Nick Clegg: Speech on the Liberal Democrat approach to taxation

1.46.00pm BST (GMT +0100) Tue 20th May 2008

Nick Clegg

Liberal Democrat Leader, Nick Clegg today called for tax cuts for low and middle-income earners after a decade of tax hikes and unprecedented public spending rises.

During a speech to the Policy Exchange think-tank, Nick Clegg said:

"We are not ready to accept the Government's proposed overall level of taxation, and will look in depth at whether it can, and should, be cut.

"Over the course of eleven years of the Labour Government, we have seen National Insurance bumped up, Council Tax sky rocketing, stamp duty quadrupled, dozens of minor stealth taxes imposed, and now the 10p rate of income tax doubled.

"It is ludicrous that the poorest people still pay a higher proportion of their income in tax than the richest do. It is an immoral use of excessive taxation on those who can afford it least.

"Excessive tax can do enormous damage - especially to the poorest families, whose power in our society is already so limited. That is why the Liberal Democrats will focus all our attention on cutting taxes - from the bottom.

"The most disturbing development is the Prime Minister's penchant for surprise tax changes. It's a tombola tax system. Gordon Brown treats tax like Forrest Gump treats a box of chocolates - you never know what you're going to get.

"David Cameron cannot credibly argue that he wants to cut taxes and improve public services unless he says how - he has asked us to trust him but why on earth should we?

"Tory tax policies are all smoke and mirrors, striking postures whilst ducking all the tough choices.

"He has cried crocodile tears for the millions who lose out from this income tax hike. Crocodile tears because he has no policies to help the people who are suffering."

ENDS

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Notes to Editors - The full speech is below: - (Check against delivery)

When Labour came to power in 1997, the Government took three hundred billion pounds a year in tax.

This year the Government will take nearly double that.

They take one thousand seven hundred million pounds of our money every single day of the year.

That's more than £18,000 a second.

Gordon Brown as Chancellor and Prime Minister has presided over the largest hike in taxation of any Government for more than 30 years.

Over the course of eleven years of the Labour Government, we have seen National Insurance bumped up, Council Tax sky rocketing, stamp duty quadrupled, dozens of minor stealth taxes imposed, and now the 10p rate of income tax doubled.

In real terms we are now taxed over 150 billion pounds a year more than we were 11 years ago.

The question is: what for? What has this unprecedented rise in public spending achieved for us?

When Labour first took power they were faced with a health and education system on it knees.

18 years of wilful Tory neglect had ensured that our health service was under-funded and overstretched. Patients were suffering and millions of children up and down the country were condemned to learning - or too often, not learning - in inadequate and outdated schools.

So in 1997 it was inevitable that taxes were going to have to rise to sort this mess out.

The Liberal Democrats were the only party with the courage to say so, the only party that made the case for increased public spending to fund improvements to key public services - with our iconic pledge for a penny on income tax for education.

But after years of massive investment, funded by an ever increasing tax burden, and spiralling government debt, we need to ask whether we've got value for our money.

There have been real improvements in both our healthcare and education systems.

But I simply don't believe those improvements near match the funding we've put in.

Take the health service.

It's received huge increases in funding but only in return for ever more central bureaucratic control.

Central control that doesn't deliver.

Health inequalities are as wide as ever. Treatment for mental health patients is a national disgrace. Hospital-acquired infections are out of control in many areas. Precious local services are being torn out of communities to make way for treatment super-centres.

And the bureaucracy has caused scandal after scandal. The fiasco over junior doctors, bungled GP contracts, the chaotic NHS IT reforms.

These mistakes don't just reduce standards for patients - they also cost billions.

So any discussion over taxation today must not just ask "how much" - it must also address "how" we are spending public money. What we should do better and what we shouldn't be doing at all.

I'm here today to set out the Liberal Democrat approach to those questions.

And I want to commend Policy Exchange, who have done some really excellent work on these issues.

Basic Principles

Let me start with a basic principle.

Tax is not a good thing in and of itself. Tax is a means to an end.

So governments must never tax for the sake of it.

I know that sounds simple.

But the other two parties in Britain appear to have forgotten or misunderstood this straightforward idea.

Labour spends hand over fist, often with far too little regard for whether the money does any good.

And the Conservatives say they will stick to Government tax and spending levels, lock stock and barrel.

They're saying there is no debate to be had about how much of other people's money the Government takes.

They are turning a blind eye to half a trillion pounds a year.

The Liberal Democrats are different. We want to challenge - not mindlessly accept - the basic principles of the Government's plans.

We are not ready to accept the Government's proposed overall level of taxation, and will look in depth at whether it can, and should, be cut.

