New curbs on tax relief given to high earners could be part of trade-off to abolish 50p top rate of tax before 2015 election
A crackdown on generous tax breaks for pension contributions for top earners could be on the cards in behind-the-scenes coalition negotiations in the runup to the budget.
New curbs on the tax relief given to high earners are being examined as the Liberal Democrats concede that David Cameron is unlikely to bow to calls for a so-called mansion tax in exchange for scrapping the 50p top rate of tax, according to the Times (paywall).
The move to target high earners, particularly those earning more than £150,000 a year, would be part of the coalition trade-off that would allow the chancellor, George Osborne, to abolish the 50p rate before the 2015 election as Cameron remains resistant to the Lib Dems' favoured 1% tax on the value of a home above £2m.
However, a source told the Times the issues were "by no means in any way close to being concluded".
On Tuesday Vince Cable, the Lib Dem business secretary, appeared to indicate that the mansion tax was on the negotiating table as a an offering the Tories might exchange for his party's agreement to the scrapping of the 50p tax rate.
He told Radio 4's Today programme: "If the 50p rate were to go – and I and my colleagues are not ideologically wedded to the 50p tax rate – if that were to go, it should be replaced by taxation of wealth, because the wealthy people of the country have got to pay their share, particularly at a time of economic difficulty.
"How exactly that is configured is a detailed matter for negotiation, but that principle must be upheld, and the mansion tax is actually a very economically sensible way of doing it. But there are different ways of approaching it."
But by Tuesday night, senior Liberal Democrat sources played down the prospects for a mansion tax, saying they could support the abolition of the 50p rate as long as its funding came from some other form of tax on the wealthy. The Times said the curb on tax relief for higher earners, which could raise billions of pounds a year, was one of the other ideas they had put forward.
Osborne is more open to the idea of a tax on wealth than the prime minister, who is highly suspicious of increasing tax on property. The chancellor believes that the best bet is to close down loopholes on stamp duty that allow millionaires to register new properties in the name of overseas companies. This means they pay 0.5% in stamp duty on properties worth more than £1m rather than the standard 5%.
Osborne warned on Tuesday that there would be no "unfunded giveaways" in the budget on 21 March. In a speech to the annual dinner of the EEF manufacturers' organisation, he said: "By facing difficult decisions head on, we have won the credibility which will allow us to constrain inflationary pressure, support long-term low interest rates and provided the stability that creates the space for private sector investment. I have a budget in two weeks' time, I can tell you: we are not going to put that credibility and stability and low interest rates at risk.
"The days of unfunded giveaways are over – and they're not coming back in this budget. Everything has to be paid for."
As Osborne prepared his budget, the government's handling of economic recovery was questioned in a leaked letter sent by Cable to the prime minister in which he warned that the government lacked a "compelling vision" beyond tackling Britain's record fiscal deficit.
The business secretary told Cameron in his letter that the government could not rely on markets alone to revive the economy, and called on No 10 to accept that the Royal Bank of Scotland would have to be broken up.
In the most sensitive section, Cable wrote: "I sense … that there is still something important missing: a compelling vision of where the country is heading beyond sorting out the fiscal mess; and a clear and confident message about how we will earn our living in future … We can be more strategic and the economic backdrop will increase demands that we are ambitious."
Lord Tebbit, a former cabinet secretary, claimed Cable's intervention on the wealth tax and the leaked letter were for party political reasons ahead of the Lib Dems' spring conference and the local elections.
Tebbit told BBC Radio 5 Live: "The normal way in which government works has broken down. Mr Cable's letter should not have surfaced in this way at all. These are matters that should be thrashed out between colleagues in an orderly fashion, as we used to, through the means of cabinet and cabinet committees, before individuals give vent to ideas and thoughts which, if they'd talked them through with their colleagues, they might have realised were misplaced."
Tebbit called the possibility of adding a mansion tax to the 50p rate "madness". He said: "There is a case to be argued over the 50p tax rate but if it goes it doesn't need to be replaced with anything, because it actually reduces revenue, not increases it. Everyone knows that. And there's an argument to be had over whether you should tax capital or not. Some people think you should. But that's an argument you conduct in a civilised matter with colleagues. You don't break down the entire way government works just for the sake of making a political point for your party conference."
The leaking of the letter coincided with a speech by Ed Miliband in which the Labour leader called for new patriotic economic policy to give British firms a better chance of competing with their foreign rivals.
Miliband accused the coalition of letting British business down by sticking to the view that government should "get out of the way". "To work, an active industrial strategy must have real vision, real drive right across government," said Miliband. "And I don't think the government gets it."
Comments