Paying for all the Covid-19 demands on the public purse

An awful lot of people want an awful lot of things from the public purse this summer. The UK’s job-furlough scheme to run beyond October (that’s mostly Nicola Sturgeon). Some kind of “one-off final payment” to help workers in vulnerable sectors to find work. A new industrial strategy that offers tax incentives to growth businesses. Immediate tax breaks for start-ups. A new scheme to support directors of limited companies who (because they pay themselves via dividends) aren’t included in any other schemes. A bailout for actors. A rise in out-of-work benefits for the newly unemployed. Yet more money for the still-failing NHS. VAT cuts. National insurance holidays. Extra tutoring for vulnerable children in the holidays. And of course an “infrastructure revolution”. No crisis is complete without demands for an infrastructure revolution.

Sounds expensive doesn’t it? It won’t all happen, but some of it will – and the UK has already spent fortunes on existing Covid measures. So how do we pay? Partly by recovering successfully. But outside that, there is no shortage of ideas. The infrastructure revolution could be paid for by forcing pension funds to buy special bonds. We could just keep borrowing (low interest rates make it easy) and put in place various forms of financial repression to make sure our bonds keep being bought. We could print money (and damn the inflation risk). We could introduce real austerity and cut the state back properly. Or we could try to pay at least part of the bill by raising taxes.

The first three of these are likely to play the biggest part. The fourth, likely none at all. The fifth will be part of the solution but (I hope) as much as a token nod to today’s relentless demands for wealth redistribution as anything else: high taxes aren’t known to encourage growth or even to redistribute wealth very well. Expect then some new tax on the “rich”. That could take the form of an ordinary wealth tax or yet another rise in property taxes.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

But a rather better idea has emerged from a study by academics at the University of Warwick and London School of Economics. They note that while the well-off in the UK pay much more tax in absolute terms than everyone else (remember that 50% of adults in the UK are one way or another net recipients of state funds), at higher levels the way in which we tax capital returns and income can often mean that their effective percentage rate is lower. If your income is all PAYE (for example, you are a very highly-paid bank employee) this is not the case. But if you are an investor or business owner it can be. Add it all up, say the academics, and over about £250,000 of total income, the system becomes “regressive”.

Their answer? A minimum effective tax rate on earned and unearned income and capital gains from all sources of 35%. This is not an awful idea (the US has something similar at 28%) and it would certainly make the tax system feel a little fairer. It might also start a conversation about the brilliant simplicity of flat taxes (something George Osborne was a great fan of before he became important). Imagine if we could cut the top rate of income tax to 35% (or lower) and raise that of capital gains tax to 35% (or lower, and preferably indexed to inflation). Wouldn’t everything feel an awful lot easier – both for those who pay and those who collect? I think so.