of all employees’ earnings above the Secondary Threshold (£7,696). There is no Upper Earnings Limit for employers.22 NICs covering other types of employment are more or less pro rata, and there are various other complications which need not be of concern here. Thus, apart from those earning more than the Upper Earnings Limit, which pay only 2 per cent, the system is progressive, but somewhat less so than Income Tax. Until 1975, NICs were paid at a flat-rate. It was a Labour government that turned NICs into an earnings-related system. The current system could be made more progressive by abolishing the Upper Earnings Limit.

Why National Insurance Contributions should not be regarded as a tax

First, NICs are not directly available for general expenditure by the government, which is the usual definition of a tax. They could, of course, be regarded as a hypothecated tax, one earmarked for pensions and other benefits. However, when NICs were first conceived in 1909, they were introduced as an insurance scheme to pay for pensions and healthcare.

This was also the case when the scheme was greatly extended by the 1945-50 Labour government – hence the name, National Insurance. Indeed, NICs are exactly analogous to contributions being paid into a private pension scheme, or health scheme, albeit without the high level of fees, and with NICs covering everybody.

Second, that part of NICs that currently goes towards pensions can be regarded as deferred earnings, which one reclaims when one retires. In other words, the accumulation p 26 From each according to their means

of a person’s contributions going towards pensions actually belong to that person, and not to the government, which merely acts as the administrator. Or they can be regarded as a form of life insurance, which yields an annuity upon reaching retirement age. Meanwhile, that part of NICs going to the NHS can be regarded as a health insurance premium.

Similarly, that part paying for other contingencies.

A further argument for collecting NICs into a separate fund is that it is more transparent, so that people can be more confident that their contributions were going directly towards their retirement and healthcare – just as they believe is happening with any contributions they make towards a private pension or healthcare scheme. In effect, NICs are no more a tax than those contributions. In the case of an earnings-related pension scheme, NICs do not act as a disincentive to work because the more one earns, which would increase the amount of contributions, the higher the pension one would expect to receive on retirement.

If pensions and healthcare were paid into a statutory fund, democratically controlled, but independent of the government of the day, people could be confident that their contributions were going towards what they are supposed to be paying for, and were not being plundered by government to pay for some vanity project or war, as has indeed happened in the past. In such a scheme, the financing of pensions and healthcare would be automatic, not involving the government at all. It could be arranged that the contributions are set at such a level that they would match the money that had to be paid out in pensions, healthcare, and other benefits, with everybody building up their personal entitlements (their deferred wages), and their personal insurance against ill-health, or bouts of unemployment.23 It would not be subject to the whims of government as now.

In contrast, the funding of pensions and healthcare out of general taxation, as advocated by some, is opaque, with great uncertainty as to where the taxes one pays are being spent. Furthermore, payouts on pensions and healthcare, in effect, from the government’s point of view become items of expenditure, rather than part of people’s incomes and entitlements, which they have paid for. Even the most benevolent of governments, hard-pressed to balance their books, have a built-in tendency to try to save money by making pensions as low as they can get away with (as with the current payas-you-go pension schemes of public sector workers), and cutting healthcare costs to the bone. With right wing governments in power, the National Insurance system, ever since it was introduced, has been constantly watered down, including destroying the only decent pension scheme Britain ever had – namely, the State Earnings-Related Pension Scheme (SERPS).

The State Earnings-Related Pension Scheme (SERPS) – and its demise

After years of planning, SERPS was eventually launched by in 1978. Unfortunately, such was the opposition from private pension interests that the government caved in and allowed those in private pension schemes to opt out – but with the proviso that their terms and conditions must be at least as good as under SERPS. Although, initially, this resulted in the biggest improvement in private pensions schemes ever, it also provided the basis subsequently for the Tory government under Thatcher, and later the New Labour government under Blair, first to undermine SERPS, and eventually to dismantle it altogether.

This also paved the way for the destruction of most decent private pension schemes, From each according to their means p 27

such that today, there are hardly any schemes offering defined benefits, virtually all having switched to defined contribution or money-purchase schemes in which all the ‘investment’ risks are born by workers. Such schemes offer no guaranteed pension, they do not reflect life-time earnings, and pensions are eroded by huge management fees disguised as a small annual levy on the accumulated funds (‘pension pots’), which can amount to as much as a third of the final pension. Furthermore, losses arise when agents in the parasitic financial services ‘industry’ – peddling the myth that an individual’s investment fund can ‘beat the market’ – make the ‘wrong bet’.24 The government’s recent relaxation of rules requiring private pension funds to buy an annuity is a desperate attempt to cover the cracks caused by quantitative easing – the government’s depression of interest rates, and hence annuity value, in order to stop the economy collapsing again. The solution to the problem of poor value annuities is, however, not to allow savers to ‘blow’ their ‘pension pots’ at the first opportunity, but to by-pass the financial services ‘industry’ altogether.

The costs and complexity of the current system of pensions in Britain

Pensions in Britain are extremely complex and costly to administer. This arises because the Basic State Pension, funded out of NICs, has never been enough to live on. Among the advanced countries, Britain (along with Ireland) spends the least amount on state pensions, just 5.5 per cent of gross domestic product, compared with an average of 10.4 per cent for the EU 15. Other schemes are therefore needed to top up the state pension.

These range from a few remaining final salary company and occupational schemes, defined contribution schemes, either occupational or wholly private, to means-tested benefits for those who have been stuck in lower paid jobs all their working lives, or who have not had access to other pension schemes. Britain has four separate public pension schemes – including the Pension Credit, which is supposed to provide a minimum income guarantee – as well as a separate pay-as-you-go occupational scheme for public sector employees in central government, education and the National Health Service. In addition, there are 89 different pension schemes for public sector employees at local government level. And there are over 90,000 private sector occupational schemes (of which around 80,000 are very small schemes with less than 12 members). Furthermore, some 1.2 million retired people currently are receiving pensions from personal private pension plans, and several million more are paying into such schemes.

This multiplicity of schemes, each requiring its own system of administration, and also the complexity of the system, adds considerably to the costs of pension provision, especially for means-tested benefits and privately run pension schemes. First, means-tested benefits – which involve some 5.5 million pensioners, accounting for over half the pensioner population – add hugely to the administrative costs of state provision for retirement. In 2003, it was estimated by the House of Commons Committee of Public Accounts that the Minimum Income Guarantee scheme (which the Pension Credit replaced) cost ten times more to administer than the Basic State Pension. The Pension Credit almost certainly costs considerably more, since it is more complicated. On top of that, there are the costs of administering Housing Benefit and Council Tax Relief that are also means-tested, and upon which many pensioners also depend.

Meanwhile, the multiplicity of schemes complicates matters and adds costs at the personal level, both in deciding what pension options to take up at different times during one’s working life, and also when one retires, with pension income often coming from p 28 From each according to their means

several different sources due to the lack of portability of private pension schemes when one changes jobs. And for those on means-tested benefits, it can be a nightmare, not only because of the humiliation of having one’s personal affairs investigated, but also because of the time and effort it takes to complete the various forms, and to report on changes of circumstances.

Case for re-introducing SERPS

None of those costs apply to a comprehensive, state-run pay-as-you-go pension scheme.