As Prime Minister, I would not be interested in spending a single penny of people's money unless I knew it was going to give a greater benefit than leaving it in their pockets.

Liberals support the basic social and economic case for taxation: a progressive taxation system can help widen opportunity, boost social justice and reduce excessive inequality; it allows the state to provide public goods and services; it funds the police, criminal justice system and the military to secure our collective safety; and it can play a vital role in discouraging behaviour which harms our environment.

But liberals also recognise the case against excessive taxation.

Because when you keep your money, you get to choose what you spend it on. You are empowered.

And when the Government takes your money, they choose what they spend it on. Your power is diminished - diminished to a single vote once in a while.

Excessive tax can do enormous damage - especially to the poorest families, whose power in our society is already so limited.

That is why we fundamentally believe in a progressive tax system - without exemptions and loopholes at the top - so that those with the broadest shoulders bear the heaviest burden.

It is ludicrous that the poorest people still pay a higher proportion of their income in tax than the richest do. It is an immoral use of excessive taxation on those who can afford it least.

The poorest people are already the most disenfranchised, and the Government worsens that disenfranchisement if they simply take away more money from them.

That is why the Liberal Democrats will focus all our attention on cutting taxes - from the bottom.

The Government's Failing Tax System

I want now to look at the tax system as it is today, what's wrong with it, and how we can fix it.

It isn't just the overall burden of tax that's hurting our economy but also its complexity and instability.

For ordinary families - and for businesses.

For families, the Tax Credit system has proved so fiendishly complicated that a third of all awards are paid incorrectly each year at a cost of £2bn - which is then demanded back.

Take up for working tax credits in some circumstances is as low as one in five. Only a fifth of people want the money they're entitled to.

We have the absurd situation where people are so afraid of and confused by the tax system that the Government literally cannot give money away.

So despite billions of pounds being pumped into tax credits and benefits - inequality continues to rise.

Tax is a mess for businesses too. The myriad of reliefs and allowances have made managers despair and tax accountants rich.

And it's getting worse.

The most disturbing development is the Prime Minister's penchant for surprise tax changes.

It's a tombola tax system. Gordon Brown treats tax like Forrest Gump treats a box of chocolates - you never know what you're going to get.

Businesses have learnt that from the day of the pre budget report until the day of the budget they must wait with bated breath.

First the Government comes up with a half-baked, back-of the envelope, un-considered tax change and then they spend the next 6 months desperately figuring out how to limit its damage.

This complexity and instability not only hurts our economy and hurts businesses who crave stability, but also damages the overall tax take.

It gives companies a huge incentive to fiddle the system wherever they can and, sometimes, to leave Britain altogether.

The Government's own figures show that we are losing up to £40bn a year through tax avoidance.

What the Prime Minister doesn't get - even after a decade as Chancellor of the Exchequer - is that the only thing all this complexity delivers is extra tax loopholes.

And it does nothing to make our tax system fairer.

Look at the capital gains tax changes brought in this year.

They were lambasted by the City but still allowed very highly paid people with clever accountants to pay a lower rate of tax than workers on the minimum wage.

And the doubling of the 10p rate?

This fiasco has highlighted the injustice of Brown's tax system.

More than any other of Brown's catalogue of mistakes as Prime Minister, it's shown how much he appears to have sacrificed the principles he once had for the sake of short term political tactics.

The tax system he's created is not fit for purpose.

We need comprehensive tax reform, simplification - and decentralisation.

Britain collects a higher proportion of its tax centrally than any other country in Europe - except for Malta, which has a population about the size of Croydon.

Our proposals to replace council tax with a simple local income tax, and localise business rates, will make it possible to transfer power over people's taxes to their own communities and give real impetus to our efforts to localise power in Britain.

Both the Labour and the Conservative Parties talk the talk of decentralisation, but refuse to put their money where their mouth is. In my view, this is a crucial dividing line in British politics: between those of us who believe decentralisation is meaningless without fiscal devolution; and those who pretend to the British people that decentralisation is possible whilst leaving the purse strings in the hands of the Treasury in London.

The Conservatives

David Cameron's Conservatives have deliberately decided to say very little of any interest or substance on tax.

They just have a tongue twisting formula about sharing the proceeds of growth which covers almost every single possible outcome.

As the Tory leader made clear yesterday he wants to try and turn his total lack of substance on tax policy into a virtue.

As in so many other areas of policy, his strategy seems to be simply to rely on the Government messing things up. With Gordon Brown's recent performance, this is perhaps understandable. But it's not good enough. No party deserves the keys of number 10 simply because it has done a spray paint job in rebranding itself. The British people deserve to know where the beef is.

