The UK really needs money. Lots of it. The coronavirus has caused our debt-to-GDP ratio to soar, and the budget deficit could hit £350bn this year. That’s more than double what it would have been without Covid, and a nasty 18% of total GDP. How on earth can we fill that gap?
One school of thought (those who like “modern monetary theory”, for example) says this isn’t something we should bother worrying about. Given low rates and low inflation, any state in control of its own currency can either just borrow, borrow, borrow or print, print, print.
Not everyone subscribes to this view. They (and I) reckon that we have to be seen to be making an effort to live within our means – something that means we have to raise taxes, and fast.
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The Institute for Fiscal Studies suggests we need to collect something in the region of £35bn-£40bn more a year. The Office for Budget Responsibility suggests £60bn if we want to try and keep our debt-to-GDP ratio stable (we can’t realistically dare to dream of bringing it down at the moment).
You’ll be so used to huge numbers by now that this might not sound like a big deal. You are wrong – it is.
The UK’s annual tax take is around £800bn at the moment, so the latter figure represents a 7%-plus rise in revenues. This may not be possible: it has been historically tough to get the tax revenue to GDP ratio in the UK much above 35% of GDP for more than a short period. At a certain level, avoidance rises – and we entered this crisis with the ratio near a 30-year high. But if it is possible, you might think the best way to get going is to shake down the rich a little more. Hello, wealth tax!
The arguments against wealth taxes
Here I think you might be wrong again. There are lots of obvious arguments against wealth taxes. They are hard to calculate and hard to collect. They end up focusing on property – and creating no end of distortions along the way, something that might be particularly irritating in the UK where the OECD notes property taxes are the second highest among member countries.
But the real argument against a wealth tax in the UK is that we already have two – inheritance tax and capital gains tax.
IHT is an obvious wealth tax in that it simply takes 40% of any estate worth over £1m on the death of the asset owner. CGT is a stealth wealth tax. But it is still a wealth tax.
There was much joy among the well off in the UK in 2008 when Alistair Darling stopped treating capital gains as a kind of income (taxing them at 10%, 20% and 40%) and introduced a flat rate of 18%. We were all thrilled by the simplicity and clarity of the policy – and later by the introduction of entrepreneur’s relief which gave our innovators a nice CGT break.
But in our excitement, we failed to pay enough attention to the complicated stuff that Darling abolished – tapering and indexation.
Pre-Darling, your gains were indexed to inflation. You were not taxed on nominal gains – only on real gains. So there was no way that paying CGT could make you poorer in inflation adjusted terms. As soon as that indexation disappeared, so did the nice idea that you should only ever pay taxes on real gains.
Let’s say you bought equities in 2007 to the value of £100,000. You weren’t the greatest of investors. By 2019 you’d only seen their value rise by the same as inflation – an average of 2.8% a year to a total of £140,000. You use your 2019 annual allowance (£12,000) and cut the gains you have to pay tax on down to £28,000. Then you pay your 20% tax (I’m assuming you’re a higher-rate taxpayer) leaving you with £134,400. The end result? Over the 12-year period, your total purchasing power has actually fallen. You are poorer. How’s that for a stealth wealth tax?
The (sort of) good news is that I suspect that Rishi Sunak knows perfectly well that he already has two wealth taxes on the go. That’s why there was a review of IHT last year (it is crying out to be turned into a gift tax charged at the marginal income tax rate of the heir) and why one into CGT is about to begin. I suspect we all know what the outcome of that will be.
But CGT looks tempting for a cash-strapped chancellor
As Hargreaves Lansdown points out, you don’t have to look at the numbers for long to see the attraction to the Treasury. Chargeable gains (before the annual allowance) came to £57.9bn in 2017-2018, but revenues came to only £8.8bn, implying an average rate of 15%, when the headline top rate is 20% for higher-rate taxpayers.
Any chancellor with a hole in his pocket would reckon that could go higher. Rates could be bumped back to their old level (a top rate of 28% for all assets rather than just for residential property). Possibly more likely, they could be aligned with income tax rates – note that CGT payers are twice as likely to be higher rate taxpayers than non-CGT payers.
We might even see limits on the exemption for primary homes, currently depriving the Treasury of a whopping £26.7bn a year. Now that stamp duty has been cut for houses costing under the fairly arbitrary amount of £500,000, might CGT be introduced for those selling a property for more than £500,000?
There might also be changes to the way business assets can be gifted, or the exemption that effectively forgives CGT (in favour of the much more generous IHT) on death.
Most of the UK will think this matters little. With a £20,000 a year Isa allowance and a £40,000 pension allowance, most investors have very little outside of tax wrappers. And where they do, the current £12,300 annual CGT allowance does just fine. They may also think (possibly correctly) that no politician would be stupid enough to raise any taxes at the moment. But all this does matter.
The UK’s well-off are already highly taxed (the top 1% pay a near record 28% of all income tax). Bumping up the two taxes we already charge on their wealth makes for a good political soundbite. But it won’t end well – repeating the fact that the rich are both mobile and good at avoidance doesn’t make it less true. It also isn’t ever going to be enough.
Double CGT and, making the silly assumption that avoidance won’t rise, you are still only at £16bn. Double IHT (same silly assumption) and you only get £10bn. If we really want to dent our debt via the tax system, it isn’t just the rich that will have to pay more. Everyone will.
• This article was first published in the Financial Times
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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