Indeed, even those with a vested interest in the private pensions industry acknowledge that the administrative costs of a pay-as-you-go system are very low – less than one per cent of contributions. Essentially, all that is required is to keep an account of contributions coming in and of pensions being paid out, a task which requires computers rather than over-paid investment managers. In other words, people get more pension for the contributions that they pay. The costs would be even lower if the system embraced all pensions. Furthermore, there would be none of the hassle, bureaucratic costs and creaming off of accumulated entitlements when one changed jobs since one would keep the same pension account throughout one’s life (as one does with the current state system). And, perhaps most important, there would be none of the risks that one’s pension fund might lose money because of a collapse in prices of the financial assets in which one’s pension fund in a private scheme may have been invested.25 In short, not only on the grounds of lower costs and economic efficiency, but also to make the system fairer – without the spivs in the financial services ‘industry’ creaming off profits at the expense of pensioners – the Economics Commission advocates incorporating all pensions schemes into a new comprehensive state-run pay-as-you-go pension scheme funded through an expanded National Insurance system, along the lines of SERPS. But this time, it should cover all pensions, and exclude private operators which experience has shown would likely undermine the scheme in their quest for profit. For reasons of accountability, it is proposed that the new SERPS and National Pensions Fund be managed by a democratically controlled statutory authority, independent of the government of the day.

Under the current National Insurance system, everybody already has a Personal Pension Account (identified by one’s National Insurance Number). Re-introducing SERPS, as proposed here, would therefore merely mean transferring the pension funds individuals have already accumulated into their existing National Insurance Pension Accounts, which, henceforth, would receive employers’ and employees’ pension contributions, both those under the current National Insurance scheme, and those previously paid into private schemes. A worked example in the full report, estimates that in order for workers to receive a pension approximately half their average pay, and a lump sum about three times that, upon retirement, employees’ contributions would need to be approximately 15 per cent of pay, and employers’ contributions about 20 per cent. For the low paid, it would be necessary to increase pay to ensure employees’ contributions were affordable. The unemployed would receive credits to their Personal Pension Accounts.

During the transition to the new system until it had bedded down, and taking into account of the highly skewed distribution of income at present, pensions would need to comprise a guaranteed basic element plus an earnings-related element. However, eventually, by ending the scandal of low wages, it should be possible for pensions to be entirely earnings-related.

From each according to their means p 29

The future funding of health and social care

Currently, the approximately 19 per cent of NICs that is paid directly to the NHS funds about a fifth of NHS expenditure. The question arises, should NICs be increased not only to cover the re-introduction of SERPS, as proposed above, but also to cover the entire cost of the NHS? In fact, once one does the calculations, it quickly becomes clear that this would be too much for the National Insurance system to bear, especially as the revenue from NICs is limited by the fact that they only apply to earnings from employment, and not other sources of income. It is therefore proposed that health and social care be funded entirely through the tax system, rather than NICs, and that the portion of NICs currently going to the NHS be abolished.

However, in order to ensure that expenditure on health and social care is ringfenced and expanded according to need, and because we cannot trust governments ‘democratically elected’ under capitalism not to undermine the arrangement, it is further proposed that it be funded through a hypothecated portion of Income Tax revenue, which would be paid into a newly established National Health and Social Care Fund under the control of a statutory body, independent of the government of the day, and subject to representative democratic control, including representatives from trade unions (similar to the proposed National Pension Fund mentioned above). This would amount to 70-75 per cent of the revenue from Income Tax for the current level of expenditure on the NHS. The key advantage of such a scheme is that people would be more confident that at least that part of the Income Tax being deducted from their pay was actually going towards their health and social care and that of their family, and not being diverted to some other activity favoured by the government of the day. And it embodies the principle that you pay what you can afford and receive the health and social care that you need. In such a scheme – since it is inevitable that with an aging population, expenditure on healthcare will continue increasing for some time – it would probably be best to use the expenditure on health and social care the previous year as a guide to setting the proportion of Income Tax to be ring-fenced for the following year.26

A new National Contingency Fund

It is proposed that the Employment and Support Allowance (formerly Incapacity Benefit), the Jobseekers Allowance, Bereavement Benefits, and the Maternity Allowance; should continue to be funded through the National Insurance system, perhaps through the establishment of a new National Contingency Fund. This would absorb approximately 4 per cent of total NICs under the system proposed here.

p 30 From each according to their means

6. Property and Land Taxes RECOMMENDATIONS 1 Abolish all current property taxes and replace with a land value tax (LVT) at an initial standard rate of 3% of capital value of the site.

2 For owner-occupied residential properties only, replace Council Tax with LVT at an average rate, initially, of 0.85 per cent of capital value of the land they occupy.

This would collect approximately the same amount of revenue as Council Tax does now.

3 For commercial and industrial properties, replace the National Non-Domestic Rates (NNDR) with LVT at the standard rate. This would collect approximately the same amount of revenue as the NNDR does now.

4 For rented properties, including residential, business premises and farmland, remove from tenants the liability to any property tax, on the basis that they are not property owners, and charge the landowner LVT at the standard rate.

5 Charge owners of derelict land or brownfield sites, and land banks, LVT at the standard rate.

6 Charge owners of agricultural land LVT at the standard rate.

7 For owner-occupied residences with a floor area greater than 300 square metres, introduce an annual tax per square metre above that threshold, at a rate to be determined by an initial survey.

8 Abolish the Stamp Duty Land Tax, the revenue foregone offset by the additional revenue collected from the LVT and the buildings tax.

9 It is proposed that the standard rate of LVT be determined nationally, but the revenues from LVT be collected by Local Authorities, with grants from central government, based on population and needs, reduced by the amount of LVT Local Authorities are able to collect.

BACKGROUND TO RECOMMENDATIONS

The main arguments for taxing property are: ■ It shifts the burden of taxation away from earned income; ■ It captures unearned income from land for public purposes, instead of going to private landowners and banks; ■ It acts as a wealth tax; ■ It leads to more investment going into production, instead of land and property, which merely inflates prices; From each according to their means p 31

■ It is impossible to evade through dubious accounting devices unlike other taxes; ■ It is cheap to collect and has low costs of compliance.

The two forms of property tax in Britain at present are the Council Tax for domestic properties, and the National Non-Domestic Rates (NNDR) – also known as Business Rates – for commercial and industrial properties. In addition, there is the Stamp Duty Land Tax, which, in spite of its name, is neither a property nor a land tax, but a transaction tax charged on properties over a certain value when they are sold. Currently, the Council Tax collects £26.3 billion, or 4.4 per cent of government revenue, and NNDR about the same.

The Stamp Duty Land Tax collects £6.4 billion, or just over one per cent of government revenue, about 70 per cent of which comes from for residential properties, and 30 per cent from commercial properties.

These taxes have serious shortcomings dealt with in the full report, not least that the Council Tax in particular is severely regressive. It is proposed that they be replaced by a land value tax (LVT) set at a level that would have a minimal adverse re-distributional impact on ordinary working people. This is a deliberately cautious approach, but it would represent a significant step in the process of shifting the balance of taxation away from the poorer sections of society – especially people who do not own any property – to big wealthy landowners. As with any new tax, some unknowns inevitably exist concerning its impact.

It is therefore recommended that its introduction should be closely monitored in the early stages to test its effectiveness against the anticipated benefits, so that adjustments can be made accordingly. In particular, it requires a carefully worked out strategy to ensure that ordinary working people who have become small-scale landowners as a result of purchasing their homes (which includes the land they stand on, and associated gardens or yards) are protected – especially those locked into repayments including interest, that take up a major proportion of their pay, not least due to the grossly inflated prices they have been forced to pay in order to acquire their homes.

Land value tax (LVT)

LVT is a tax on the value of land, disregarding any buildings or other structures on the site.

