A good budget needs a little suspense. Last week’s didn’t have any – we all knew exactly what was going to be in it long before George Osborne stood up. I had some tiny hope that there might be some last-minute drama – a flat rate of income tax for all, a commitment to cut the state’s share of GDP down to 35%, or some such.
But it wasn’t ever very likely: the public finances and the economy as a whole are still in such a dismal state that proper cuts – be they to taxes or spending – are just too terrifying for the government to contemplate.
That said, the Budget came with two interesting trends: first a small shift from taxing income to taxing wealth (something the OECD says is better for economic growth) and second, an effort to close some of the major loopholes used to avoid paying both types.
You can see these in the way Osborne cut corporation tax and income tax (both at the top and the bottom end) and substantially raised one of our many taxes on property. The sharp rise in stamp duty on £2m-plus houses is effectively the mansion tax that the Lib Dems have been after and the new duty of 15% on houses bought via a company (the old avoidance measure) will push many wealth tax avoiders back into the net.
This isn’t just the case for stamp duty – it might well have an effect on the inheritance tax take too. KPMG notes that most overseas nationals buy via firms not to save on stamp duty, but to avoid IHT. Take a £10m house. The stamp duty in the past has been £500,000, something that pales into insignificance compared to the possible £4m (40%) IHT bill.
But at 15% the sums don’t look so good. The stamp triples to £1,500,000. Add that to the new annual levy on company-held houses of up to £140,000 and most people would be better off buying a house in the normal way and buying insurance to cover the IHT bill instead.
The coming limit on tax relief for ‘tycoons’ is interesting too. From April 2012, the extent to which the wealthy can use perfectly legal tax reliefs to reduce their bills will be capped. I’ve often written here that the key to raising the tax take in Britain is not to introduce new taxes, but to make people pay the taxes we already have. This is a good step in that direction.
But what Osborne didn’t do is offer much in the way of tax simplicity. Take the shift in the top rate of income tax from the temporary rate of 50% to what looks to be a new permanent rate of 45%.
One reason that 50% hasn’t raised much is because people found ways to avoid it. Now that they’ve found those ways, surely they’ll keep using them. If you know your rate is coming down next year, might you not work even harder to avoid tax this year? It may turn out that, in terms of short-term tax take, raising the top rate was a mistake and cutting it like this is too. That’s what comes of complication and meddling.