<b>Michael Meacher</b> argues that fiscal stimulus need not be based on tax cuts, as the pre-Budget report contends
AS THE parliamentary debate on the pre-Budget report has demonstrated, perhaps the biggest issue – and it’s still hotly disputed – is its affordability. After committing up to £500 billion to ease liquidity in the financial markets and encourage bank lending, plus £37 billion spent on recapitalising the banks, can the Government now afford the £21 billion package to help protect families and businesses in the recession?
True, the Government did offer one innovation to begin to address this dilemma – the new 45 per cent tax rate on those earning more than £150,000 a year. But even this was pretty feeble. It will raise a mere £1.6 billion a year, it is limited to the top 1.5 per cent of taxpayers and it will not be applied until 2011 – by which time the economy should be on the mend, when funding is actually needed now.
However, there are many other and more effective ways to make serious inroads into the ballooning deficit. This could be done by funding tax cuts and the bank bail-outs from sources other than open-ended borrowing.
Energy companies are currently making a huge windfall gain as a result of being awarded permits to pollute free of charge under the second stage of the European Union’s emissions trading scheme. Shell and BP, which have just announced quarter year oil profits of £6 billion each, are expected to make further unearned profits of £9 billion as a consequence of being allocated these permits free over the next four years. Ofgem, the energy regulator, has strongly encouraged the Government to charge in full for this privilege, as Spain already does within the EU. In this way, the Exchequer could recoup all or most of these windfall profits.
The same device could be applied to other industrial sectors which are very large emitters of greenhouse gases. At present, they are required to keep within emission limits negotiated with the European Commission. But pollution allowances are given free. If, on the principle accepted within government that the polluter pays, power generators, airlines and major manufacturing sectors were required to buy through auction, say, 10 per cent of the permits provided for each sector, the Government could raise as much as £30 billion a year. When Gordon Brown auctioned the wavelengths reserved for the mobile phone companies a decade ago, the sale raised £22 billion.
A third major source of additional revenue could come from a long-overdue serious crackdown on tax evasion and avoidance by the biggest businesses and very rich individuals. According to a recent report by tax accountancy expert Richard Murphy entitled The Missing Billions, the Treasury currently loses at least £25 billion a year from tax avoidance – £13 billion of it from super-rich individuals and £12 billion from the 700 largest corporations. In addition, a further £8 billion is lost from “tax planning” – changing the nature, timing or location of a transaction to reduce tax, or switching payment to a family member, trust or offshore company – by those on incomes over £100,000 a year. On top of this, tax evasion, which is illegal, is reckoned on the best estimates to cost the country a further £10 billion. If even half of that total of £43 billion lost each year could be clawed back by a stronger and better-resourced HM Revenue and Customs, the proceeds could create more than a million jobs.
Sadly, the plan is to run down HM Revenue and Customs by 25 per cent in the five years to 2010. Yet the Treasury calculates that each member of Revenue and Customs staff recovers on average 96 times their full cost of their employment.
Nor is combating corporate tax evasion so very difficult. The Treasury should tax at source – in other words, from the country from which payment is made – all income paid to banks or other financial institutions in tax havens. There is strong international pressure for this from the Organisation for Economic Co-operation and Development and especially Germany. The Treasury should also change the accounting rules to eliminate transfer mis-pricing by requiring corporations to report on a country-by-country basis. These two measures alone would dramatically reduce tax evasion and increase Treasury revenues.
Another major potential source of funding to fight the recession could be derived from rebalancing the current system of tax relief and allowances towards the lower-paid and job creation. At present, Inland Revenue statistics show that those paid more than £100,000 a year, who constitute just 2.1 per cent of the population, now receive no less than £8 billion a year in tax relief and allowances. In the case of pension tax relief alone, the Government spends £35.9 billion a year, according to official figures, of which more than half goes to higher-rate taxpayers. If these subsidies to the richest 2-3 per cent of the population were drastically pared down, it could generate an additional £10 billion-£15 billion a year for the Exchequer.
There are other obvious changes to the tax system that need looking at urgently in the crisis we are facing over the next year or two. There is a huge loss of tax revenues from undeclared share trading on the London Stock Exchange. It is known that the average market holding of portfolios is about 14 months, but even if individuals trade their portfolio only half as frequently as that, it would still, if collected, raise the revenue by some £4 billion a year. And collection could readily be secured by requiring automatic declaration by the stockbroker of all such deals.
At present, nearly 50 per cent of all commercial property in this country is owned by foreign nationals. Yet they almost always pay no British tax on these property sales – although British owners do. Charging full capital gains tax would raise £1 billion a year. If the extraordinary concession to private equity partners – that they paid only 10p in the pound on their enormous commissions, a lower rate of tax than their cleaners – were removed, and if the iniquitous non-dom loophole (whereby hyper-rich tycoons who spend up to half a year working in this country pay no British tax at all) were also removed, an extra £5 billion a year at least would accrue annually to the Exchequer.
There are several other options which, as Britain faces perhaps its longest and deepest recession since the Second World War, need to be examined afresh. A so-called Tobin tax on currency transactions in sterling could be adopted unilaterally – although it would be much better if it could be agreed internationally – and at a levy rate as low as 0.005 per cent could still raise over £3 billion a year.
Finally, this would be an appropriate time to review the increasingly regressive nature of this country’s direct taxation system. A marginal tax rate of 50 per cent on incomes above £100,000 would raise an extra £5 billion a year, while tapering the artificial ceiling on national insurance contributions at the highest levels could generate another £1 billion or more a year.
The options are there if the Government has the guts to use them.
Michael Meacher is Labour MP for Oldham West and Royton
