We need a fairer tax system

By Maeve Cohen

The Bank of England has raised interest rates to their highest level in a decade. This is a bad move. It will do nothing to address the external causes of the inflationary crisis. As the Governor of the Bank of England admitted, raising interest rates will not produce more gas.

A higher interest rate increases the cost of all debts. This makes it harder for Government to borrow and less likely that the Treasury will make the necessary investments to address the cost of living crisis, the climate crisis, the housing crisis and the care crisis.  

We must find a new approach to both fiscal and monetary policy. For monetary policy, Andrew Jackson, Tim Jackson and Frank Van Lerven have put forward a transformative plan to make it fit for the 21st Century. But what are the options for fiscal policy?

Why do we need to reform the tax system?

First, what is the purpose of the tax system? How can it help create the kind of society we want to live in? At the Social Guarantee, we maintain that everyone should have access to the essentials they need to be able to live a fulfilling life. This means collectively providing things such as health care, public transport, secure housing, childcare and education to make these basics accessible to everyone. The collective provision of public services depends on having a tax system that can collect enough money to pay for them.

More than a decade of austerity has decimated the collectively provided services that formed the backbone of our welfare system. Council housing and Sure Start centres have all but disappeared.  The NHS and public transport are stripped to the bare bones. Adult social care, childcare and decent housing are unaffordable for far too many.  People who can’t pay directly for life’s necessities are forced to go without.

The government response to the ‘hole in public finances’ caused by the pandemic has been to raise National Insurance Contributions (NICs) in the form of a health and social care levy. This hits the same people who have already taken the hit of reduced public services.

The rise in NICs is expected to bring in around £10.9bn. That’s shy of what’s needed just to keep the NHS on its feet, according to IPPR’s The State of Healthcare 2022 report. There will be nothing left over to fulfil the Government’s much-needed pledge to spend £5.4bn of the revenue raised on adult social care, and nothing for childcare either.  It becomes very clear, very quickly that raising taxes in this way is both inefficient and unfair.

The increase in taxes on incomes comes at the same time as a large boom in the value of assets and wealth. Despite this, the top rate of tax on capital gains is a mere 28% compared with an effective top rate on employment income of 60% once income tax and NICs are accounted for. Why should someone who has inherited a few million pounds worth of assets pay less tax on that wealth than someone working 40 hours a week?

This feature of our tax system exacerbates inequality as starkly illustrated by the case of housing – a valuable asset, but also a fundamental necessity. As house prices rise, property owners get rich by just sitting on their assets. Meanwhile working people, particularly my age group and younger, are finding it impossible to earn enough money to save enough for a deposit to buy a home. This leaves an entire generation exposed to an increasingly insecure and exploitative private rental sector.

How do we reform the tax system?

Three suggestions are worth exploring here: a Windfall Tax on oil and gas companies, a Wealth Tax, and a system of National Contributions.

A Windfall Tax

Calls are growing for a Windfall Tax on oil and gas companies to help pay for the colossal increase of oil and gas prices, currently being shouldered by consumers. As companies such as Shell and BP announce massive profits, such calls are harder to ignore.

Windfall taxes have been tried before. In 1997 the Labour Government raised around £5bn by taxing the excessive profits of privatised utility companies. The Italian Government recently imposed a Windfall Tax on oil and gas companies at 25%. They are popular, tried and tested, and doable. So what are the current proposals in the UK?

Labour are calling for a tax at 10% which would currently raise some £1.2bn. As gas and oil prices continue to soar, it could yield as much at £3bn.  But once you consider that energy is predicted to cost consumers over £20bn this year, it looks like a drop in the ocean.

The tax rate could in theory be raised above 10% , but how far that would be politically possible remains to be seen. In any event, it is likely that all revenues would be allocated to protecting consumers from energy prices rises – with no scope to address the wider causes of poverty and inequality. 

A Wealth Tax

The Wealth Tax Commission released their final report at the end of 2020 providing a comprehensive exploration of whether a Wealth Tax in the UK was desirable or deliverable.

To inform their design the authors conducted surveys and focus groups with representative members of the public and found that a Wealth Tax has significant public support across the board, with the most popular argument against being the belief that the wealthy would avoid paying it. They recommended a one-off Wealth Tax would be difficult to avoid, relatively cheap to administer and would raise around £260bn in a fair and efficient way.

The tax would apply to any person with a net wealth of more that £500,000 at 1% a year for 5 years. It would be a one-off tax based on the market value of assets at a recent point in time, making it hard to hide assets or dodge payment.

It would help to rebalance inequalities between wealth and income taxation and raise a significant amount. The Commission do not specify how the revenue should be spent, which was beyond their remit, but we can hope some of billions would be spent on restoring and improving public services and investing in a just transition to a low-carbon economy. On the downside, a one-off tax is not a wholesale reform and leaves systemic inequalities undisturbed.

A system of National Contributions

A report by Andrew Percy and Howard Reed at the Institute for Global Prosperity sets out proposals for a thorough reform of the tax system. They propose simplifying it by ending the discrimination between active (from employment) and passive (from assets) income and taxing both at the same rate.

This would mean replacing income tax, national insurance, capital gains tax and inheritance tax with a single ‘National Contributions’ tax. It would reduce the amount of taxes paid on employment income and increase taxation on wealth. Modelling in the report suggests that a National Contributions system would fully fund universal basic services, as well as a transition to net zero by 2030, at the same time it would reduce taxes on income for 98% of taxpayers.

This report is an initial offering and does not look at questions of tax avoidance, political viability or public support. However, the proposals offer a radical, long term strategy for reducing wealth and income inequalities, and delivering life’s essentials for all.   

Conclusion

Building a society that supports the needs of everyone and protects the environment is not an easy task but nor is it impossible. The ideas are there.  We can build a fairer tax system and share our collective wealth in a fair and equitable way. The job now is to build the political power to do so.

Maeve Cohen is Project Lead at the Social Guarantee

Image: Pixabay. https://pixabay.com/illustrations/tax-deductible-tax-time-tax-break-5272916/

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