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Last updated: March 11, 2012 8:17 pm
Nick Clegg has been forced to soften proposals for a “tycoon tax” less than 48 hours after announcing it as a flagship policy at his Liberal Democrat party’s spring conference.
The deputy prime minister said on Saturday that he wanted to set a minimum effective tax rate, making sure high earners did not use various loopholes to pay less than 20 per cent of their income in tax. “There are hundreds of people earning millions per year who are barely paying 20 per cent tax – forget 40 per cent, forget 50 per cent, forget 30 per cent,” he told the Daily Telegraph. “I think it’s time that we look at what I call a tycoon tax.”
Journalists were told this would be modelled on proposals by Warren Buffett, the US investor who has advocated anti-avoidance measures in the US.
The Treasury was surprised by Mr Clegg’s explicit mention of a minimum tax rate, as they had expected his speech to focus on general anti-avoidance measures. People close to George Osborne, the chancellor, told the Financial Times a minimum rate was not being considered.
Mr Clegg was also rebuffed over the government’s proposed health reforms, after his party voted against backing the NHS bill in its current form.
Mr Osborne will instead announce proposals in next week’s Budget to crack down on tax avoidance by the wealthy, including an anti-abuse rule to limit aggressive tax planning. He will also bring forward measures to close the loophole that allows buyers to avoid stamp duty by purchasing property through offshore companies.
One Treasury official said: “There are people out there making use of various reliefs and loopholes who don’t pay much tax at all. There is a commitment across government to close those loopholes.”
Aides to Mr Clegg insisted that a tycoon tax remained on the table, but acknowledged it would not mirror Mr Buffett’s proposals.
The deputy prime minister appeared to moderate his stance during the keynote speech at his party’s conference on Sunday. Instead of mentioning a minimum rate, he told delegates: “We will call time on the tycoon tax dodgers and make sure everyone pays a fair level of tax.”
Lord Oakeshott, the former Lib Dem Treasury spokesman, called Mr Clegg’s plan a “superficially attractive measure that falls apart under scrutiny”. Vince Cable, the Lib Dem business secretary who has backed an alternative levy on properties worth more than £2m, told Reuters he hadn’t seen Mr Clegg’s proposals.
Lord Oakeshott’s comments provoked fury among the party’s leadership and Mr Clegg challenged the peer in his speech: “The one person in the party against the tycoon tax is one of our very own tycoons.”
‘Tycoon tax’ idea echoes US policy
The “tycoon tax” proposal originally put forward by Nick Clegg to ensure that millionaires pay a minimum rate of their income in tax would undermine government policy by inhibiting take-up of incentives for start-ups and charitable giving, according to a former Treasury adviser, writes Vanessa Houlder.
Chris Sanger, head of tax policy at Ernst & Young, professional services group, said: “HMRC will consistently look at all routes for protecting the exchequer from abuse but this [idea] does not fit with the UK’s system of targeted reliefs.”
Mr Clegg proposed the idea in an interview with the Daily Telegraph after he discovered there were “hundreds of people earning millions per year who are barely paying 20 per cent tax”.
His suggestion appeared to echo the “alternative minimum tax” introduced in the US after it emerged in 1969 that 155 high-income households paid no income tax. But the US rule has been widely criticised because it affects many moderately wealthy households while having little impact on the wealthiest taxpayers who benefit from a lower capital gains tax rate such as Mitt Romney, presidential candidate, who pays a 15 per cent per cent tax rate.
The UK, although it has fewer tax breaks than the US, permits some wealthy individuals to pay less income tax than might be expected because they have opted to incorporate rather than be self-employed. Some high earners, such as private equity executives, are able to draw their remuneration in the form of capital gains which are taxed at a lower rate.
Figures recently released by Revenue & Customs show that 16,000 taxpayers with income above £1m paid an average rate of 35 per cent, with an average of 3.8 per cent of their income sheltered by deductions and reliefs in 2009-10.
Some individuals use aggressive planning to reduce their tax bills significantly but recent tax policy changes, including limits on pension tax relief introduced in 2009, last year’s crackdown on “disguised remuneration” and limits on film finance have reduced the scope for lowering income tax bills. A general anti-abuse rule, expected to be proposed in the Budget, would further reduce planning opportunities.
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