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How many of us expect our tax to go down, rather than up?

THERE are few issues as explosive in politics as taxation. The Poll Tax riots and the pensioners’ protests against council tax are just recent examples of a centuries-old phenomenon.

Taxes are likely to loom large in the next General Election, as debate continue across the political spectrum about the level of inheritance tax, greater Scottish powers to vary income tax, the likely return to issues surrounding the 10p tax rate debacle and the end of the temporary reduction in VAT. The combination of such issues has made taxation a more salient issue than it has been in recent years.

Originally, taxation was just a way to pay for the spending of Government but, as ideas about taxation developed, it is now being used as a means to build a fairer society. Each of the main political parties has experimented with tax changes in the last few years.

The Labour Party reduced the VAT rate in order to encourage consumer spending and to stimulate the retail economy. There is debate about how well this stimulated the economy and who benefited from it, but there is little evidence that it has increased the spending power of ordinary families, who would have had to spend large sums of money in order to see a substantial saving.

David Cameron committed his party to increase the threshold for inheritance tax so that it would not be paid on estates worth less than a million pounds, although the financial problems facing the UK have forced his party to walk this back.

Nick Clegg has also led the Liberal Democrats plans to reform the tax and benefits system to raise the tax threshold for people with lower incomes. Coming from a party which has been associated with higher taxes, this repositioning was a brave move by the Lib Dem leader.

Plaid Cymru supports a greater number of tax bands and a 50% on earnings over £50,000 although, without support from another party, they are unlikely to achieve such an ambition.

The parties each know how emotive an issue taxation can be and will be hoping to capitalise on it in the next year’s General Election. For prospective Welsh MPs there are two main issues to consider in this election: how to make the tax system fairer, and what effect any changes would have in Wales.

Most progressive thinkers would argue that a fairer tax system would be one in which higher earners pay more as a percentage of their income than lower earners. It should be a matter of grave concern to everyone who wants to make Wales, or the UK, a fairer society that people on very high incomes pay less as a percentage of their income than those on low incomes. This was a scandal before Wales was engulfed by recession, but it has been made more so by rising fuel prices (and prices of other utilities) which have increased the overheads of the average household and made disposable income rarer.

If the standard measure of prosperity involves looking at income levels, then the best way to tackle tax inequality would be to look at income tax. Under the current system, anyone earning over £6,475 a year is liable for income tax and, in recent years, on the 20p rate. The easiest way to lift the poorest out of paying taxes is to raise this threshold. Lifting the tax threshold to £10,000 would bring give around £700 a year back to the average citizen. It is difficult to imagine many other mechanisms having quite the same impact, especially if it were attempted by VAT or inheritance tax.

Any system of tax redistribution would need to be paid for. There are two methods of paying for reducing tax income on lower earners. The first is to reduce overall spending levels. A reduction in spending levels is likely to occur anyway over the next decade or so, and the squeeze on public finances, coupled with a desire to protect public services, effectively eliminates this as an option. The other, therefore, is to raise taxes on those with higher incomes. This is where the argument becomes politically unattractive. Gordon Brown’s decision to introduce a 50% rate on higher earners was heavily criticised by the opposition and by the media, admittedly mostly as it was perceived as the end of the New Labour model. Instead, an easier way to off-set lower taxes would be to end benefits for higher earners; pension relief on large pension, child benefit for high-income families and cracking down on tax evasion are three obvious examples. These would have the benefit of creating a fairer tax system as well as helping to simplify the tax system.

Prospective MPs also need to consider the impact of such decisions on Wales.  The most obvious of these is that Wales has a higher proportion of people on lower incomes than most other parts of the UK. As a result, Wales will benefit from any moves towards a fairer tax system more than elsewhere.

Cuts to other taxes are also likely to have less of an impact. Fewer estates in Wales would save money under a higher inheritance tax threshold, as there are simply fewer estates worth that much. The average Council Tax bill is lower in Wales so it would be less effective to reduce or replace the Council Tax, and the experience in Scotland shows how difficult doing so would be. Simply raising the threshold would be the most effective way of making taxation in Wales more progressive.

Finally, in light of the recommendations of the Calman Commission, politicians need to decide on what tax powers they think the National Assembly should have, and what they would use them for. This may not be a significant issue in this election but it will be over the course of the next Parliament. The debate is likely to cover issues about income tax and whether the Assembly should only be given powers to vary rates of income tax or to more wide-ranging powers to reform the whole structure itself.

If the next election is going to be about spending cuts and the economy, then taxation is going to be a very important issue indeed. Building a fair society is going to require drastic reform of the way taxes are collected. There are different approaches between the parties to tax reform but the party which finds the right one may well successfully exploit what has always been an explosive issue.