David Cameron cannot credibly argue that he wants to cuts taxes and improve public services unless he says how - he has asked us to trust him but why on earth should we?

Tory's tax policies are all smoke and mirrors, striking postures whilst ducking all the tough choices.

A year after Brown announced the doubling of the 10p rate of tax, David Cameron became a superficial convert to the idea a progressive tax system.

He has cried crocodile tears for the millions who lose out from this income tax hike.

Crocodile tears because he has no policies to help the people who are suffering.

The million or more people who are paying more because of Brown's tax rise would be no better off under a Conservative Government than they are now.

Through the fog of reviews, half promises and u-turns it is often difficult to decipher what Tory tax policy is.

But they have made one thing clear: their prime target for tax cuts is dead millionaires.

Their only concrete tax policy is raising inheritance tax thresholds to £1m.

For all the talk about fairness, the Conservatives still believe it is most important to offer tax cuts to people who own - without even a mortgage - a house worth a million pounds - five and half times more than the average home.

David Cameron would rather give these people a tax cut than low paid families who've been nailed by Brown's tax rises, high debt costs and soaring food and oil costs.

So two years out from an election we know where Labour and the Conservatives stand.

On one hand you have a Government taxing low and middle income earners through the nose and on the other a Conservative party who won't do anything about it.

A Government that has taxed its population more than any other in a generation, and a Conservative party too haunted by its past to even question it.

At the next General Election the British public deserve an alternative to this cosy consensus.

The alternative is exactly what I intend to offer.

Liberal Democrat Tax Plans

We already have a radical tax package, cutting the basic rate of income tax to just 16p, to make work really pay for everyone.

And scrapping the unfair council tax, which hurts the poorest the most.

Council Tax bills have more than doubled since Labour came to power, and the poorest pensioners pay four times as high a percentage of their income than the richest working people.

Removing this unfair tax and replacing it with a fair local income tax will massively shift the tax burden away from the poor - and take many people on the lowest incomes out of tax altogether - those who don't pay income tax but are hit by the council tax.

It's absolutely vital that we make these tax changes if we want to make work pay.

At the moment, for every pound you earn over and above six thousand, at least 31p is lost in tax and National Insurance.

But for many, because of the loss of tax credits and means tested benefits like Council Tax benefit, much more is lost. 1.8 million people face an effective tax rate of more than 60%.

For the worst affected, the tax rate can be 90p in every pound. And almost all of them are low earners.

The moment you add in the cost of childcare - or travel to work - for far too many people work is just not a viable option.

And that impacts on the economy.

Families who are dependent on benefits and discouraged from working don't have the incomes for the consumer spending the economy needs.

So these tax cuts are at the heart of the Liberal Democrat plans.

And we will make up the money by taxing pollution and reforming capital gains tax and pensions tax relief.

Switching over £8bn of taxation from income to pollution is and will continue to be one of the corner stones of Liberal Democrat tax policy.

The other two parties' environmental credentials will not stand up to closer inspection unless they are prepared to use green taxes to change behaviour.

On pensions, we believe everyone should be entitled to basic rate relief on their pension contributions - but higher earners shouldn't get extra money by getting higher rate tax relief.

And when it comes to Capital Gains Tax, I look to that great socialist reformer... Nigel Lawson.

Following Lawson's model for CGT, we will index-link capital gains and then tax them as income.

No more will hedge fund managers be able to present their income as capital to secure themselves an 18% tax rate, while their cleaners pay 31%.

Finally, we will dramatically simplify business tax. The Government's constant tinkering fails to meet the basic needs of business: stability.

So I want to abolish complex reliefs like R&D tax credits and instead simply cut the headline rate of corporation tax.

Liberal Democrats Going Forward

This is already by far the most radical tax package on offer in British politics. It's fully costed to be revenue neutral.

But I want to go much, much further, so we can lift even more of the tax burden from low and middle income families.

It is likely that the next election will be fought with the UK economy in its weakest state since the Conservative recession of the 1990s.

Ordinary families in good jobs and on a decent salary are struggling with rocketing food and energy bills and ever higher debt repayments.

So the Liberal Democrats will show that we can spend and tax more intelligently in order to cut taxes for low and middle income families who are feeling the pinch. And take the poorest out of tax altogether.

I am setting in motion today a process that will deliver more financial flexibility in government, so that money can be given back to ordinary families. As the economy worsens, now is when they need it most.

There are two strands to this process. First, how we can cut tax avoidance, so everyone pays their fair dues. All the extra revenue should be ploughed into reducing rates overall.

And second, how we can streamline government expenditure to free up resources.

