There is much discussion in the media today about Rachel Reeves and tax rises.
Rumour has it that Reeves has decided that cuts to public spending are not required.
Rumour also has it that the wealthy will not be asked to shoulder their fair share of the tax burden, as has been the case since the Thatcher years.
Instead, the Treasury's kite flying suggests that they are testing the idea that, even now, they might impose a significant extra tax on those on average and lower incomes, which will have an incrementally smaller impact on well-being for those with higher earnings. The hints are of a 2p rise in the basic rate of income tax, to 22p in the pound, but as I wrote nearly a month ago, if Rachel Reeves must raise taxes, the basic rate of income tax is the worst place to start.
As I said then (and as I have reiterated since), if Reeves believes she must raise taxes — and she clearly does — for political and institutional reasons, then the real issue is not whether to raise them, but who should pay.
First, not all income tax rises are equal
Adding 2p to the basic rate would penalise millions of people already struggling with stagnating wages, stealth fiscal drag, and collapsing public services. This would be a tax rise on the lowest paid, who already shoulder a disproportionate share of the burden in proportion to their real capacity to pay.
But there are alternatives within the income tax system itself. In the Taxing Wealth Report, I showed that almost all the real tax giveaways of recent decades have gone to the top few per cent of the population. That has not been through the headline rate of income tax, but through the myriad ways the wealthy convert income into something that is not taxed like income at all, or through which they can claim disproportionate tax allowances and reliefs. Not all taxes are equal in that case, and a rebalancing is required.
Second, tax wealth, not work
If Reeves wishes to make the tax system fairer and raise substantial revenue, she should begin where the money really is, which is in wealth, and not wages. Four straightforward reforms would achieve more than any blanket increase in income tax:
-
An investment income surcharge. Apply an additional tax rate to income from interest, dividends, and rents, sources overwhelmingly concentrated among the wealthiest households, largely to address the fact that national insurance is not paid on these sources, and Reeves could find much of the tax she is supposedly looking for.
-
Equalise capital gains tax with income tax. There is no moral or economic justification for favouring returns from ownership over returns from labour. These rates should be the same.
-
Charge VAT on banking and financial services. These sectors are currently exempt, which favours the wealthy who are the predominant purchasers of their services.
-
Restrict pension tax reliefs for high earners. The subsidies here are hugely regressive, turning pension contributions into tools of tax avoidance rather than social insurance.
Together, these measures could raise more than £50 billion in my estimate, while improving fairness and efficiency. They would also help to begin closing the yawning gap between earned and unearned income, which is a gap that distorts markets and erodes the legitimacy and social acceptability of the tax system in the eyes of most people, which matters when they are now very angry about that fact and are moving towards Reform as a result.
Third, stop pretending tax rises fund spending
Even if Reeves were to adopt all these proposals, the purpose of doing so should not be to plug a hole. Taxes do not fund spending. They serve to reclaim some of the money the government has already injected into the economy through its own expenditure, to manage inflation, shape behaviour, and express social priorities. The point of tax is to redistribute both income and power, not to fill imaginary fiscal gaps.
The real tragedy is that Labour still speaks as though it is constrained by some kind of household-sized budget. And Reeves insists that every pound of public investment must be fully funded as if she were managing a corner shop rather than steering a sovereign government with direct control over its own monetary operations.
What follows
If Reeves genuinely believes that Britain needs better public services, and she frequently says she does, then she must stop treating taxation as a penalty and start using it as an instrument of fairness.
Raise taxes, by all means, but only on those who can easily afford it. And do so for the right reason: not to balance the books in some mistaken way, but to rebalance the economy and restore legitimacy to public finance.
Will Reeves listen? I doubt it. The only people she seems to listen to are on the far right. We will all pay the price if she does not, though.
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
What is interesting is that as a result of the freezing of personal tax allowances and the Triple Lock is how tax is now hitting pensioners with their net private pensions dropping each year.
