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Mr. Deputy Speaker forthwith declared the main Question, as amended, to be agreed to.


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Fair Taxation of the Wealthy

Mr. Deputy Speaker (Sir Alan Haselhurst): I must announce that Mr. Speaker has selected the amendment in the name of the Prime Minister.

7.31 pm

Dr. Vincent Cable (Twickenham) (LD): I beg to move,

I am grateful for the opportunity to introduce a debate on this subject on behalf of my Liberal Democrat colleagues. I am also grateful to House of Commons staff who, after much deliberation, admitted the word “fair”, which I believe was quite controversial.

There are usually two broad approaches to debates on taxation. One is the argument about the level of taxation in the economy. Indeed, arguments have raged backwards and forwards between the parties as to whether as a country we are over-taxed or under-taxed. This debate is not about that subject. As I understand it, although the Conservatives approach the problem from the opposite direction, they broadly accept the current share of taxation in the economy, at least as an initial starting point, and are arguing about whether tax should be applied in a more sensible and equitable way. We believe that within the current level of taxation it would be possible to have a system that is fairer, simpler and greener. I want to focus on the first of those—the concept of fairness, by which I mean paying greater attention to the distribution of income and wealth.

To introduce some precision to the concept of fairness, it would probably help at the outset to monitor some of the recent trends in income and wealth distribution. It is fairly clear that since the Government came to power in 1997, income distribution as measured by the standard Gini coefficient initially deteriorated. It was rather odd that the Government were talking about fairness and equality after a long period of Conservative Government, yet for a considerable time income inequality widened. Subsequently, it has levelled off and is now roughly back to where it was in 1997. I guess that one of the major contributory factors was tax credits. Although Members on these Benches and on the Opposition Benches generally have been very critical of the tax credit system because of its administrative failings, there is little doubt that many people have benefited from it and it has contributed to the stabilisation, at least, of the income inequality measure.

The distribution of wealth, however, has become significantly worse. If we track the share of marketable
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assets held by the top 1 per cent., 5 per cent. or 10 per cent. of the population, we find that their share increased from 1997 to 2003 while the share of the bottom 50 per cent. shrank. Unfortunately, we cannot track what happened since 2003 because the Government no longer publish the data. They say that there are “methodological problems” with that. It is a tricky thing to measure, so I will be generous and acknowledge that that could be the reason, but it could also be rather embarrassing and so they do not wish to publish such data. None the less, we do not have data beyond that date. Such as we have suggest that the distribution of wealth was deteriorating during the Government’s first six years in office.

The context in which we can assess the trends in income and wealth is difficult because of broader global trends. However progressive any Government wish to be, it is difficult to maintain an approach to income and wealth equality of the kind that was possible in more closed economies. We now have virtual freedom of movement of capital, and capital migrates to areas with the highest rates of return—that is the way the market works. That is true also of many people with high levels of skill and entrepreneurial ability; they pursue the best returns. It is probably also true that, because of the large-scale entry of China and, to some extent, India to the world economy, real wages have come under pressure everywhere. It is difficult for any Government in any circumstances to maintain very close levels of equality in an open economy. I start out by recognising that.

For that reason, it is probably best to look at comparative measures of how other rich countries perform. I recently dug out some data on the distribution of wealth. There is not a great deal of it around and it is difficult to compile. One set produced by the Central Intelligence Agency—perhaps an original source—which was put together by the Economic and Social Research Council, shows that although Britain has a more equal distribution than the United States, it has a substantially less equal distribution of family wealth than almost every other developed country. It is much worse than Scandinavia, France, Germany and most eastern and southern European countries. The same relative conclusion is reached in a parallel study carried out by an organisation called WIDER—the World Institute for Development Economics Research—which I believe is linked to the United Nations university.