Our aim is simple. If there is money to spare once we have funded our public policy priorities, we will not look for more things to spend it on. We will look for new ways to hand it back - to the poorest families first.

Raising The Money - Tax Avoidance

It is time to get tough on tax avoidance both by businesses and individuals.

It is unacceptable that someone on the minimum wage can pay 31% tax when some of the very richest people and businesses can pay virtually no tax at all.

We must stop the drive from companies who decide to locate "virtually" offshore.

The UK has much to offer, good communications, a skilled worked force and a desirable place to live. If a company is attracted by these things it must also pay UK tax.

A Liberal Democrat Government would have a very simple rule. If your company is based in the UK, you pay tax in the UK - not Jersey or the Cayman Islands.

In particular we want to make sure property taxes are paid in full. Buildings and land are, quite clearly, located in the UK or they're not. You can't "offshore" a building - so we shouldn't let them go offshore for tax purposes.

Too many top companies and prosperous people in Britain now see no shame in aggressive tax avoidance. It may, strictly speaking, be legal but it lets down millions of hardworking ordinary taxpayers.

So over the coming months, we will work with financial experts and business to find ways to make tax avoidance so difficult it is no longer worth trying.

I want to send a clear message to businesses and some very wealthy people that tax is not optional.

But I pledge that all of the money we identify that we can recoup from tax avoidance will be used to cut taxes for low and middle income earners - not ploughed into extra spending.

Raising The Money - Spending

There is always a temptation for governments to spend more and more. The hubris of government deludes ministers into thinking they can solve every problem with a new grant, or an extra spending commitment.

This is a fantasy. There is a lot the Government can do to improve people's lives.

But it must never underestimate the importance of leaving people's money in their pockets as a tool of real, daily empowerment.

So the Liberal Democrats will question every single penny of government spending.

David Cameron yesterday distanced himself from the James Review which the Tories produced at the last election on the basis it wasn't credible.

He's right it wasn't, but not for the reasons he said. David Cameron now seems to believe that an opposition need not produce any detail on how it plans to change public spending.

The James review had the right intention, to identify areas where the Conservatives would cut public spending, it was only incredible because the research was dodgy and the numbers it produced were worse.

Making detailed decisions of what you would and wouldn't spend public money on is exactly what a true opposition party should be doing - offering a real alternative to the Government.

This is a process we have already started. Our Treasury team of Vince Cable and Jeremy Browne are closely looking at everything the Government spends your money on.

This process has already shown that there are times when public money simply shouldn't be spent at all - like on the unnecessary and extravagant ID card scheme.

And that public money can be spent much better if, for example, we radically decentralise the NHS, or scale back Tax Credits.

We are totally committed to decentralisation - not just of services but of taxes too.

Once central government does less, it can tax less.

Until Labour or the Conservatives make this basic financial commitment to decentralisation, it's clear their proposals are just talk.

Communities will not have real power over local services until they have the power to raise and spend their own money.

These are no easy choices and not every penny of Government spending is either good or bad - but it is this lack of rigour and lack of scrutiny which has seen Government spending shoot up over the last decade.

We must get away from the Labour notion that if the Government is spending more it must be doing better.

We have set a target to reallocate £20 billion of Government spending to Liberal Democrat priorities - taking money away from unnecessary or wasteful policies and redirecting them towards our key priorities.

And we will look for ways we can replace some benefits with tax cuts, to reduce bureaucracy and dependency.

I just don't believe it's right that a low-income family should pay, say, £3000 in tax and get £2500 back in tax credits, when they ought to just be paying less tax, or no tax at all.

I don't believe it's right that 90% of families are eligible for means tested benefits.

The Government believes that's part of the stakeholder society - so everyone pays in and everyone gets out.

But we, as liberals, believe it is better to enable people to stand on their own than to drag them into state dependency.

At every opportunity this Government has tried to creep into people's lives. The benefit system has too often been used as another way of doing it.

Reforming the benefit system is not easy, and we will always ensure that vulnerable people do not end up losers. But we must end this merry-go-round where the Government gives with one hand and takes with another.

Conclusion

Many of the things I have laid out here today are not easy. We have already taken tough choices and we must take more.

It is only tough choices that will enable us to reduce the tax burden on those who are overtaxed, and limit the tax burden on Britain as a whole.

But I ardently believe we must act - cutting taxes first and foremost for lower earners, so every family can make ends meet, and make a good life for themselves.

We must never forget that public money is just that: public. It is not the government's by right.

It is given in trust, and spent for and on behalf of the people.

Ministers should be as careful with it as if they had borrowed money from a friend.

And that is why a Liberal Democrat Government would ensure that we never spend or tax a penny more than is needed.

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