Also by next year anyone on New State Pension only will have an income tax liability BUT at the moment there is no mechanism to allow tax to be deducted from it, as a result large numbers of tax bills will have to be sengt out which will have to be settled by the recipient rather than via PAYE
This will be an administrative mess to say the least
Totally agree
And can politicians stop using the term “tax payer’s money” whenever they want to assert how clever they are being in managing the economy
They won’t. Because once that veil is lifted all hell will break loose.
When is she going to raise the basic tax threshold? If she doesn’t do this soon even pensioners living on just the state pension will be paying some tax and will be required to do a tax return which be costly for HMRC and likely not done by many. She could create a separate threshold for pensioners, but that would not look good when do many struggling on low incomes are being drawn into paying tax. If she does raise income tax this be on upper rate payers and in addition to the measures you suggest. The higher rate pension tax credits are particularly hard to justify.
The seeming compulsion by the generation in government born post Thatcher (Reeves was born in 1979), to economically penalise the lower paid (which is increasingly the majority), unlucky and chronically ill, making them pay more taxes than the mega wealthy, is reminiscent of the cruelties of any evangelical puritan cult where only God’s (in this case Mammon’s) Elect are deemed worthy to live. The unelect deserving punishment and death. Apart from this obvious anthropological parallel, I no longer understand their economic rationale. I questioned it way back whenever Thatcher was elected, but as I am not omniscient and was much younger, I gave their loud, feverishly revolutionary, neoliberal political testimony the benefit of the doubt. But after 46 years of gruelling social failure. Just, no. Perhaps someone on this blog understands how they justify their political choices making economic sense.
I agree, it is the wrong place to start…. however, it still might be a place to go – BUT only as a broader jiggling of rates, allowances and bands.
We know that Reeves is far too timid but what should the personal allowance be? What should the basic rate be? What should NI be? (Abolished and rolled into Income tax? Reduced rate above an upper threshold? etc). What tiering of rates should there be and should allowances be tapered (as they currently are)?
I am sure you have a view!!
I do, but not today
So okay there is a proposed 2% rise in income tax and 2% cut to national insurance to raise more tax from those who don’t pay NI. Fair enough.
What stood out to me though is the consideration to increase income tax on people with the “broadest shoulders” and then suggesting this would be anyone on more than £46k.
Does our government still genuinely believe that a £46k income gives someone “broad shoulders?” Someone on that income will spend 50% of the net on rent and council tax in my area. I thought they had gotten past such stupid thinking when they raised the higher income child benefit tax charge tapering to £60-80k.
No one knows what is really planned…
It is now official RR has ‘lost it’. If the budget being trailed – as apparently they intend – is what is finally announced, Labour have scored a massive own goal but, more importantly, they have completely and utterly failed to introduce a budget for working people and one that is fair, equitable and effective.
The news that i managed to read this morning has been depressing and demonstrates how out of her depth RR is: the opinion piece by Ruth Curtice (Resolution Foundation) is inept and at the level of RR’s thinking (?); AstraZeneca have just demonstrated their willingness to pay taxes (i.e., not unless they have no way of avoiding them) illustrating why we need to more effectively tax wealth; and, Fart Rage continues to espouse xenophobic hate whilst pretending to be a mainstream politician and even has the gall to point to the failings of Brexit which, of course, wouldn’t have been a failure if it had been done the way he intended.
What on earth have we done to deserve this coterie of clowns?
There is nothing wrong with any of your proposals as far as I can see – rational, fair etc., which makes them especially tragic. Here we are writing and witnessing history in a very tragic way.
If anyone is reading this sometime in the future, a long time from now where I am, I hope that your future is better than what we are living through now. It’s a madhouse.
“No tax rises for working people…”
“Those with the broadest shoulders… etc.”
Will she get eviscerated in media interviews, concerning those two statements? Of course not. Does Fa***e have a coherent alternative? Of course not.
But you present a very coherent and concise alternative argument.
