Tax reform of the day: an investment income surcharge

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To continue my series on how to address inequality by changing the UK tax system, this suggestion is, I think one that glaringly obviously needs to happen:

Introduce an investment income surcharge

A perversity of the UK tax system is that those who work for a living tend to have much higher tax rates than those who live off unearned income. This is largely because those who work for a living have to pay national insurance contributions in addition to income tax and those who have unearned income do not do so. Despite this, those with unearned income do have access to the full range of state services and might even qualify for some benefits if, for example, their income fell in old age. This system is, then, another contribution to the creation of income and wealth inequality in the UK.

It can easily be addressed. Until well into the 1980s the UK had what was called an ‘investment income surcharge’ rate of income tax. This charged an additional 15% income tax on investment income and rents over a specified annual allowance, which could be significantly increased for those of pensionable age, but might otherwise apply to investment income in excess of, I suggest, £7,000 per annum, which limit would imply that the taxpayer to whom it would apply had significant wealth holdings, and which happens to broadly align with the income level at which national insurance is first charged at present.