As part of the Tax After Coronavirus (TACs) project I suggested yesterday that there should be an investment income surcharge of 15% on incomes for all those below the age of 60 (when retirement becomes more commonplace) of 15% on all investment income exceeding £2,000 a year. The objective is a simple one, and is to reduce the disparity between the tax rates charged on income and wealth that currently exists.
My question is a straightforward one, and is whether or not readers think that this is a good idea, and how they might improve the suggestion?
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Rather than taxing income propose incentives for directing capital towards and reducing the risk of investing into sustainable and robust business models focused on improving society… Ie green energy… low carbon transport… etc etc….
Maybe. Not a helpful answer but all I can offer.
The best solution is to level the playing field so that income, wherever it comes from, is taxed at the same rate. The investment income surcharge falls short of this.
First at 15% it does not match NI rates (employer and employee combined are 25% ish).
Second, I am not sure that pensioners should be let off. This is tricky as it imposes a substantial reduction in income on those less able to respond to it (by working) and would raise questions about how pensions were taxed etc. However, in general, as long as proposals are sufficiently progressive, I don’t think pensioners should be treated differently for tax.
Third, how does it link in with Capital Gains taxes etc.?
However, it IS a step in the right direction so if the choice is “this or nothing” then I would take the Investment Income Surcharge.
I stress, this is a ‘current move’
Long term we have to get rid of NIC and replace with other taxes – it’s absurd that we penalise work
Then with CGT equalisation we solve these issues
Yes.
I would argue for a charge on any return greater than the 2% inflation target.
I know that this 2% figure seems quite high in the current market but we have to think long term. We also should try to keep things simple so using a real CPI figure would complicate things.
The charge should also apply to interest paid on bank accounts and savings accounts. (Obviously at the moment this would yield nothing (as rates are below 2%) but this makes it an easier time to introduce it.)
Ken
How would you do that?
It’s an interesting idea but….I can’t think how to write it
And I’m still not sure I buy the idea given the absolute disparities in tax rates now
Richard
The mechanics of it need not be too difficult.
In another sphere – DB pensions – an allowance is made for the indexation of previously accrued pension so it doesn’t impact on the annual allowance.
I am not sure if you are asking about the mechanics though.
Surely if it was on the tax return it would be
[FV end – (FV start)x1.02 – investments (possibly x part year adjuster or a notional 1% but probably not )] x tax rate
If you left it to the fund administrator or bank to do it would be the same calculation, in fact given I think income tax should apply too (even on ISA) you could get them to collect that too.
It is partly all these tax free wrappers that are increasing the imbalance between working and rent.
You would have to adopt a method for part year withdrawals too.
I have to admit that on any simplicity measure that fails….
And simplicity does matter in tax
“And simplicity does matter in tax”
Agreed.
Perhaps what I am outlining is more appropriate for CGT.
The non-mechanical wording of what I am saying is simple.
“We make an allowance for inflation.”
You have made me think about it….
Does this include investment landlords/buy to let?
Yes
Necessary.
There are ‘ordinary’ people out there with some cash but with near worthless pensions looking for ways to improve their situations, sometimes choosing buy to let. What could be done by the way of alternatives?
I have offered many suggestions of late
Bonds for social housing then.
Why not just roll national insurance into income tax? Much simpler and easier.
Yes this would mean that pensioners would pay more, but the NIC threshold could be increased to £12,500 in line with the income tax allowance which would exclude people with lower incomes.
But that is not a viable short term option and those are what I am looking at
https://www.theyworkforyou.com/debates/?id=1978-04-05a.450.1
For those interested here is a discussion as to the reasons why it was abolished in the first place
You are asking me to take that seriously when the reason why it was needed was ignored?
Why not place your arguments in the context of the discussion, and not dogma, or pure nonsense as John MacGregor offered ?
” dogma, or pure nonsense”..??
I don’t understand your hostility. As i say these are the arguments why it was abolished in the first place. Agree or disagree as you see fit but don’t abandon counter argument, that is nothing more than totalitarian..
But this is not argument
I have suggested that there is a massive problem with the low taxation fo wealth and your argument is, by implication, let’s perpetuate it
The IFS dismissed MacGregor’s claims b the way in the article I linked
So let’s ask you: why do you favour inequality?
The wider question, surely, is why do we have two taxes on employment and self-employment income? Life would be much easier with only one income tax not two. Adding an investment income surcharge is sticking plaster to in effect extend NICs, so why not just merge the two together. Let’s be honest, and recognise that for most people income tax is not really charged at 20%, 40%, and 45%, but rather 32%, 42% and 47%.
Call it, I don’t know, a solidarity surcharge… but it would take a brave politician to take the flak for increasing the basic rate of income tax from 20% to 32%.
That would also deal with the peculiarity that persons above state pension age don’t pay NICs, even when doing the same work for the same pay as someone below pension age.
But how long would it take?
Can we wait?
