I have this morning published the fourth in my series of recommended changes to the UK tax system designed to address the fact that wealth is seriously undertaxed in the UK.
In this new recommendation, I suggest that capital gains earned in the UK should be taxed as if they are the top part of a person's income, meaning that income tax rates would be applied to them.
The summary of this report says:
Brief summary
This note suggests that:
- The tax owing on capital gains should in the future be taxed as if they represent the top part of the income of the person making those gains in the year that they arise.
- This proposal is made to end the current situation where capital gains are charged at rates that are very often half those applied to earned income.
- This change to the tax system would be easy to implement since the tax rate at which a gain is charged does at present require that the income of the taxpayer in the year in which the gain arises already be taken into account.
- The change in taxation that this proposal creates would be fair from the perspective of horizontal and vertical tax equity[1].
- This change would also eliminate a major tax spillover effect in the UK economy, as a result of which the credibility of the UK's income tax system is undermined by the existence of capital gains tax rates that are usually about half those due on equivalent income.
- There would be a significant reduction in the amount of time wasted on tax avoidance activity in the UK as a result of this change to the overall advantage of society at large as this activity makes no useful contribution to the wellbeing of society as a whole.
- The proposed change is fair because the increase in the wellbeing of a person as a result of an additional pound of wealth is the same whether derived from income or capital gains, meaning that it is appropriate that they be taxed at the same rate.
- The calculated estimated additional sum owing as a result of this change is in excess of £16 billion per annum. In case of potential behavioural changes it is assumed that a lower sum of £12 billion might be raised for the sake of prudence.
Discussion
For many people, the disparity in tax rates between capital gains and income tax is the most obvious and egregious evidence of bias towards wealth in the UK tax system. This recommendation addresses that issue.
The advantages are clear. A simpler tax system that would be open to significantly less abuse and much reduced rates of tax avoidance would result whilst an obvious tax injustice would have been removed.
It is important to note that the estimated yield is prudent. As the supporting note shows, it could easily amount to £16 billion a year.
Cumulative value of recommendations made
The four recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £47.7 billion per annum.
Footnotes
[1] These terms and the nature of tax spillovers are explained here. https://www.taxresearch.org.uk/Blog/2023/09/07/the-taxing-wealth-report-2024-methodology/
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
A common sense and fair proposal that virtually all reasonable people would go along with. It’s scandalous that Sunak’s income last year was £2m and he only paid £500k in tax – a lower tax rate than nearly all workers have when you take into account NI. I’d go a step further and abolish NIEE’s and increase income tax rates.
I’d also introduce a simple rule – the tax due on anyone with Total income (earned and unearned, and Capital Gains) > £250k is simply Income x 50%. No reliefs, no nothing. I get there be a problem with high marginal rates as people approached £250k but that could be easily be accounted for by some form of taper relief. The beauty of this is that orfianry people could clearly see that everyone is paying their fair share.
Is 50% enough?
The tax experts suggest that the low 50s as a % of marginal income is enough.
Saez and Piketty
“The median voter optimum tax rate of 38%
would actually be close to the current US tax rate in that situation. A high tax rate of 50%
would be rationalized by ¯g = .5, i.e., fairly strong redistributive tastes. The utilitarian criterion
also generates an optimal tax rate close to 50% in that elasticity scenario”
We have many rates above that.
But not on the wealthy.
How do you propose to tax wealth tied up in pension schemes which are not accessible until retirement?
I am not proposing to tax wealth. How often do I have to say that?
I am proposing to reduce the rate of tax relief.
What are you proposing?
Might be a more palatable proposal if the old indexation system removed by Gordon Brown was reinstated so that people aren’t paying tax when they aren’t really any better off.
Sorry
Indexation was a scam to reduce tax on wealth
A pound received has the same value whatever the source and should be taxed in the same way
Indexation??
Consider taxpayer A, who buys some shares for £1,000,000, and sells them 1 year later, for £1,050,000. (The shares paid no dividends during this year.) A gain of £50,000, but should it be taxed, if inflation is 5% or more?
Compare taxpayer B, who places £1,000,000 in savings accounts, and receives £50,000 interest after 1 year. Economically, this outcome is identical to taxpayer A’s situation. Why should taxpayer A get any indexation allowance, when taxpayer B doesn’t, with the full £50,000 interest being considered as taxable income?
Perhaps you will now say that they *both* should get indexation allowance. Both or neither is more consistent than only one of them getting it.
But now consider taxpayer C, who starts out with no capital at all, works for a year, earns £50,000 before tax, and pays tax on that income. Indexation allowance can’t apply here. Why should taxpayer C pay more tax than taxpayer A or B, which they would if A and B are granted any indexation allowance?
To say A and B should pay less tax (or even none!) is implicitly placing a huge emphasis on the preservation of wealth. Is that defensible, given the huge, and largely untaxed, increase in wealth which Richard has identified?
If C is struggling to cover their outgoings, they may have only their after-tax income to work with. A and B, by definition, also have the option of dipping into their capital.
You get it
How much of tax avoidance activity is focused on this disparity? Do we know? If this matter reduces tax avoidance activity, that is itself an economic benefit.
We do not know
HMRC do not include such figures in their tax gap estimates