Tax is always going to be taxing
This week saw the publication of the Final Report of the 2020 Tax Commission, issued by the pressure group the TaxPayers’ Alliance and the Institute of Directors, calling for tax reform to make taxes “lower, simpler and more transparent”. The most eye-catching proposals were a flat income tax rate of 30% and the reduction of government spending to pre-world war II levels. But one of the recommendations which received less attention was the call to abolish all wealth taxes: capital gains, stamp duty, inheritance tax – you name it.
So why do we need wealth taxes? For a start, they raise around £15 billion a year, equivalent to a quarter of the education budget. Giving this up would mean raising taxes elsewhere or cutting spending. While the Commission certainly advocates further spending cuts, it provides no explanation of where they will fall or who in society will lose out.
But beyond raising revenue, wealth taxes play an important role in the UK tax system. They help to reduce tax avoidance, widen the tax base, reduce the burden on earned income and could have a role in reducing the volatility of the housing market.
The justification for wealth taxes is strengthened by social justice arguments. Wealth is spread far more unequally than income in most countries, and the UK is no exception, with the top 10% owning more than the 100 times the wealth of the bottom 10%.
However, the Commission is right to argue that existing wealth taxes in the UK are badly designed. But the response should be to reform rather to remove.
Inheritance has the strongest grounds for being taxed. Stark differences in wealth, combined with low inheritance tax, exacerbate inequality. Those at the top are more likely to have something to leave than those at the bottom. The Commission argues that inheritance tax discourages savings, but the expectation of receiving inheritance is likely to have the same effect. The current inheritance tax system is flawed because it is open to avoidance by those with enough disposable income and understanding of the tax system to give away their assets in advance, making it deeply unpopular with the middle classes
Rather than scrapping inheritance tax, a fairer option would be a tax on lifetime gifts. The more an individual receives, the more tax they would pay, and even levying a tax only on gifts worth more than £150,000 could generate £1 billion more in revenue than inheritance tax currently.
Similarly, the Stamp Duty Land Tax is in serious need of reform. The current bands do not work. A £1 rise in house price from £500,000 to £500,001 lifts the stamp duty by £5,000.
Reforming stamp duty would see it become a marginal tax which applies gradually as property values rise.
In the longer term, more radical reforms would look to raise extra revenues from property and land taxes, for example through a land value tax on undeveloped land. There is broad agreement from economists and commentators across the political spectrum that land is a good basis for tax but the practicalities and politics are difficult. Additional revenues raised from property and land taxes could be used to reduce the burden on earned income or to ensure that tax rises make a greater contribution to deficit reduction than under current plans.
No one likes paying tax. But in developing Labour’s next manifesto, newly appointed Jon Cruddas should confront the issue of wealth taxation as part of efforts to secure the public finances and achieve greater social justice. Tax is always going to be taxing but it could be fairer.