Although it is understandable that because of the mobility of capital and skilled labour and the pressure of labour competition through trade, equality of income and wealth are under pressure, Britain seems to have become a relatively unequal country. One can reasonably ask that the Government do not pursue policies that make those disparities worse. I would like to concentrate on several of those policies, related specifically to taxation as it applies to wealth. We do not have a wealth tax in this country—it is probably no longer a practical concept, though the Swedes and French have tried it—but we have proxy taxes for wealth. We have taxes on capital gains, and taxes on stamp duty and inheritance, so I want to consider how those systems work and particularly some of the exemptions for non-domiciled investors—one of the main concessional areas of tax policy. There are, of
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course, much wider aspects of tax policy relating to income tax, tax credits and council tax, which colleagues and others might wish to refer to, but I will narrow my remarks to the areas that I have defined.

Mr. John Redwood (Wokingham) (Con): Will the hon. Gentleman explain how it would be fairer to impose a poll tax or rubbish tax on people on low incomes in addition to their local income tax, which he proposes? Why would it be fairer to charge small businesses extra business rates if there happens to be an improvement in their neighbourhood that they could not control and that does not benefit them? Under the hon. Gentleman’s supplementary business rate proposals, that would mean a big leap in their business taxes.

Dr. Cable: I am not quite sure where the right hon. Gentleman has got the idea that we are proposing a poll tax on people on low incomes. He has wholly misunderstood that. The only taxation relating to individuals that we propose is the complete elimination of the council tax system and its replacement by local taxation based on ability to pay.

Mr. Redwood: The hon. Gentleman should read section 4.0.12 of his document, “Reducing the Burden”, which states that Liberal Democrats “support giving authorities” the “powers to introduce” rubbish taxes.

Dr. Cable: If the right hon. Gentleman read the document more carefully, he would discover that—if he is talking about the collection system, which has been controversial in the Communities and Local Government Committee—we are in favour of giving local authorities discretion. Surely the right hon. Gentleman, who I know is a highly economically literate man, would accept that where there are pollution and externalities, they have to be properly charged for. That applies to waste disposal as to other things.

The first of the major exemptions given by the Government is in relation to capital gains tax. In 1997, the system inherited from the noble Lord Lawson had the merit of simplicity, as capital gains were taxed at the same rate as income. The system worked reasonably well and was accepted by businesses as providing reasonable incentives. I recall—the right hon. Member for Wokingham (Mr. Redwood) is probably the only other Member present who was part of the discussions—that a radical change in the capital gains tax regime was introduced by the hon. Member for Coventry, North-West (Mr. Robinson).

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

The issue has surfaced in the context of so-called private equity companies. I shall not use this debate as an opportunity to speak for or against that form of corporate governance—there are arguments for and against it—as it is not the right context. Some of those companies, however, have availed themselves of generous tax relief, and have created the situation in which they hold on to assets as a result of carried interest for several years—two years if they are classified as a business—and pay as little as 10 per cent. in tax. That gave rise to the popular story about private equity companies paying tax at 10p in the pound, and their cleaners paying tax at 20p in the pound.

Criticism has come from outside the industry, some of which is well informed and some less so, but it is worth quoting one of the leading advocates of that method of corporate governance, Jon Moulton, of Alchemy Partners, who has been doing that kind of business for many years. He said in relation to his own business:

as a result of leveraged buy-outs. He acknowledges the enormous cost to the Exchequer of the concession that his industry has been granted.

One could argue that that problem could be dealt with selectively. There was a memorandum of understanding under which that form of carried interest was allowed tax relief, and that could simply be closed and dealt with on a selective basis. That would probably be unfair to the private equity industry, however, as such companies are only one of several types of company taking advantage of such a generous loophole.

To give an example that has nothing to do with private equity, in Property Week a few weeks ago, the retiring chairman of British Land, Mr. Ritblat, described his experience:

He was not claiming in any sense that he had contributed to entrepreneurial endeavour; he had simply found a way of managing his property portfolio in a way that saved himself enormous amounts of tax as a result of the Government’s taper relief concession. We would argue that that tax relief has been grossly, excessively generous, with very little positive economic outcome. It is a strange form of tax, as the total tax yield to the Government—£4 billion—is considerably less than the Government’s own estimate of the value of the relief, which is £6 billion. We would argue for going back to the much simpler system that the Government inherited in 1997.