The land value of a site is mainly a function of its location (or more precisely, its popularity for whatever reason, and therefore how much it is in demand), and its permitted use as determined by planning authorities.27 The basic principle of a land value tax (LVT) is that it returns to society the value of land, or economic rent, that society itself creates. As an economy develops, the demand for land in particular locations goes up, and because the supply of land is fixed, its value tends to rise, and therefore its price. In the absence of LVT, when land is privately owned, it is the landowners who benefit without having contributed at all to the economic growth that has led to the rise in land values.

In Britain, up to now, it is the 200,000 or so families who own some two-thirds of Britain’s land, including some of the most valuable land in cities, who have gained the most – at the expense of the rest of us. Over the years, or even centuries, they have accumulated vast amounts of capital through renting (or hiring) out land and from capital appreciation arising from other people’s work. The introduction of LVT would begin the process of redressing this gross economic injustice.

Small-scale landowners, especially people who have bought their own homes, may also benefit from economic rent. But the banks that lend the money to enable working class people to make such a commitment benefit much more. Thus, the huge escalation of property prices – or more precisely, land values – due to the economic demand created by p 32 From each according to their means

the uncontrolled expansion of credit since the deregulation of banking in the 1980s, and the corresponding vastly increased amounts that people have to borrow in order to acquire a home, has meant that the revenue banks have been able to collect from interest on home loans has multiplied many times over, which represents their appropriation of economic rent from land on a huge scale at the expense of everybody else. The introduction of LVT would begin the process of ending this exploitation.

LVT has many other economic and social benefits beyond the scope of this pamphlet.28 The problem is how to introduce it – or more specifically, what transitional arrangements are needed for it to be introduced with the least side effects that might cause harm to people and businesses whose activities have evolved under the current tax regime.

First and foremost, land that is essentially a part of consumption, mainly owneroccupied residential land, on the one hand, and land used for production and which generates an income, on the other, need to be treated differently when determining the rate of LVT – hence the different initial rates of LVT proposed.29

Replacing Council Tax with LVT

One effect of a land value tax if applied at a relatively high rate, say, 4-5 per cent – which is what would be needed in order to maximise its economic benefits, and for society to get back the economic rent that society itself creates – would be to reduce substantially the market price of land, and therefore property, because the price would be discounted by the annual outlay of LVT. This would render the purchase of homes much more affordable, and less economic rent in the form of interest on home loans would disappear into the coffers of banks. However, it would not be good news for the nearly 70 per cent of households in Britain who live in owner-occupied homes (nor for the politicians who depend on them for votes). They would not like to see a decline in the market value of their property – which, more often than not, is their main form of wealth (or potential wealth if they are still paying off their mortgage) – especially as most homeowners have got used to the idea of their properties increasing in value year by year. No matter that if property prices did decline and people got less when they sold, they would also pay less for the properties they moved to, so it would make little difference.

But the fact is that if prices did decline substantially, people would inevitably feel worse off – all the more so among those who had borrowed heavily in their desperation to buy a home.

However, if, in the first instance, for owner-occupied properties, LVT merely replaced Council Tax, as recommended here, it would make little difference to property prices, because they would already have been discounted by the annual outlay of Council Tax, which would be the same if the outlay on LVT was the same. According to estimates given in the full report, the average rate of LVT to collect the same amount of revenue as Council Tax does now would be 0.85 per cent of the capital value of land.

An important issue is that the relative value of properties (including the land they stand on) will have changed quite radically since Council Tax was first introduced, because properties have not been revalued since 1991 (2003 in the case of Wales). Thus, the actual outlay of individual households following a valuation for the purposes of introducing LVT might change considerably, either up or down – though no more so than if there had been a revaluation under the current Council Tax regime. Furthermore, the value of land, in spite of the recession, has continued to escalate in some regions – especially in London, but also in some other areas – so that if the rate of LVT were the same everywhere, it would result in a disproportionate increase in outlay in some areas compared with others. Therefore, it is proposed that initially the rate of LVT in each Local Authority area be set such that the From each according to their means p 33

LVT collected the same amount of revenue that the Council Tax does now. This would mean that the rate of LVT for owner-occupied properties in different Local Authority areas would vary, so that the 0.85 per cent figure given above represents only the average rate.

Replacing the National Non-Domestic Rates with LVT

A great advantage of replacing the NNDR with LVT is that it would be much cheaper to collect. First, it would not involve the need to assess the value of buildings, which are particularly difficult in the case of commercial premises, because of their immense variety in every respect (offices, shops, warehouses, factories, power stations, and so on). In addition, it would act as an incentive to make the best use of the land occupied, subject to planning regulations, and encourage investment to achieve that object. Furthermore, since around two-thirds of the land on which business premises are located is rented,30 it would remove the liability of those owning the business from having to pay a property tax, which would mean that they would have more to invest in their business, thus benefiting economic development.

In order to collect the same amount of revenue from LVT as NNDR does now, it is estimated that the rate of LVT should be set at 3 per cent of the capital value of a site.

Other land

It is proposed that all other land with potential to generate income be taxed at the same rate – that is, 3 per cent of the capital value of a site. This would include derelict land or brownfield sites, and land banks owned by the big house builders – which would act as a major incentive for the owners of such land to develop it as quickly as possible in line with prevailing planning regulations.

The 3 per cent rate would apply also to land used for rented homes. Thus, unlike land used for owner-occupied homes, which may be considered a form of consumption, from a landlord’s point of view, land used for rented homes is income generating, and therefore, as noted already, should be treated differently – in fact, exactly like a business, which is what it is. In this case, the tenants, unlike now, would not be liable to any kind of property tax, which makes sense because they do not actually own the property in which they live.

Similarly, it would apply to the owners of leases in the case of leasehold owner-occupied properties – which again makes sense because the owners of the properties, in this case, would not own the actual land on which their properties stand.

Finally, it would include agricultural land, which is currently untaxed. As in other cases, subjecting agricultural land to LVT would encourage the best use of land. But, perhaps more importantly, it would stop agricultural subsidies feeding into higher land prices and rents (in other words, big landowners’ bank accounts), leaving more for investing in the actual production process.

Public services such as the NHS and state education, public parks and open spaces, and land used for other public amenities, generate no income and would be zero rated and therefore pay no LVT, because by law the land could not be used for any other purpose.

The case for a buildings tax

It is normally regarded that LVT obviates the need for a buildings tax, which, apart from anything else, would tend to act as a disincentive to invest in the building to make the best possible use of the land (subject to planning consent). Moreover, because of their hugely varying characteristics, it is harder to value buildings than land (which can make use of computer aided mass assessment techniques and geographical information systems).

But there is the issue that similar size sites accommodating houses of different sizes and p 34 From each according to their means

values. Under the Council Tax regime, they would pay quite different amounts according to which Band they were placed in, but under LVT, it might be thought, they would pay the same. This undoubtedly would be perceived as unfair. However, land value is not only based on area and location. It is also affected by optimal permitted use. If it is assumed that all sites are put to optimal permitted use (or were at the time the houses were built), then the owner of the small house would pay less than the owner of the large house on the same size site, because the owner of the small house would not have planning consent for a big house. The latter, therefore, would have a lower land value, and would pay less LVT. Nevertheless, there is still a case for taxing owner-occupied residences beyond a certain size (especially those located on country estates, which would have relatively low land values), because houses, like landownership, are a form of wealth, or accumulated economic rent. In order to retain a reasonable element of fairness, therefore, it is proposed that such residences beyond a certain size – say, 300 square metres of floor area, which would include outhouses, stables, swimming pools, and the like – be taxed per square metre above that threshold, at a rate to be determined following an initial survey. This tax would be in addition to the land value tax. Clearly, most people would be unaffected by this measure, and would only be of concern to the very wealthy.

