We ask a lot of our tax system. Not merely – merely! – that it fund all that government does. But also that it encourage socially or economically desirable behaviours and aid income redistribution. It has to do this efficiently, in a manner mindful of the UK’s need for investment and which is fair.
Such limited latitude as this leaves to the fiscal architect is then constrained by a number of further factors beyond her control. She must reckon with the structural risks inherent in drawing such a large slice of her revenue from such a small (and mobile) section of the population. She must plan mindful of the large margins for error in the economic modelling of the consequences of her tax changes. And she must act cognisant of the increasing intolerance of capital markets for those running continued structural deficits. Oh yes, and there’s the electorate too.
How, against this background, are we to judge the shadow cabinet’s tentative moves towards formulating its tax policy? What might a sensible manifesto look like?
We don’t have much to go on. So far, only a fiscally meaningless debate about whether our top rate of income tax should be at or below 50 per cent: whatever else returning the rate to 50 per cent will achieve, it won’t fund measures to help the squeezed middle. The choice 45/50 is as near to revenue neutral as matters. That, and a proposed mansion tax.
The mansion tax is more interesting. Not because it is the right policy. But because it’s close to the right policy.
There are a whole raft of reasons why it’s economically insensible to tax those resident in London and the shires who are compelled to spend more on housing than those who benefit from the wide open spaces (and cheaper house prices) away from the south east. As anyone with a mortgage will tell you, house prices don’t reflect wealth.
But where a mansion tax is interesting is that it is a first, faltering footstep towards – it’s a poor but newsworthy proxy for – a greater fiscal reliance on wealth taxes.
Taxes on personal income – including national insurance contributions – account for over 40 per cent of our annual tax take.
Yet there’s nothing fair about raising taxes on the labour of successful strivers while leaving accumulated capital untaxed. To do so is to burden the young rather than the old, the wealth creators rather than the wealth holders, the productive and not the fallow.
And unlike raising income taxes, taxing wealth could be fiscally meaningful. An IPPR study of last year estimates UK private household wealth of £10.3tn. 1 per cent of that annually is £103bn. A tenth of that is still a hundred times the sum the IFS estimates will be raised by increasing the top rate of tax from 45 per cent to 50 per cent. (By way of comparison, we raise some £600bn in taxes annually of which income tax and national insurance contributions account for over 40 per cent – and inheritance tax, our only real wealth tax, about half a per cent.)
Taxing wealth isn’t easy. But it’s right in principle. And it stands to give our theoretical fiscal architect meaningful room for manoeuvre: to help loosen the belts of the squeezed middle, to ensure opportunity for the young and to maintain the social compact. A commitment to increasing taxes on entrenched capital: that’s what I’d like to see.
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Jolyon Maugham is a specialist tax barrister. He tweets @JolyonMaugham
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Photo: Images Money
Some in Labour may want to emulate all the worst aspects of how France manages its economy – but it is the road to another period of opposition. Wake me up when we are fit to govern.
ps thought this was Progress not Morning Star?
Before one jumps to the conclusion that taxing capital is a good idea, it is worth looking at the tax system that we’ve already got in the UK.
It is also worth looking at the economic arguments for the State (by imposing taxes on people’s capital) using capital (admittedly, other people’s) for its current spending.
At present, a lot of people’s wealth (at the poorer end of society) is in their houses (whose value over recent years has tended to be increased on account of profligate lending by institutions). There are large transaction costs in downsizing, so it won’t be easy to tax people’s housing wealth if they don’t have large incomes, or some liquid assets.
Inheritance tax is at 40% on everything in a person’s estate above £325,000, so the State will obtain a large part of people’s wealth when they die (unless they can afford a specialist tax adviser).
I don’t want to make this a long comment, but to use capital for current spending is to get yourself on a downhill slope financially, just as with the taboo matter of borrowing for current spending.
Taxation in the UK needs a complete re-think (which could include an element of capital taxation on the grounds that people may prefer to invest in assets that do not give rise to income). It does get such re-thinks from time to time, but they are, generally, disregarded.
However, the fashion of politicians to ask: “Where’s the money?” and then grab it (as Gordon Brown did, with his raid on the pension funds) is not acceptable.
Anthony, it’s absolutely right to look at this in terms of winners and losers. Winners include the poor (who by definition don’t have much wealth) and the financially upwardly mobile (who generate wealth through their own income), including the wealthy financially mobile (who will pay less on the wealth they generate). The losers are those who have come by wealth without earning it (inheritance, structural changes in housing market and so on).
I am not arguing for raising the overall incidence of taxation (Chelseaboy1905) – that’s an economic and social judgment and I’m neither a politician nor economist – but if one is to do so, one should do so in a manner which places the burden on this best able to bear it.