The second group of tax measures that I want to discuss is those relating to non-domiciled investors.
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The concept has been around for roughly two centuries—since income tax was introduced. From its inception, it was understood that it would be fair and an encouragement to the City of London, which was then in its embryonic form, for people to be taxed on their income in Britain but not on the income that they accrue overseas if they have good claims to be non-domiciled and not to have strong, traditional connections with this country. That developed in an ad hoc way, and was formalised first after the first world war, and secondly after the second world war.

It is clear that that system has caused some dissatisfaction, probably expressed most cogently and aggressively by the current Prime Minister when he was the shadow Chancellor of the Exchequer. In 1994, he undertook to close the loophole under which

He did not lose sight of that concern: in the pre-Budget report of 2002, he returned to the subject. He argued that we need to revisit the question:

to a country

He initiated an inquiry into the non-domicile tax regime in the following terms:

He initiated an inquiry in the Treasury with a view to tightening up those rules.

The spirit of the age was also expressed by Mr. Peter Mandelson, as we can now call him, who described the new Government as “intensely relaxed” about people getting filthy rich, as long as they paid taxes. He was anxious that the Government should close down the loopholes.

The question arises: how do the loopholes operate, and do they operate entirely in accord with the spirit of non-domicile?

Steve Webb (Northavon) (LD): My hon. Friend mentions the comment about being relaxed about the wealthy getting even wealthier. Does he recall the then Prime Minister being interviewed on “Newsnight”, being pressed repeatedly on whether it was a bad thing that the gap between the rich and poor was growing, and serially evading the question? Given that our debate is about fairness in the tax system, is my hon. Friend as relaxed as Mr. Mandelson about that gap, or does he think that there comes a point beyond which gross inequalities are damaging to society?

Dr. Cable: I am not relaxed about that matter, as it is a subject of legitimate concern. There are two issues: one is whether one is relaxed about inequality; the other, about which Mr. Mandelson was quite right, is that one can be more relaxed, providing that the very wealthy pay their share of tax. In many non-domicile cases, it seems that tax is not being paid that should have been paid, at least if the spirit of the system was being observed. Let me describe one or two different
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ways in which the system now operates so that capital gain that accrues in the UK does not carry taxation.

We need only consider the evidence given by tax advisers, who are often quite public and free with their advice. Mr. Andrew Tailby-Faulkes, a tax partner at Ernst and Young, described some of the mechanisms currently employed.


That is a common practice among people who are in the City for several years. Another tax adviser, Lee Hadnum, author of “Non Resident and Offshore Tax Planning”, describes preferential tax treatment as

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

A third example, although tricky and technical, illustrates the opportunities that are now becoming available. It has generally been assumed that while it is possible for non-domiciles to find a way of not paying income tax and capital gains tax, inheritance tax is payable and is paid. One tax adviser, however, has described the mechanisms that are developing to prevent its being paid.

Mr. Philip Hammond (Runnymede and Weybridge) (Con): The hon. Gentleman speaks of taxes that it is difficult or impossible for non-domiciles to evade. Will he confirm that the one tax that they cannot avoid paying is the council tax that he proposes to abolish?

Dr. Cable: We are talking about people who are extraordinarily rich. The amount paid in capital gains tax is so trivial that it hardly makes a difference to the sums we are describing. If one is Mr. Mittal and one has just bought a £50 million house, paying £1,500 to the local council hardly constitutes a major contribution to British revenue.

Andrew George (St. Ives) (LD): The Conservatives introduced a council tax system under which £150 million a year was used to subsidise second homes for the wealthy when many thousands of people in constituencies like mine did not have a first home. Does my hon. Friend agree that, in contrast to the Conservatives, we need to think of ways of introducing a fair system to ensure that where scarce housing must be rationed, it is given to those who need it rather than to the wealthy who simply take advantage of second homes for investment purposes?

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