Myths concerning LVT

Although forms of LVT have been successfully implemented in various parts of the world, various vested interests – notably big landowners and their associates, as well as most mainstream economists whose theoretical approach ignores land altogether – continue to perpetuate a number of myths regarding LVT. The full report lists a dozen such myths, together with the counterarguments that expose them as myths.

From each according to their means p 35

7. Wealth Tax RECOMMENDATIONS 1 Introduce an annual wealth tax of 2 per cent, and higher rates for the ‘mega rich’, once the principle, and the administration for collecting, a wealth tax had been established.

2 End ‘non-resident’ and ‘non-domiciled’ exemption from UK income and wealth taxes.

3 Take steps to prevent capital flight by implementing robust capital controls.

4 Retain the Inheritance Tax, more or less as it is, eliminating the various loopholes through which it can be avoided, until such time other taxes on wealth, land and property have been introduced.

BACKGROUND TO RECOMMENDATIONS

A wealth tax has previously been advocated by Labour. It was included in the 1974 Election Manifesto and Chancellor Denis Healey committed the Party to it in his first budget. He published a Green Paper on the subject, and said that it should be considered by a Select Committee of the House of Commons. The paper stated: “The fundamental purpose of the wealth tax is to make the distribution of the tax burden accord more closely with taxable capacities and thereby contribute to the creation of a more equitable society in which social divisions characterised by wealth are reduced and in which social and economic power created by the possession of wealth is less concentrated than at present.”

This proposal was compatible with wealth taxes charged at sufficiently low rates to enable them to be paid out of income, without significant redistribution of existing accumulations of wealth – as is the case in nearly all countries that have operated wealth taxes over the years. There was – and is – a crucial economic distinction between wealth taxes paid from income, and wealth taxes which could only be met from sale of assets.

Healey would have been well aware of the ambiguity but hesitated to commit himself one way or the other.

A wealth tax remained a Labour Party commitment, repeated in the manifesto for the 1979 and 1983 elections, but it was dropped thereafter. In recent years, The People’s Charter has breathed new life into the concept as an alternative to austerity and the working class paying for the financial deficit.

Wealth distribution

The Office for National Statistics (ONS) reported in December 2012 that total personal wealth in Britain in the 2008-10 survey was £10.3 trillion, rising from £9.1trillion in p 36 From each according to their means

2006-8. It is heavily concentrated at the top, so that the richest ten per cent of households (some 2.6 million out of a total of 26 million households) own £4.5 trillion, while the bottom half of society owns less than ten per cent. Indeed, the wealthiest ten per cent of households are 4.4 times wealthier than the bottom fifty per cent of households combined.

The biggest gap between rich and poor is in pensions. The ONS found that the top ten per cent had built up pension savings averaging £742,000, whereas the bottom fifty per cent had no net property wealth and just £4,000 in pension savings. Given that it is the wealthiest who engage in tax avoidance, these figures must underestimate the gap between the rich and poor.

The proposed wealth tax

One option would be to introduce a one-off wealth tax of 20 per cent, to be paid over a period, with a modest rate of interest. This would raise about £900 billion. Practical means of collecting the tax are contained in the 1974 Green Paper. The threshold for payment would be about £1 million worth of assets and the tax would be paid on the net market value on the valuation date of the taxable wealth of every assessable person and trust. There could be reasonable exemptions: for example, property and important works of art made irrevocably accessible to the public. One of the economic arguments in favour is that the tax would have the effect of re-circulating some of the nation’s resources that has been used to inflate property values. This ‘dead money’ would become government spending that would stimulate growth.

However, a better option would be an annual wealth tax of, say, 2 per cent, which, it is estimated, could initially raise £90 billion per annum – in other words, almost enough to close the current budget deficit of £120 billion. This annual contribution would grow in line with the established tendency of the wealth of the very rich to grow faster than the economy as a whole.31 Furthermore, having established the principle of, and the administration for collecting, a wealth tax, a more progressive application would be possible with higher rates for the mega-rich.

It is further proposed that the wealth tax should be extended to ‘non-resident’ British subjects,32 and that exemptions available to British residents who maintain that Britain is not intended to be their permanent home (‘non-domiciles’) should be abolished. Should it prove impracticable to levy a wealth tax on their overseas assets, a substantial withholding tax should be imposed in return for leave to stay in Britain. The exemption of foreigners from British taxes on their British investments should also be ended.

Capital Flight

Arguments against the introduction of a wealth tax include: that it would lead people to transfer capital assets such as insurance funds abroad; that it would result in a big movement of banks, insurance and shipping businesses out of Britain; that it and would encourage people to seek non-resident status, resulting in a large outflow of dividends and interest; and that foreign employees in foreign companies resident here would be subject to tax, further encouraging the movement of businesses out of Britain.

Some of these risks may be exaggerated. Others might have less serious consequences than is feared. The more damaging ones could be addressed by imposing capital controls.

In the final account, the prospects for a wealth tax will depend upon the political strength of its proponents, inside and outside Parliament – that is to say the balance of power between the working class together with allied social groups, and the capitalist class together with the media under their control.

From each according to their means p 37

Inheritance Tax

In the long run, a wealth tax as proposed above, together with the introduction of a land value tax, and a selective buildings tax, as proposed in Chapter 6, which would act as easyto-collect wealth taxes with regard to land and property, would largely obviate the need for a separate Inheritance Tax. However, it would probably be best to retain the Inheritance Tax more or less at it is for the time being – but removing the major loopholes that enable avoidance – until it has been possible to introduce those other taxes, and they start to take their effect.

A tax on newspaper ownership?

The ownership of a national newspaper confers particular benefits on those who can control, either directly or indirectly, the newspaper’s editorial content. Many of these individuals are non-resident or ‘non-domiciled’. The benefits they derive from ownership take the form of political influence rather than the level of profits of the newspaper. The benefits of newspaper ownership cannot therefore be taxed with a profits tax or a wealth tax. It is therefore proposed that the government should mount a public debate concerning newspaper and other media ownership and the resulting anti-working class bias – perhaps commissioning some independent research, untainted by business interests, into ways of taxing media ownership to ensure more balanced reporting.

p 38 From each according to their means

8. Indirect Taxes RECOMMENDATIONS 1 Retain VAT but reduce the standard rate to 15 per cent.

2 Raise the rate of VAT on domestic fuels to the standard rate, introducing a rebate scheme through the National Insurance system that would be subject to tax, thus ensuring that the main beneficiaries would be the low paid.

3 Retain the zero-rate for VAT on foods, children’s clothing, and books, until such time as the government has increased the minimum wage, pensions, and welfare benefits sufficiently to compensate for a higher rate of VAT. 4 Raise the minimum wage and basic pension, and other benefits to compensate for the regressive aspect of VAT. 5 Abolish the exempt status for VAT on private schools fees, and also their charitable status.

6 Retain schemes to vary the rates of VAT and/or Excise Duties to achieve particular policy objectives.

7 Retain Excise Duties more or less as they are.

8 Retain the Insurance Premium Tax much as it is now.

BACKGROUND TO RECOMMENDATIONS

An indirect tax is a tax levied on goods or services rather than individuals. It is ultimately paid by consumers in the form of higher prices. Some indirect taxes act as, or have taken on the character of, environmental taxes, including Fuel Duties, Vehicle Excise Duty, and Air Passenger Duty. These are covered Chapter 9. Indirect taxes together account for about 30 per cent of total receipts.

