Why taxation need not be a dirty word

A radical change to the way we tax wealth could benefit us all, says David C Stevenson.

Talk to economists (including many of the more conservative ones) and they’ll admit to a passion for three taxes that don’t currently raise significant sums for the UK exchequer: a carbon tax; tax on land value increases; and – most controversially – inheritance tax (IHT). They regard all three as fair, equitable and efficient. Non-economists tend to disagree – particularly on the latter. Three arguments are advanced against IHT. The first is that it penalises hard work and long-term wealth accumulation. The second, that it is a form of double taxation – “I’ve already paid my income taxes – I don’t want to pay even more tax on the same money”. Third, it is widely viewed as being applied vindictively, with beneficiaries often forced to sell assets quickly to pay the IHT bill.

Many of these arguments rest on shaky foundations. No one frets about other forms of double taxation, such as VAT (a tax on consumption). And much of the most recent rise in household wealth is nothing to do with hard work, but is instead due to soaring house prices, which are in turn down to incredibly low interest rates and quantitative easing. In effect, a privileged part of the population – homeowners – have received an indirect government subsidy, hugely inflating the value of their assets. The vindictiveness of the tax is perhaps the best criticism – largely because it highlights the need for a rethink.

My own view is that we need to boost the tax take from wealth taxes (taxes on capital and property, including IHT). It’s been nearly a decade since the financial crisis, yet the UK government still runs a big structural deficit. Meanwhile, poll after poll finds that we want Scandinavian-style public services – but we only want to pay US-style low taxes. Something has to give. Currently, around 62% of the total tax take comes from income tax, National Insurance (NI) contributions (another income tax) and VAT. Very few of us would argue that VAT or NI rates are too low, and while many on the left argue for higher income-tax rates for the better off, there’s a genuine debate to be had about how efficient this would be in revenue-raising terms.

What are the alternatives? You can argue that corporate taxes are low at 8% of total government revenues – many on both sides of the political spectrum accept that there’s a major problem with multinationals using various wheezes to avoid paying tax where they should. But it’s one thing to recognise this and quite another to address it quickly and efficiently. Hence my focus on wealth taxes. Capital taxes account for just 5% of tax revenues today, with property taxes at 9%. According to the Institute for Fiscal Studies, the share of capital taxes is likely to rise between now and 2021 – but if we’re to prevent arbitrary tax grabs, we need to think these through. A government desperate for revenue might be tempted to raise £26bn by abolishing the nil-rate IHT band, for example (as well as spouse-based allowances) – or perhaps even to remove the capital gains tax exemption for the main home, bringing in £28bn-odd a year. These would be drastic, unpopular moves – but they could go a long way towards eliminating that structural deficit (or paying for Corbynomics).

If we don’t want to see that sort of smash and grab, what might a new settlement on wealth taxes look like? Firstly, why tax capital more favourably than income? Why shouldn’t capital gains be taxed at the same rate – 20% and 40% depending on the tax band (and accumulated wealth)? On IHT, why not introduce a lower rate of 20% for most taxpayers, plus a 50% rate for those with over £2m, say? In addition, wealth taxes should directly fund measures to help improve inequality – we need to show critics of IHT the clear benefits of this limited form of wealth redistribution. To tackle the vindictiveness point, we should also allow later, staged payments via some form of tax bridge funding, run by the private sector – possibly also involving equity release. Lastly, let’s tighten up on IHT reliefs, such as the business property, agricultural and forestry reliefs. These all started off as sensible measures but could raise more than £1bn a year if scrapped.

What do you think? Are higher wealth taxes the way to plug the deficit or reduce inequality, or is there a better option? Send us your responses to editor@moneyweek.com and we’ll publish the best answers in the magazine.