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.
Jolyon Maugham is a specialist tax barrister. He tweets @JolyonMaugham
Photo: Images Money
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