Indirect taxes typically satisfy only five of the ten criteria mentioned earlier, as follows: ■ Generally simple to understand; ■ Predictable; ■ Unavoidable ■ Compatible, or should be compatible, with one another and free from concerns about double taxation, at least in an international context (although it is not unusual for one commodity to bear two or more indirect taxes); ■ Objective to assess.

Whether or not indirect taxes are transparent is debatable. Consumers are typically unaware of how much they are paying in indirect taxes, and only become aware when the taxes are changed. Although often used by politicians for dubious ends, the term ‘stealth tax’ can indeed be accurately attributed to most indirect taxes.

Indirect taxes generally fail to satisfy other criteria, namely: ■ They do not reflect the ability to pay; ■ Unless targeted at items consumed only by the wealthy – seldom the case – they are not redistributive; From each according to their means p 39

■ They are susceptible to pressure from vested interests – for example the pressure

routinely exerted by tobacco manufacturers to resist increases in tobacco duty; ■ They tend not to be socially just – that is, they fail to favour the interests of ordinary working people.

Indirect taxes represent a tax on consumption and can therefore be used both as an incentive to saving and to regulate the overall level of activity in the economy, perhaps targeting particular sectors, as required. Indirect taxes can also be used to stimulate or dampen the consumption of different types of commodity and services, and can be used to compensate for ‘externalities’ – that is costs that arise from consumption that are not born by the individual purchaser or consumer. In short, indirect taxes can play an important role in economic planning, and achieving social objectives such as a healthier population, as well as promoting a cleaner and more sustainable environment.

Value Added Tax

The principal indirect tax is Value Added Tax (VAT). As noted already, it was introduced in 1973 as one of the requirements on Britain for joining the then European Economic Community. Changes to VAT are constrained by our continued membership of the EU – which is not relevant to this discussion, since it is the policy of the Communist Party to withdraw from the EU. The introduction of VAT, and the steady increase in the rate of VAT from 10 per cent initially (later lowered to 8 per cent) to 20 per cent now, represents the most dramatic shift in taxation in Britain to date, such that its share of total tax revenue since 1973 has doubled. It is now the third largest source of government revenue (after Income Tax and National Insurance Contributions).

Some goods and services are zero-rated for VAT – for example, food, books and children’s clothing. Zero-rating on essential goods, and the lower rate of VAT on domestic fuel and power, are designed to compensate lower income groups who allocate a larger proportion of their expenditure to those items. However, although higher income groups spend a smaller proportion of their incomes on these goods, they spend more, and therefore are the main beneficiaries of zero (or reduced) rates of VAT. In order to meet equity objectives, therefore, it would be better if governments raised incomes for lower income groups, by raising the minimum wage, introducing a more progressive Income Tax, and increasing pensions and welfare benefits to compensate for higher rates of VAT on essential items. Removing zero-rating would have the advantage of removing the distortions in people’s consumption decisions that result from differential tax rates for different goods. But until a government undertakes such measures, the zero-rating for those items mentioned should remain.

For domestic fuel and power, it would make sense in order to promote energy efficiency to raise the rate of VAT to the standard rate (which, as stated above, should be reduced from 20 per cent to 15 per cent), and to compensate low income groups by introducing a rebate scheme through the National Insurance system, which would be subject to tax, thus ensuring that the main beneficiaries would be the low paid.

It is proposed that the exempt status of VAT for private schools fees, and also the charitable status for all private educational institutions (including ‘public’ schools) should be abolished on the grounds of equity.

The full report reviewed alternatives to VAT, and found none of these superior to VAT.

Other indirect taxes

The Insurance Premium Tax is a tax on general insurance premiums, designed to act as a proxy for VAT, which is not levied on financial services because of difficulties in implementation. Excise Duties perform an important role in regulating and controlling consumption of goods with significant externalities, such as alcohol, tobacco and petrol. It is proposed that both taxes be retained much as they are now. p 40 From each according to their means

9. Environmental Taxes RECOMMENDATIONS 1 Increase Fuel Duties in real terms to up to what they were at their peak, and beyond that, when politically possible.

2 Introduce a rebate for those driving mainly in rural areas, and for the lower paid, who need their vehicles to get to work, and increase investment in public transport, extending bus passes to citizens in all age groups – perhaps restricted to off-peak travel.

3 Undertake research on the introduction of road pricing through number plate recognition systems.

4 Retain the differential rates for Vehicle Excise Duty based on carbon dioxide emissions, increasing the rates over time, until such time a new carbon tax can be introduced (see below).

6 Retain the Air Passenger Duty until such time international agreement can be achieved to end the exemption of aircraft fuel from Fuel Duties and VAT. 7 Retain the Landfill Tax, the Landfill Allowance Trading Scheme, and the Aggregates Levy in their present forms.

8 Move as a matter of urgency to a ‘tax-and-dividend’ approach for addressing the problem of global warming – with Britain acting unilaterally, if necessary, by way of example, with the introduction of standardised carbon tariffs on imports.

BACKGROUND TO RECOMMENDATIONS

The role of environmental taxes is to change behaviour as much as to raise revenue, with the aim of minimising adverse environmental impacts, and generally promoting, and stimulating investment in, sustainable economic development. Such taxes are based on the theory that they internalise what would otherwise be social costs of pollution or the plundering of resources – which economists describe as ‘externalities’ of the activities of firms, or other institutions, or individuals.

By far the most important externality facing humanity is carbon dioxide emissions from the use of fossil fuels. This is the major cause of global warming, and, if allowed to continue at the present rate, will have catastrophic consequences.33 In fact, the problem is hardly being addressed at all, and certainly not with the urgency that is required. The Climate Change Levy, for instance, because of the various exemptions enjoyed by energy intensive industries, is almost having the opposite effect to what is needed. The most effective measure, agreed by most environmental economists, would be to introduce a sharply rising carbon tax on all fossil fuels at source based on the carbon dioxide their use will emit. What gets in the way is the neo-liberal economic order that more or less dictates policy at national and international levels, and the vested interests of the finance houses and the giant transnational corporations that dominate the global economy. Making the From each according to their means p 41

case for a carbon tax, in effect, challenges that order, which favours a market approach, As discussed in the full report, this approach has been totally ineffective in reducing emissions.

Considerable pressure will have to be mounted on governments if they are to introduce the steeply rising carbon tax that is required. This would be hugely facilitated if it was made clear that the revenue from the tax, instead of going to governments, would be distributed to all citizens on a per capita basis – a scheme first proposed by James Hansen, who is an expert on global warming – which he called the ‘fee-and-dividend’ approach,34 and renamed here as the ‘tax-and-dividend’ approach.

As discussed in the full report, governments are in a position to enact such measures unilaterally through the simple device of charging standardised carbon tariffs on all imports, and there is no reason why Britain should not set the pace, and go ahead with the proposal, even if other governments are reluctant.

The major advantages of the scheme are that it is more efficient, simpler, and less prone to distortions and corruption, than the alternative ‘cap-and-trade’ approach – which is the basis of the Kyoto agreement, and the EU approach to reducing carbon dioxide emissions. All that would be required is a simple system for collecting the tax at the point of power generation or manufacture of fuels. Administrative costs would be minimal, especially as those activities are highly concentrated among a small number of large firms.

