The Chancellor, Rishi Sunak, has single-handedly turned the UK Conservatives into the party of big government, big spending and – ultimately – big taxation. Ironic really, since the former investment banker used to be a bit of a free-market Thatcherite.
Coronavirus is no respecter of ideology. At the height of the furlough programme, nearly half of all British adults were being paid by the state one way or another. Few socialists ever envisaged the state paying private sector wages.
But even this Chancellor has to obey the laws of gravity. The UK and Scotland’s finances will have to be repaired somehow. Borrowing £350 billion per year is simply unsustainable, even for the most enthusiastic Keynesian. There are three main ways of doing this: cutting public spending, raising income and sales taxes or taxing wealth.
Boris Johnson has made clear that austerity, 2010 style is not happening this time, which is a relief. Nor is he likely to increase income taxes by very much. This is because, like cutting public spending, a general increase in income taxes will only depress the economy further.
People will be less inclined to spend in the shops if their take home pay declines. That means fewer sales and that leads to redundancies and short time in services sector and in the factories making unsold commodities.
So, the most sensible way to repair the public finances would appear to be to tax wealth rather than income. There are several reasons why this makes sense.
First of all, wealthy people don’t spend much of their wealth in the high streets, so taxing them doesn’t depress the economy very much. There are only so many Lambos and Patek Phillippe watches your average plutocrat can buy.
Most of the wealthy put their surplus income into investments like property and shares. Their money makes money. And those assets have increased in value because of the Bank of England policy of Quantitative Easing. By forcing down interest rates, the value of assets like houses increases dramatically when governments print money.
According to the Office of National Statistics, house prices in London have risen 500% in the past 20 years, whereas incomes have risen less than 50%. Since the financial crisis, many people have literally become millionaires simply by seeing their homes increase in value by double digits year on year.
Same with shares, which are over-valued because companies can right now access almost free money via QE. This has meant a wealth windfall for property owners, share portfolios and private pensions.
The answer seems simple: just slap a surtax on the top 10% of the population who own nearly half of all wealth. This is exactly what the Scottish Labour leader, Richard Leonard, proposed last year: a 1% annual tax on those with more than £750,000 in property and financial assets like private pensions.
He believes that the Scottish government right now has the power to impose this tax – a claim the Scottish government reject. But even if Nicola Sturgeon could impose a wealth tax, she wouldn’t go for this one.
A number of Scots may private pension funds worth £750,000, but they don’t have access to the money until they retire, when they commonly get annuities based on the fund. Most people have no idea just how costly pensions are these days
Funding a private pension of £25,000, with an index-linked annuity, would require a private pension pot of around £1million, and that pension money is taxed. A government that slapped a £10,000 super-tax on people earning pensions of less than the average wage would soon feel the heat.
Moreover, many more people with occupational pensions and public sector pensions are also millionaires, though they don’t realise it until they retire and are told the transfer value of their fund. NHS doctors recently revolted over paying tax their pensions above £1 million. A senior teacher on a defined benefit pension also might well have a nominal fund value of approaching £1m.
Hitting pensioners and public sector workers would be politically catastrophic, and Nicola Sturgeon is much too cautious to go there. Indeed, the SNP have probably been sitting on Richard Leonard’s “pension grab” to use as ammunition in May’s Scottish election campaign.
The new UK Labour leader, Sir Keir Starmer, has certainly seen the risks and has slammed on the brakes. There is currently much confusion about whether Labour has a wealth tax at all, but we can be pretty sure that, if it does, it will not include main homes and pensions, in England at least.
Nearly 80% of the UK’s total personal wealth of around £14 trillion is in homes and pensions. That leaves a relatively small chunk that’s wealth-taxable. And we can be sure that if there is a wealth surcharge, financial planners will help those with much “excess” wealth to send it abroad or put it into their pensions.
However, this is not a reason to give up,. The economy needs to be rebalanced in favour of people who work for a living rather than just sit around watching the value of their assets increase. The Labour-supporting tax expert, Professor Richard Murphy, says there are ways of taxing the income from private wealth more fairly. The best wealth taxes are on property and death.
Capital Gains Tax is a tax on the increase in value of an asset, like a house. But at present it is limited to 15% , not the current top rate of 45%, and there are claims that the rich are paying themselves in CGT to avoid income tax. There are cross party calls for the rates to be harmonised with income tax rates.
Rishi Sunak appears to agree and is currently reviewing capital gains tax relief. He may also apply it on first homes over £1 million. In France, owners pay a special tax, fonciere, on the rental value of a home, whether it is rented or not
There is a very strong case for a revaluation of home values on which council tax is based – they haven’t been revalued for nearly 30 years so don’t take into account the huge increase in property values since. The Scottish Government could do this under Holyrood’s existing powers.
Death duties are also very hard to avoid. There is a case for increasing this too since in the next few decades there is going to be a boom in inheritances because of those increased property values. Currently, fewer than 5% of the population pay death duties, so this should rise.
Tax reliefs should also be in the firing line. Abolishing or reducing higher rate tax tax relief on pension contributions could raise tens of billions fairly, as would further raising the ceiling on National Insurance Contributions.
Mr Sunak should also be thinking about increasing business taxation if only to claw back some of the earnings of multinational companies, like Amazon and Apple, which have become adept at avoiding them.
So wealth taxes are the future. But any politician who tries to slap a general tax on wealth is asking for trouble. According to recent polls, most voters are in favour of wealth taxes – just so long as it’s someone else’s wealth.