The last week has seen the governments of the Anglo-Saxon world bail out capital to an unimagined degree.
There will be a cost. Some are saying that will be 5p extra income tax in the UK. I can't say: I don't think anyone knows yet. But that suggests a bill of £20 - £25 billion a year at current revenue rates.
How do we raise that? Well, that of course is the figure I identified as being lost to tax avoidance in the Missing Billions, so we know we can get this back.
But let me for now offer one specific reform we need right now. We need class 5 national insurance.
It is absurd that national insurance is only charged on income derived from human labour, and not at all on capital. Right now it is human labour that is bailing out capital. We need a payback. Class 5 national insurance would do that and would be charged at, I suggest, 15% on all investment income (interest, dividends, rents, etc) over £5,000 a year for all UK residents below retirement age.
15% is a compromise between employee's NIC rate and combined employee and employer rate.
No one would pay this if they did not have about £100,000 of savings. The vast majority of people do not have that sum.
But, in 2005/06 (the last year with data) there was £64 billion of such investment income. It will be more now: say £70 billion. Amazingly only half of that is attributable to higher rate tax payers (which is clear evidence of income shifting) but even so if that is a proxy for having serious savings then maybe £5 billion could be raised in this way.
It's an important start in meeting the bill.
And we could do it now.
And it would also kill a lot of the fad for incorporation of small businesses. We'd also win from that.
So why not Alastair?
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Without saying it, this is a call for a return to the Investment Income Surcharge and Close Company Apportionments. But, to introduce yet another class of NIC is not the way. If it is a tax, call it a tax.
I know we are both of the opinion that the IIS should never have been abolished. Its reintroduction would not only have the direct advantage being sought but, along with allied measures such as a return to the CCA rules, would sidestep the impending policy trainwreck which is the looming of the commencement of anti income shifting rules next year.
There would be a concern that imposing an age limit would probably be discriminatory and £5,000 is probably too low (the threshold was, if I recall correctly, slightly higher in 1985 when the IIS was abolished).
The alternative, or additional, proposition is to remove the wholly anomalous exemption for CGT on private residences. In behavioural terms, this has been as much to blame as the lending policies for the inflated housing market. Why would the average person invest in, say, a bank deposit on which the return is taxed at 20% + 15%, when an investment in their own residence would produce a return taxed at 0% ?
Andrew
I think NIC is important
1) There are no offsets or allowances. There are in tax
2) Pensioners can be easily excluded. I like that
We just have to also recognise that NIC is tax. Since we all know that to be true, what’s the problem?
And I do accept that close company apportionment is the next step.
I agree re private housing, but think a CGT difficult. Progressive land tax and removing limits on council tax are the way forward here
Richard