Meanwhile, consumers would be compensated for the higher prices of goods and services that would result from the tax by the annual dividend they received. A further major advantage of the scheme is that it would encourage people to be more economical, and penalise those who are profligate. Furthermore, it would stimulate research and the development into energy resources not dependent on fossil fuels, thus obviating the need for subsidies for such activities, which tend to distort. To some extent, also, such a tax would obviate the need for other taxes on fuels. However, until such a time, taxes on the use of fuels need to be retained, indeed raised.

Fuel Duties

First, it should be noted that Fuel Duties are a not a good proxy for the damages caused by motoring. Thus, the appropriate tax on fuel consumed driving in central London should be many times that for someone driving mostly in rural areas. Furthermore, the extent to which Fuel Duties cover the externalities resulting from driving has tended to decrease over time, first because as traffic increases, the level of congestion rises, and second, as cars become more fuel efficient, so the Fuel Duty falls per kilometre. The introduction of congestion charging (which already exists in London), and road pricing, using number plate recognition systems, would be better options, the pros and cons, and practicalities of which, are discussed in the full report. A further problem with Fuel Duties is that they are somewhat regressive in that they discriminate against people with low incomes and for other purposes, perhaps because of the lack of public transport where they live.

However, until a better approach is available, there is a strong environmental case for increasing Fuel Duties substantially. A way of making Fuel Duties more acceptable to the public would be to hypothecate the tax (at least in part) to increased investment in, and subsidies for, public transport (from which, it should be emphasised, private car owners benefit because of the reduced congestion). Furthermore, a scheme could be introduced to compensate people on low incomes who need cars to go to work. p 42 From each according to their means

The existence of Fuel Duties should also act as an incentive for the development and purchase of electric vehicles. This would at least eliminate the local pollution that is caused by motor vehicles. In the short run, they would likely be much cheaper to run because they avoid Fuel Duties. However, once they became more common, it would make sense to tax operational costs not only to raise revenue, but also to take account of the externalities of electrical power generation and the disposal of batteries when they have ended their useful lives.

Other environmental taxes

As discussed in the full report, it is recommended that Vehicle Excise Duty, Air Passenger Duty, Landfill Tax and Aggregates Levy be retained more or less as they are.

From each according to their means p 43

10. Financial Transaction Taxes RECOMMENDATIONS 1 Retain the existing financial transaction tax on the secondary trade in shares (the Stamp Duty Reserve Tax), and extend it to bonds and financial derivatives, at a rate of 0.5 per cent.

2 Support a financial transaction tax (Tobin tax) on the trade in currencies at a rate of 0.05 per cent, not so much to raise revenue (which would likely be trivial), but in order for Britain to have greater control of its economic policy.

3 Any revenues from financial transaction taxes to go to the Exchequer, rather than directed towards economic aid to poor countries, as some advocate, on the basis that economic aid is better dispensed through a separately financed technical assistance programme that does not involve cash transactions.

4 Introduce a financial activities tax (a levy on banks’ profits and remuneration packages) at a rate of 5 per cent.

5 Retain the existing Bank Levy (a tax on bank debt) at an increased rate of 0.15 per cent for short-term liabilities and 0.075 per cent for long-term liabilities.

BACKGROUND TO RECOMMENDATIONS

The case for introducing new taxes on the financial sector is strong, first because, at present, it is relatively undertaxed, and, and second, to alter behaviour. The latter objective could, of course, be achieved more effectively by public ownership, but that is not the subject of this pamphlet.

Britain has had a financial transaction tax since the late seventeenth century, which is the tax on the secondary trade in shares, now called the Stamp Duty Reserve Tax. It is proposed that this be retained at the current rate of 0.5 per cent, and that it be extended to cover secondary trades in bonds and financial derivatives.

Much attention recently has centred on the attempts by the EU to introduce its version of a financial transaction tax (FTT), often dubbed a ‘Tobin tax’, after James Tobin, the economist who first proposed a tax on currency transactions, or the ‘Robin Hood Tax’ among those who believe that any revenue arising from financial transactions should be diverted to help the world’s poor. In fact, the object of the proposed EU FTT is to act as a source of funds independent of the governments of member countries. It has the backing of only 11 Eurozone countries. p 44 From each according to their means

The Tobin Tax

The financial transaction tax as originally proposed by Tobin in 1972 was specifically directed towards foreign exchange transactions, not trades in other financial products.

The EU proposal, in contrast, specifically excludes foreign exchange transactions (but not foreign exchange derivatives).

Tobin’s intention was not so much to raise revenue, but to make speculation less attractive. It was a response to the huge increase in volatility of exchange rates, caused by the growth of currency speculation following the collapse in 1969 of the Bretton Woods agreement, which the previous 25 years had done the job of stabilising exchange rates.

Thus, his main objective, as he put it, was ‘to preserve some measure of national monetary autonomy’. He proposed a tax of 0.05 per cent, which, as he pointed out, ‘is negligible for a one-time transfer but, if paid once a week, it cuts 2.5 percentage points off the annual rate of return and much more off the yield of day trading’. This buffer, 2.5 percentage points, he argued, ’provides the central bank with some room to move its own short term interest rate’.35 But the proposal was never implemented.

The limitation of financial transaction taxes

Today, currency trading amounts to some £400 trillion a year. This is fifty times the total value of goods and services traded globally each year. The difference, it is assumed, is due to the large sums used for speculation. Campaigners latch on to these figures, and also the sums involved in the speculative trade in other financial products, suggesting that a transaction tax of just 0.05 per cent could yield huge amounts – some £200 billion just on foreign exchange dealings – which, so it is argued, presents the opportunity to divert some of the enormous profits generated by the financial sector towards poverty alleviation around the world (hence the term ‘Robin Hood Tax’).

In the case of an FTT on currency trades, if the tax was doing its job according to Tobin, the amount traded would slump to around that required for the purposes of real trade, because it would no longer be worthwhile to speculate, which depends on very thin margins, and trading very large sums. It is likely therefore that nothing like the above figure could be raised. This is the dilemma for all financial transaction taxes: is their aim to curtail speculative activities that are detrimental to the functioning of the real economy, or are they to raise revenue, which may interfere with financial markets that may have beneficial effects on the real economy? But perhaps there is a more important question: do we indeed want exchange rates, and economic development in general, to be determined by financial markets? In other words, would it not be better to devise other, more direct, ways of curtailing speculation in financial products, which have a negative impact on economic development (such as exchange controls in the case of currencies)?

From each according to their means p 45

A consideration of such issues is beyond the scope of this report. Suffice to note here that until such alternatives have been enacted, financial transaction taxes if properly designed do have the potential to generate modest amounts of revenue (though nothing like that suggested by ‘Robin Hood’ campaigners), and also to play a role in reducing speculative activities or alter adverse behaviour in other ways.

Financial transaction taxes for Britain?

Until such other policy measures can be introduced, there is no reason why Britain should not extend the use of financial transaction taxes unilaterally, independently of the EU (from which it is the policy of the Communist Party and most supporters of an alternative economic strategy to withdraw). The main issue is that when setting the rate of tax, care must be taken not ‘to kill the goose that lays the golden eggs’, but at a level that might deter at least to some extent adverse speculative activities. Any revenue raised, it is proposed should go to the Exchequer, rather than directed towards economic aid to poor countries, as advocated by ‘Robin Hood’ campaigners, on the basis that economic aid should be on a bigger scale than what could be raised from financial transaction taxes, and that it is better dispensed through a separately financed technical assistance programme that does not involve cash transactions, which may end with the aid not reaching the intended recipients as is often the case.

