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by GK Strategy 2nd April, 2015

How Might the Conservatives Raise Taxes?

In January David Cameron began setting out the broad brushstrokes of what would constitute the Conservative Party’s election manifesto. Amongst the firm commitment to balancing the books was a pledge to raise taxes, a very un-Conservative thing to do. In commemoration of the estimated £5bn a year the Treasury has raised since 2010 on reducing tax avoidance, the Prime Minister set a target of doubling this over the course of the next Parliament.

For governments, there’s a fine line between tackling aggressive tax planning that challenges the spirit of the law and simply increasing the domestic tax base by restricting commercial structuring options, a process that is becoming ever more complex in a globally integrated economy. Being seen to tackle tax avoidance is, however, an easy political win and all parties are likely to promise action in the run up to the election.

The IFS has questioned Cameron’s claim, describing the £5bn figure as ‘flaky.’ There’s certainly no clear explanation from the Conservatives on what this would mean but there’s a number of ways this could be done. Announcements in the recent Budget are a drop in the ocean; there’s £160m gained through reducing the scope of employment intermediaries, a similar amount through reducing contrived losses arrangements for corporations and a very small contribution from tightening up capital gains tax rules.

There’s the prospect of international action as the OECD’s base erosion and profit shifting programme gets underway. Full implementation is due by the end of 2015, and a whole range of regulations could be in place to restrict the ability of multinational corporations to pay tax on profits in jurisdictions where the profit was not generated. It’s far from clear how much all these measures will raise, but George Osborne’s diverted profits tax, or ‘Google tax,’ is projected to bring in only around £360m a year.

Indeed, HMRC’s estimates of the ‘tax gap’ characterise only £3.1bn of the £34bn gap as the direct result of avoidance. This implies that rather than pursuing unintended legal loopholes, or indeed multinational tax evaders, where good progress has been made in recent years, the Conservatives could focus on altering tax law in a variety of ways to increase the tax base. Given the arms race among the parties on pledging not to raise personal taxes, it looks increasingly likely that the Conservatives could be planning tax changes for business. These won’t be set out in detail until after the election, but could dampen the enthusiasm of the 103 business leaders who endorsed Cameron’s approach in the Telegraph yesterday.

As Paul Johnson, the IFS Director, concluded, all this really means is that the Conservatives are likely to resort to tax rises should they remain in government after the election. The political risk of spelling out who exactly would lose out from this far outweighs the risk for Cameron of appearing unclear about the details of his policies. Either way though, a Conservative government will look to increase its tax take in an effort to reduce the deficit and it will find this task increasingly difficult as the realities of the global flows of capital and commerce are felt. The party could be walking a very fine line between maintaining its fiscal credibility through deficit reduction and starting to seem less business friendly as it looks to more creative ways to increase the tax take.

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