How wealth tax tweaks could raise £7bn a year
It’s rare in polite circles to hear talk of tax rises. The idea of charging richer people extra for good public services (certainly as a mainstream concept) pretty much bit the dust at about the same time Margaret Thatcher hit the scene.
So it was interesting today to see a discussion about wealth taxation in Accountancy Daily. I mean, it’s not exactly a bastion of left-wing politics!
Philip Hammond could raise £7bn a year by 2022-23 just by making tweaks to five wealth taxes according to Torsten Bell and Adam Corlett of the Resolution Foundation.
They say: “Raising taxes is never easy. Raising taxes with the government’s slim parliamentary majority is harder still, and raising taxes on wealth in those circumstances, given our diverging senses of fairness, is not a walk in the park. But that does not mean it does not need doing, and the good news is that significant progress can be made despite these constraints.
“There are three reasons it is needed. First, one of the biggest challenges facing our country is how to fund the rising cost of public service provision as the population ages.
“This demographic headwind and wider health cost pressures are set to increase the price tag of the current welfare state by £36bn a year by 2030, and £84bn by 2040.
“Second, we need to manage those pressures while avoiding the danger of further suppressing living standards growth for the working age population, which has already been the main victim of both the financial crisis and the long-lasting productivity slump that has followed.
“Third, wealth in the UK has grown significantly in recent decades while tax on it has remained completely flat. Since the 1980s wealth has surged from three to nearly seven times our GDP (or £13 trillion). It is simply a bigger feature of the modern UK, relative to income, than our political economy likes to admit.”
Torsten and Adam believe progress can be made across five areas. Here are their views:
1. Limit entrepreneurs’ relief
“Entrepreneurs’ relief has cost £22bn over its first 10 years, giving a very small minority huge capital gains tax cuts with no evidence of anything to show for that huge bill. Worse still, new figures from the Office for Budget Responsibility (OBR) show that the annual cost is now projected to rise from £2.6bn in 2018-19 (more than is spent on school sixth forms) to £3.9bn in 2023-24.”
2. Tweak council tax
“Everyone knows council tax is in need of reform or – in our view – replacement, being more like the poll tax it was meant to replace than a genuine property tax. In Scotland the Greens have said that (further) reform of the tax would be the price of their support for an SNP Budget. Indeed Scotland has already made baby steps in the direction of a fair (proportional) property tax, with increases for the top bands of council tax and an increase in deductions for low earners.
England, they say, is stuck with the most regressive system in Britain. “Even just copying the marginally improved Scottish structure in England and Wales, would have raised an extra £1.1bn in 2015-16, while £0.7bn could be raised by removing the single person’s discount from the top bands. If those options are too scary, councils could also be given their own flexibility to increase the relative taxation of more expensive properties in their area (with some power over the multipliers that determine council tax rates for different bands of properties).”
3. Tighten up inheritance tax
“Inheritance tax manages to be a hot potato despite only a tiny minority ever having to pay it: one of the reasons why we’ve suggested replacing it entirely. But some changes could be made in the here and now without affecting most people. In 2020-21 people will be able to pass on £1m tax-free. Stopping there rather than continuing to increase the thresholds with inflation would be very sensible and raise £200m a year by 2022-23.”
5. Fairer pensions tax relief
“There’s a case for completely reforming pension taxation, such as moving to flatter rates of tax relief or looking at the £17bn employer national insurance tax break for pension contributions.
“But a smaller change would be to reduce the maximum generosity of the tax-free lump sum. The current ability to take over £250,000 tax free is worth up to £119,000 to an additional rate taxpayer, £105,000 to a higher rate payer, £53,000 to a basic rate payer and nothing to lower income pensioners who’d be below the personal allowance each year anyway.
“That’s very generous, very regressive, and a strange incentive not to stagger your retirement income. Capping the tax-free lump sum at £40,000 would raise £2bn a year while leaving three quarters of future pensioners unaffected.”