Enjoy the break.
More evidence, if any were needed, that the Starmer–Reeves axis has a deep-seated political death wish.
Let’s grant it.
I was listening yesterday to the media explaining that f the bond market is displeased then this could destroy all hope of a progressive government. Generally there is no explanation as to why this should be so, simply the reinforcement of the power of the markets to determine all of our futures.
I thought to myself why can’t these “journalists” explain why people /institutions are selling, say, gilts in such quantities that the market value of the gilt falls and in doing so increases the percentage rate of return on the investment and why that, in turn, means that the government (we) have to pay more to borrow.
At the very least they should show some interests in ensuring that such market determining movements are not motivated by some cabal or foreign power.
After all If you sell a gilt (redemption guaranteed, income tax free, reasonable rate of return) what do you replace it with, it has to be something better. Crypto, shares in arms manufacturing companies, tech bro projects? We know only minimal cash deposits will be held.
If there are investments out there that are much more attractive than gilts then these will attract the money regardless of government performance.
But no, the power of the markets over our lives is the message.
I sometimes look at Japan -Borrowing 255% of GDP, Inflation rate of 3.9% and interest rates near zero -and think surely you have to explain this every time you refer to the power of the market.
Politics is about making difficult decisions and forcing the consequences on those least able to complain. That Reeve is forcing the consequences on us —the working public —shows that they have no intention of listening to us or caring about our wishes. They are only listening to the people who take them out for dinner and have promised them jobs when they leave government.
If Labour put 2p on the basic rate of tax, while letting the rich carry on in luxury, free of austerity, they can kiss goodbye to ever winning another election (even under FPTP).
This would be madness given the options they have. I can only assume that Starmer and Reeves have a death wish for the Labour Party.
Farage must be rubbing his hands with glee.
There is one possible issue with taxing capital gains equally, and that’s inflation. If it gains 30% but that was just inflation, then in real terms there has been no gain. I can see some argument that this part should not be taxed as it’s not a ‘real terms’ gain.
However, you might also argue that earned income involves the payment of time and should be taxed less than unearned income, and set a higher tax rate on the part above inflation, not just the same as income tax.
Additionally, you might argue that a simply capital gains allowance is fairer, supporting moderate wealth to make gains to improve their security while the independently wealthy have to pay a higher share.
A punhd earne3d is a pund earned
We don’t tax income at 1980 prices
So why tax gains on that basis?
I suspect there’s the usual theatre going on here, raising the prospect of a basic rate increase so that what she does introduce looks more palatable. She will still be marching in the wrong direction but will be shielded by widespread expressions of relief that things could have been worse. This is how bad tax policy is delivered, over and over again.
The income tax on an £80,000 salary – £19,432.00 – is almost exactly the same amount as the £19,200 that would be paid on a (non-investment) capital gain of the same amount. An investment gain would be charged at 32% for £25,600 of tax paid.
I get it, that doesn’t include NI, which IMHO is a separate argument.
Clearly, very big capital gains – over £100k – start to show significant tax savings; it would be interesting to see just how many very large CGTs are realised in any fiscal year, and whether introducing some kind of banding within the CGT rules would therefore raise useful sums of money without materially changing the behaviour of those who are in receipt of such large CGs.
But gains are invariably in top of income so your argument is disingenuous and I am sure you know that.
I think it is about time we set “tax on all sources” rates based on someone’s underlying wealth (an indirect tax on wealth that makes work far less rewarding for the already rich).
So for example, a new graduate on £30k with no assets and no other sources would pay a very low rate of tax. In contrast, a pensioner on the same income in a house worth £1m and an ISA worth £500k+ would pay the 45% rate of tax on all sources. Same for someone who received a large inheritance. There would be no IHT, but the recipient’s personal tax rate would increase.
And to stop avoidance, once it increases, it would not fall even if someone gave all their assets away (only bankruptcy would reset it).
The last is very penal
Graduated rates are something I am thinking about