Are you insane? At the time of a deep recession?..cant think of anything worse
Perhaps you have not noticed that employees are already taxed at effective rates of 32, 42 and 47% once you take employee NICs into account? The self-employed do a little better, “only” 29% basic rate, but then 42 and 47% too. Why should people receiving interest and dividends, and realising capital gains, pay tax at lower rates than workers? All this would be seeking to do is recognise the existing (hidden) tax rates, and address the tax penalty on earned income compared to non-earned income and gains. But I doubt any politician would be brave enough to take it up.
No.
We need simpler taxation. You cannot fix the faults of geocentric taxation by adding more epicycles, like Gordon Brown. You need a Galileo to propose a new basis and everything must shift to it.
Stop propping up the artificial significance of income versus capital and the arbitrary desirability of one activity versus another. Focus on the real enemies, wealth and the concentration of wealth.
Tax the stock, not the flow. A good physiocrat knows that spending is virtue and saving is vice.
Unify the rate of income and capital gains tax but at ZERO and tax wealth progressively.
Make billionaires work harder than millionnaires and let the rest of us lie in our hammocks.
I can assure you, that there is not enough wealth to do that
What you are actually arguing for is a t9ny and broken state
Why not say so?
Can you prove that assertion? I am happy to be shown my error but ultimately the stock is the sum of the flows so the two propositions should be equal in magnitude (but not in incidence and consequence).
If the flow of income is untaxed by the state, it will instead be “taxed” at each turn by the rentiers and end up wholly in their hands. Some level of universal private savings is desirable. Tax the rest.
Wealth is many times national income. There is plenty of wealth to tax. And remember, under MMT, taxes are irrelevant in cash terms. Let the taxes be non cash items, e.g. Liens on property or shares. The point of taxation is not funding but redistribution.
I have to admit that when I moderate I can[‘t see what you’re commuting on so I have no idea what I am meant to be responding to here
And as many in MMT – Stephanie HKwelton, for example – will agree, MMT is far from irrelevant in cash terms. Or policy terms come to that. It’s fundamental in cash term to control inflation and policy terms to deliver much more than redistribution
I think your claims are a little wide of the mark in that case
Tax matters a great deal in MMT – it just doesn’t fund spending, that’s all
Lol – what investment income? But seriously no , I guess some kind of fair wealth tax is best. But god knows how that would work without unfair anomalies. Never happen though and even I bet you know that.
Good discussion. I think the concept of an additional surcharge on investment income makes sense with 2 key caveats;
(i) Per points above, think there needs to be some inflation adjustment
(ii) Whilst selfishly at the age of 64, I like the idea of 60+ being excluded, I don’t think this is fair.
I don’t believe pensioners should pay NI on pension income, but absolutely do believe they should pay NI on income earned post pension age (the fact this doesn’t happen is absurd). I hope to still work for a few more years and crazy I will pay less tax than someone younger doing the same work.
Likewise, I don’t see why any income I hypothetically make from savings (after inflation adjustment) should be taxed less than my daughter.
Thanks
It’s totally obvious that a surcharge should be introduced immediately as a first step towards taxing earned and unearned income equally. Dividend taxation should be put back to a neutral system at the same time, but subject to the surcharge.
I have some questions about your proposed details:
Why a 2k allowance? Why have any allowance at all? Shouldn’t most of this be collected as PAYE anyway?
Why a 15% rate? Just because that was what it was in the 70s? If we want equal treatment, we need the combined effects of income tax and surcharge for unearned income, income tax and self-employed NI for self-employment income, and income tax, employee NI and employer NI for employment income to be the same, and so since the effects of the latter two are different at the moment anyway I suppose there’s no single obvious number to choose.
Why age 60? Why not the age at which NICs are no longer payable on earned income? I think, to be logical, the surcharge should also apply to pension income taxen before that age, which I could see being popular as a tax on those able to retire early and which would support the logic of pensions being an EET scheme. (Personally I don’t think there should be advantageous tax treatment of pensions or tax privilege for the elderly, but you have to start somewhere.)
I’d suggest the next step after introducing a surcharge is to get rid of employee NI and only have surcharge, self-employed NI and employer NI, all giving rise to the same tax wedge (or as close as possible). Then we could raise the headline rates and declare that employer NI is part of the employee’s pay and is part-payment of their tax.
Thanks
The 15% rate is arbitrary
I hope I explained the others
Your points are noted
But PAYE does definitely not cover this
Thanks for your reply.
Re: PAYE, I somehow thought that basic rate income tax was withheld on bank interest and stock market investments and thought this withholding could include the surcharge, but I see I was wrong (at least since 2016 wrt bank interest). I assumed you were proposing a 2k allowance to simplify administration for people with smaller holdings. I still don’t know what the proposed allowance is for.
Can I just ask one more question? Would the surcharge be on taxable income i.e. after the personal allowance, or on all unearned income, including unearned income on which income tax is not due? If the former, surely it would be simpler not to have an allowance, as then having the surcharge would be functionally equivalent to having higher rates for unearned income than earned income.
There is an allowance for savings – which will be the subject of another post
The £2k is to save having to file inconsequential sums and to prevent minor savings being penalised when that is not the issue of concern