A few years ago, when running ippr, I had an idea. It was to create a new top rate of tax for the wealthy but to give these taxpayers the option of choosing where their tax revenues were directed. The reaction I received from my left of centre policy wonk friends is relevant to the heated debate about the imposition of a cap on tax relief; but, first, some context.
Back in 2003 the personal tax base was narrowing. The Government was able to rely on business taxes – particularly those generated by financial services - to fill the coffers. This strategy blew up disastrously with the credit crunch. Indeed, as the current ippr director Nick Pearce has argued, it was the over-reliance on taxes related to financial services and property transactions – much more than over spending – which was the biggest cause of the deterioration in public finances in the wake of the crunch. However, given political nervousness and hostility from the well-off it was difficult to see a way of making an increase in wealth taxes a realistic policy, thus my idea.
The strong opposition to the proposal from ippr colleagues (as a consequence of which it never surfaced) explains why the Guardian is defending the tax cap and why Ed Miliband is performing verbal contortions to condemn the Government without actually opposing the policy.
The first objection was that rich people's choices would tilt spending in unfair and irrational ways. This is exactly the same charge levelled at tax relief in a recent Guardian leader:
the chancellor is right to limit the tax relief that wealthy people receive for supporting good causes. This is effectively money that pensioners and the low-paid, along with other taxpayers, are handing to the rich to indulge their philanthropic activities
The second objection is more subtle and profound. Although in proportionate terms low and medium earners actually donate more of their income than the well off, most people can’t afford to make large donations to good causes. They have to accept their contribution to society is made through the taxes they pay, and they have no individual control over how those taxes are spent. From a left of centre perspective, the problem with my idea was accepting the principle that by paying more aggregate tax rich people should have greater rights as taxpayers and citizens. This could even be seen as the first step in a slippery slope back to property qualifications on the franchise. The critique applies more directly to my idea than to the case against the tax cap, but it is still applicable.
Behind the critique of Government cock–up and the understandable but instrumental complaints of the charity sector lie deeper issues. Do we think high tax payers should, in essence, have more control than the rest of us over where their tax is spent? If the rich do have more control, isn’t that a good thing in that it means bold, controversial or decorative causes which the state might not support get independent funding? Conversely, given that the majority of big domestic donations go to either, or both, elite institutions or London-based good causes, doesn't tax relief just add an extra dimension to the imbalance of culture and social capacity between London and the rest of England?
Given the best defence of the Coalition policy is from the left, and charities will probably fight shy from explicitly defending the principle that rich people should be uniquely free to hypothecate their taxes, I suspect the public debate about the tax relief cap may not get to the heart of the matter.
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