A more lucrative source of revenue from the financial sector would be through the introduction of a Financial Activities Tax, which is a levy on the sum of banks’ profits and bankers’ remuneration packages. At a rate of 5 per cent, this could yield around £4 billion.

Furthermore, there could be scope for increasing revenue from the existing Bank Levy, which is a tax on banks’ outstanding debts (with certain exemptions). Since the doubling of the rate to 0.142 per cent for short-term liabilities (0.071 per cent for long-term liabilities) in January 2014, this is likely to yield around£3.4 billion per annum. Again, any increase in the rates would need to be balanced against the extent it may act as a disincentive for banks to lend (though part of the purpose of the Bank Levy is to discourage banks from making risky loans).

p 46 From each according to their means

11. Taxation & Revenue Redistribution within a Federal Britain RECOMMENDATIONS 1 In order to part fund a redistributive block grant to the individual Nations of Britain, 10p in the ÂŁ of Income Tax at the basic rate of 20p to be levied at Federal level and 10p levied at National level with the option of varying this up or down at National level. Similar proportions between National and Federal levels should be levied for higher tax bands. The one half rule should equally apply to whatever Income Tax bands may subsequently be set at Federal level.

2 The redistributive element within the block grant to be calculated on the basis of social need using the indicators recommended by the House of Lords Select Committee on the Barnett Formula.

3 National Insurance to be levied and distributed (as pensions and other benefits) at Federal level – with the exception that the income stream for Housing Benefit be distributed at National level (enabling National governments to use this income in accord with housing provision policies decided at National level).

4 In order to address the geographical inequalities in the distribution of all forms of wealth, taxes on corporate income and financial transactions, and individual wealth, land and property be levied at Federal level to sustain Federal expenditure and also to part fund the block grant to Nations.

5 Indirect taxes (for example,VAT and Excise Duties on fuel, alcohol, and tobacco, as well as environmental taxes) to be levied at National level.

6 In order to advance local democracy within the Nations of Britain and provide a source of income independent of Federal and National control, Local Authorities should have the power to levy an additional local surcharge on property values (residential and commercial), or, when introduced, land values.

BACKGROUND TO RECOMMENDATIONS

The Communist Party calls for a federal Britain with national parliaments for England, Scotland and Wales as a key interim stage in advancing democracy and limiting the power of big business.36 The Communist Party has called for home rule powers for Scotland and Wales since the 1930s. The party’s current programme the British Road to Socialism explains the place of federal parliaments within the overall strategy for socialism.37 It argues that such federal structures would strengthen the ability of the organised working class movement and its allies to combat the centralised power of finance capital and the From each according to their means p 47

big monopolies. It sees devolved national parliaments, with significant economic powers, as enhancing democracy in the full sense of working people being able to exercise greater control over the forces of capital. Such national parliaments should therefore have both the legislative power and the financial resources – for instance, to take public services, utilities and areas of production into public ownership. The Communist Party opposes all forms of federalism which seek to minimise redistribution at British level and which fail to provide powers to develop public ownership at national level. Subsequent to the Scottish referendum it has become even more important to oppose such reactionary federalism, organised to impose neo-liberal policies, and to promote those that can enhance social and economic democracy.

Taxation at Federal level

Major areas of taxation would need to be retained at Federal level (alongside control of monetary policy). Their main function would be redistributive: to ensure the taxation of financial and business activity and wealth is at a uniform level in a country where wealth, income and economic activity is geographically very unequally distributed and to redistribute tax revenue geographically in the interest of social equity. There would need to be a contra-cyclical flow of income to nations and regions in face of the uneven incidence of unemployment.

Taxation at National level

Taxation at National level would have two principal functions. One would be to provide a major part of the revenue needed to provide public services as determined democratically

by National parliaments and local government. The second would be to provide the tax base required to sustain public sector borrowing in order to enable National parliaments to invest in the ownership of utilities and some areas of productive industry.

The main heads of taxation at National level would be: ■ Indirect taxes (for example, VAT, Excise Duties on fuel, alcohol, and tobacco, as well as environmental taxes) on the grounds that for these taxes per capita yield in the different jurisdictions is roughly similar (and currently around 26 per cent of all tax38).

■ Taxes on income on the same basis as that proposed in the 2012 Scotland Act: that 10p in the pound, for all income bands, be removed from Federal Income Tax and National parliaments empowered to levy 10p in the pound or, if they so choose, a higher rate without prejudice to their share of a block grant disbursement from the Federal government based on social need – see below (Income Tax at the 10p rate currently produces about 13 per cent of aggregate tax income at Federal level39).

■ Taxes on income should additionally include the power to increase tax for higher bands more steeply.

The Federal redistribution of tax revenue between Nations within the Federation

Because economic activity is unevenly developed across the Nations of Britain, and because weak development usually coincides with areas of high social need, some element of redistribution based on demonstrated social need is essential. The current system does not adequately serve this purpose.

Currently, the Scottish Parliament and the Welsh Assembly fund their delegated p 48 From each according to their means

responsibility for the provision of services almost entirely out of a direct block grant from Westminster. The per capita value of this grant currently varies: Scotland receives 117 per cent of the British average; Wales receives 111 per cent; and England 97 per cent. These differences are intended to reflect, to some degree, differing levels of social need. They are calculated using the ‘Barnett Formula’.

In terms of calculating a needs based allocation at Federal level, the 2008-09 House of Lords Select Committee on the ‘Barnett Formula’ examined a range of measures of social need and concluded that it would quite feasible to calibrate the distribution of tax revenue in this way.40 The Commonwealth of Australia, among other countries, has successfully used such methods. The key indicators would be child poverty, standard mortality rate, the proportion of population under 16 and over 65, work-limiting disability, unemployment and household income per head. A smaller allowance would be made for dispersal of population (because the actual number of people living in dispersed rural communities in Scotland and Wales is small).

The block grant allocation of revenue to devolved administrations has to date covered just under half of all public expenditure in the Nations (and also notionally their share of government debt interest costs). Most of the rest is dispersed by central government to meet pensions and benefits. About 5 per cent is raised within devolved administrations through Council Tax and National Non-Domestic Rates.

Moving to a new system of a fully needs-based re-allocation would require a phased transition. It would also require, if it is to meet social need after the recent period of drastic cuts in public expenditure, an overall increase in taxes on wealth and a more progressive taxation regime, as outlined in this pamphlet.

From each according to their means p 49

Endnotes

1 It arose from a resolution passed at the 52nd Congress of the Communist Party which instructed the Economics Commission to review taxation policy. The views expressed are those of the authors, and not necessarily those of the Communist Party which is a democratic party whose policies are determined by its Congress.

2 Andrew Fisher, The Failed Experiment: How to build and economy that works, Conford and Miller, West Wickham, 2014. See also Thomas Piketty, Capital in the Twenty-First Century, Harvard University Press, Cambridge, Massachusetts, 2014.

3 Neo-liberal economic theory is an extreme form of neo-classical economics, which dominates teaching in our colleges and universities, and economic thinking among policy makers, more or less to the exclusion to all other approaches to economics. Policies based on neo-liberal economics have contributed much to the current economic crisis, which economists subscribing to those policies have been unable to explain. This underlines the need to change the terms of the debate and return to the defining principles of a Marxist political economy.

4 If the case for redistribution were not already self-evident, Wilkinson and Pickett have demonstrated that unequal societies are bad for almost everyone within them – the well off as well as the poor. (Richard Wilkinson and Kate Pickett, The Sprit Level: Why more equal societies almost always do better, Allen Lane, London, 2009.)

