My old friend and long term colleague in tax justice and accounting reform campaigning, Prem Sikka, who now sits in the House of Lords, said this in that House yesterday as part of a longer speech on the injustices within Sunak's Spring Statement:
The Government's tax policies are loaded against work and workers. I will give your Lordships an illustration of how they work and how unfair they are; hopefully noble Lords have a pen and paper handy to note down the numbers I am going to call out. Let us look at a case with two individuals who each have an annual income of £30,000. One is a worker in a factory and the other speculates on shares and makes capital gains. The worker has £30,000 gross income and will receive a personal allowance of £12,570 from tomorrow; that leaves a taxable income of £17,430. This worker then pays income tax at a rate of 20%, which comes to £3,486, and will now also pay 13.25% of national insurance, which comes to £2,309. Their total deductions are £5,795 and their take-home pay is £24,205 out of £30,000 gross.
Now let us look at the speculator, who speculated on shares and made capital gains of £30,000. They will receive a capital gains allowance of £12,300. Chargeable gain—the phrase used—is then £17,700. This is not liable to 20%, as the worker pays in income tax, but to only 10%, so their capital gains tax is £1,770. The national insurance payable is zero because no national insurance is charged on capital gains. The total deductions paid by this speculator are £1,770 and their take-home pay is £28,230, compared with the worker's £24,205. Why on earth are workers penalised with higher deductions?
Prem is right to ask the question.
Why is it that those who live off financial speculation are taxed so much less than those who work for a living?
In what sort of society is it thought reasonable that this is the case?
What are the ethics that drive this?
Why should we tolerate it?
I am aware of how angry Prem is about this. So am I.
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Well done that man!!
What was the response? Did any of them stir? Wake up even?
Denial from the government front bench
Absolutely – and he didn’t even include EmployERS NI contributions which is still a tax on work.
The solution is very simple;
(1) Abolish NI and raise income tax levels to compensate.
(2) Equalise Capital gains and income tax rates and have a combined income/capital gains tax threshold/bands without regard to source.
(3) I think that (1) and (2) would ensure a level playing field for small companies versus sole traders and other workers. Indeed, more tax would be paid but that would reflect the privilege of limited liability. (But, Richard, you tell me!)
This will switch the tax burden onto pensioners but I would say two things. First, some compensation through the State pension should be possible. Second, I think wealthy pensioners should pay more; medical advances mean older folk are living longer and using more and more expensive medical resources – this is a good thing but we can’t expect overburdened youngsters to bear a marginal tax rate of over 50% (Income tax, NI employers and employees contributions, student loan repayments etc) while I only pay 20%.
Much to agree with
I am beginning to love on the pensioner issue too – thin king it is fair now if pensions are increased – and I have resisted this for years
It is tricky – there is a lot of pensioner poverty and few pensioners have a chance to change their circumstances in the face of changing tax regimes.
However, if we assume income tax rises to 30% (from 20%), an income tax threshold of 12k, an increase in the State Pension of 1k then pensioner with less than 22k would be better off (those above worse off)….. with a total cost to the UKT of £15bn a year.
I am sure it has been done, but what is the fiscally neutral rate of basic income tax if NI abolished, cap gains equalised etc.. I have guessed 30% but it is just a guess.
Howard Reed is the person to ask….he has the best model in the country on this
Isn’t this to encourage speculation, investment being arguably a business essential, by rewarding it well when it succeeds in recognition of the fact that it may well fail? I’m assuming this practice dates from a time and environment when without money being available to gamble, many businesses wouldn’t have ever got off the ground, hence the encouragement.
The excuse was always drivel
You only pay tax if you succeed
And there are tax reliefs for losses
The system is completely loaded in favour of those who own (and often inherit) capital. NI targets working families, but not those with property or financial investment income. Its also charged at lower rates on the self employed and is capped at higher levels of income.
NI is NOT a pension or healthcare levy in any meaningful sense, but simply a tax mechanism that increases inequality and complicates tax collection. . NI should be absorbed into a single system of tiered income tax that applies to all forms of income, including property, investments, and capital gains.
At the same time we should abolish most, if not all, tax allowances and replace with a universal basic income. This would not only alleviate extreme poverty, but create a ladder out of poverty, where the lowest paid are positively motivated to earn extra income, instead of being punished through loss of benefits. (UBI would also compensate lowest earning self-employed who might otherwise suffer from absorption of NI into a Universal income tax.
Isn’t an answer it’s people’s savings and it’s been taxed at least once on their earnings before they had it to invest???
No
And no
Simple fact
To Beth.
My (Conservative) MP tried this ‘taxed already’ argument on me a while back when I wrote to him making basically Richard’s and Prem Sikka’s argument. I replied pointing out that it was not the already taxed capital we were talking about but the previously untaxed capital gain. He did not reply.
NI was created as a way of establishing entitlement to contributory benefits and pensions at a time when there was no capital gains tax, and few people paid income tax.
The scope of income tax grew massively due to the two world wars, and the scope of contributory benefits has shrunk enormously, so now we have in effect two income taxes, one for earned income and another for everything else (or arguably four interlinked regimes – one for employment income, a different one for self-employed income, a third for savings income, and a fourth for dividends). And an employer payroll tax, which penalises employment status rather than encouraging it.
Capital gains tax was added, almost as anti-avoidance, in the 1960s. The rate has bounced around, from a flat 30% rate from 1965 to 1988, then aligned with marginal income tax rates (up to 40%) to 1998, then with taper relief until 2008, then “simplified” to a flat 18% for two years. And recently rates of 10/18/20/28%, but all substantially below the equivalent income tax rates of course.
There is a significant level of avoidance behaviour whenever the rate of CGT is different to the rate of income tax. I really can’t see the justification for applying a lower rate to gains, as long as there is an allowance for inflation.
As an alternative, if it is an organised full time activity, Prem’s share speculator might be a self-employed trader, in which case they should be paying the same income tax but somewhat lower NICs.
Basically, the tax system is in a bit of a mess – particularly as it applies to labour income through different arrangements, and to capital assets – and ripe for reform. A key driver has to be the reduction of rampant inequality.
Agreed
Restoring the redistributive integrity of tax system is a key driver on my work on tax transparency
https://fiscaltransparency.net/making-tax-work/#:~:text=The%20Making%20Tax%20Work%20(%20MTW,international%20community%20in%20that%20endeavour.
This country is beginning to work like the concentration camp ethos of Nazi Germany that Hannah Arendt spoke of:
The concentration camp system was designed to make people superfluous as human beings; to make people feel unnecessary; punishment was not connected to crime; work would not produce profit or anything useful. It was designed to be senseless and hopeless and make people give up.
It all sounds familiar to me. Arendt described this as the truly ‘evil’ part of Nazism.
It also the truly evil part of this fascist Tory party.
I understand that we invented the concentration camps in this country – the Boer War wasn’t it? It’s been said before here that the Tory party is like British imperialism coming home to run havoc.
So whist the investor class make hay, the rest of us have to put up with the Tory Raj.
and produces nothing edible nor useful
Whilst not disagreeing with the principle of the claims made it should be pointed out that the income paid out as dividends is subject to corporation tax at the business level of at least 19% whereas the amounts paid as wages are not.
That is not necessarily the case