5 Office for National Statistics data as quoted by Fisher, op. cit.

6 See Richards Brooks, The Great Tax Robbery: How Britain became a tax haven for fat cats and big business, One World Publications, London, 2013, for an excellent discussion of this issue.

7 PriceWaterhouseCoopers, KPMG, Deloitte and Ernst & Young.

8 See Brooks, op. cit., p. 219.

9 Public Accounts Committee, Forty-Fourth Report, ‘Tax avoidance: the role of large accountancy firms’.

10 See Richard Murphy’s blog of 16 April 2013 for more on this: http://www.taxresearch.org.uk/ Blog/2013/04/16/the-general-anti-abuse-rule-is-a-step-in-the-right-direction-but-we-have-a-long-way-to-go-to-hetthe-attack-on-tax-avoidance-right/ 11 Michael Meacher, Morning Star, 3 June 2013.

12 See Michael Meachers’ letter to The Guardian at: http://www.theguardian.com/business/2013/sep/05/draft-billagainst-tax-avoidance 13 Nicholas Shaxson, Tax Havens and the Men Who Stole the World, Bodley Head, London, 2011.

14 The term ‘secrecy jurisdiction’ is preferred by some commentators, but ‘tax haven’ will continue to be used here, given its common recognition.

15 However, it should be noted that when account is taken of the various allowances and exemptions enjoyed by corporations to reduce their tax liabilities (see below), which may vary considerably between countries, the actual rate of tax paid in practice may be substantially below these headline figures.

16 For more information, see the excellent report by Sol Picciotto, ‘Towards Unitary Taxation of Transnational Corporations’, Tax Justice Network, December 2012 (available at www.taxjustice.net/wp-content/uploads/2013/04/ Towards-Unitary-Taxation-Picciotto-2012.pdf ).

17 In 2013, the total relief for individual donors amounted to £1.1 billion, mostly divided equally between higher Income Tax relief and Inheritance Tax relief. On top of that, charities receive £3.3 billion of tax relief, about 50 per cent of which is from National Non-Domestic Rates, and Gift Aid, which amounts to just over £1 billion (see www. hmrc.gov.uk/statistics/charity).

18 See, for instance, Report on Abuse of Charities for Money-Laundering and Tax Evasion, Centre for Tax Policy and Information, Organisation for Economic Co-Operation and Development, Paris 2010 (www.oecd.org/tax/exchangeof-tax-information/42232037.pdf ).

19 Layfield Report, Local Government Finance, Report of the Committee of Inquiry, Cmnd. 6453, HMSO, London, 1976. Cited in, J A Kay and M A King, The British Tax System, Fifth Edn., Oxford University Press, Oxford, 1990; p. 149, from which much of the rest of this paragraph is drawn.

20 See full report for a more detailed discussion.

21 Calculated from figures in National Insurance Fund Account 2011-12, Stationary Office, London, 2013. Note that all figures given in the National Insurance Fund are net of the NHS allocation, which is taken into account in the figures here.

22 Employees and employers paying into a salary-related pension scheme pay NICs at slightly reduced ‘contracted out’ rates. For employees, this is 10.6 per cent on earnings between the Primary Threshold and the Upper Earnings Limit, and above that 2 per cent, as before; and for employers, it is 10.4 per cent between the Secondary Threshold and the Upper Accrual Point, and above that, 13.8 per cent. p 50 From each according to their means

23 In fact, the National Insurance Fund in recent years has always been in surplus. In March 2012, for example, it had a surplus of £38.6 billion. Such surpluses are loaned to the government – in effect, funding activities that were never meant to be funded by NICs – through the Debt Management Office, part of the Commissioners for the Reduction of the National Debt in Call Notice Deposits (previously invested in gilt-edged securities), which in 2011-12 earned the National Insurance Fund £189 million in interest at 0.48 per cent.

24 One of the many contradictions in neo-classical economics is that capital markets are good because they are ‘efficient’, but if they are efficient it is impossible for investment managers to provide consistently superior investment performance without using insider information whose existence is inconsistent with market efficiency.

25 For a more detailed discussion of Britain’s pension system, and how it could be reformed, see Jerry Jones, The Future of Pensions: How to Ensure a Decent Retirement for All, Communist Party of Britain, 2006.

26 An important feature of hypothecation as far as the public is concerned is to ensure that all of the hypothecated revenue goes towards what it is earmarked for, with any surpluses going into a contingency fund, or carried forward to the following year. Otherwise, confidence in the system would be lost (just as it is now for taxation in general).

On the other hand, if the scheme needed a top up from other sources of revenue, this would not matter as far as that issue is concerned. For a full discussion of the pros and cons of hypothecation, see Paying for Progress, A New Politics of Tax for Public Spending, Fabian Society, London 2000; pp. 154-185.

27 Land value tax should be carefully distinguished from the development land tax introduced under different guises by Labour governments between the 1940s and the 1970s (only to be abolished each time by a subsequent Conservative government), which is merely a tax on the uplifted value of a site, following a change in planning consent. It has quite different economic and behavioural consequences, in that it tends to delay the development of a site, whereas LVT provides every incentive to develop the site in line with prevailing planning regulations. See Jerry Jones, Land Value … for Public Benefit, Labour Land Campaign, 2008, Chapter 5; and, in more detail, V.H. Blundell, ‘Labour’s Flawed Land Acts 1947-1976’ in Nicolaus Tideman (Ed.), Land and Taxation, ShepheardWalwyn, London, 1994; both are available at www.labourland.org.

28 See Manifesto of the Labour Land Campaign: Towards a fairer tax system and a more just society, Labour Land Campaign, 2011, available at www.labourland.org, and Jones, op. cit.

29 As discusssed in the full report, over time, in order to optimise the economic impact of LVT, these different rates of LVT would need to converge towards the standard rate (in parallel with reducing other taxes).

30 Property Data Report, July 2010 (Paul Mitchell Real Estate Consultancy Ltd., at www.pmrecon.com).

31 See Piketty, op. cit.

32 Classified as those spending less than 183 days in Britain in the tax year, or an average of 91 days per tax year over four years.

33 For a brilliant and highly readable account of the scientific basis of global warming, the politics of combating it, and the consequences for humanity if we do not, see James Hansen, Storms of My Grandchildren: The Truth about the Coming Climate Catastrophe and Our Last Chance to Save Humanity, Bloomsbury Publishing, London, 2009.

34 Ibid., Chapter 9.

35 James Tobin, ‘An idea that gained currency but lost clarity’, Financial Times, 11 September 2001.

36 Note that the Communist Party does not recognise the legitimacy of Northern Ireland as a political entity. It argues for a united Ireland and a political process whereby those currently supporting a separate political entity in the North are won to see the advantages and legitimacy of a single sovereign Irish state. Until this has been achieved it would refer consideration of the proposals for restructuring the current responsibilities of devolved parliaments to our sister party in Ireland.

37 Britain’s Road to Socialism, June 2011, pp. 28 and 30 38 The 2013 Government Expenditure and Revenue Scotland provides figures for the amounts raised at Scottish and UK level and their relative proportions under all tax heads http://www.scotland.gov.uk/Topics/Statistics/Browse/ Economy/GERS 39 Scotland Act 2012 http://www.legislation.gov.uk/ukpga/2012/11/contents/enacted. Scotland Bill White Paper CM 7973 November 2010 40 House of Lords, session 2008-09, SC on the Barnett Formula, Report 9 July 2009. HL Paper 139 http://www. publications.parliament.uk/pa/ld200809/ldselect/ldbarnett/139/139.pd

From each according to their means p 51

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