I referred to the need to tax capital gains at higher rates yesterday if any party was serious about tackling inequality in the UK.
This is not the only tax reform required to achieve that goal. Another deeply inequitable tax in the UK is national insurance. This is for two reasons. First, the rate falls as people enter higher rates of income tax, rather negating the purpose for those higher tax rates, the graduation of which could be much better managed if national insurance was not cut when they begin.
At least as importantly, national insurance is not charged on unearned income (rents, interest, dividends, capital gains, etc.). The result is a considerable bonus for those who can arrange their income in this way. This has, of course, been the basis for much tax planning by contractors and others over many years, who have used dividend payments from limited companies that they own, which have been paid in lieu of salaries, to reduce their overall tax rates.
There is an obvious way to tackle this inequality. It is called an investment income surcharge. We had one in the UK for more than 20 years, but Margaret Thatcher got rid of it. It is time that we had one again, creating an additional 15% tax charge on income from wealth of more than £10,000 a year. It is absurd that those who live off unearned income in the UK pay less tax than those who have to go out to work to earn the same money.
The video was made in 2021. It remains as relevant now.
And what do you think? A poll:
Should we have an investment income surcharge to increase the tax rate on unearned income in the UK?
- Yes (59%, 117 Votes)
- Yes, and the combined tax rate should be higher than that on work (29%, 57 Votes)
- No (5%, 10 Votes)
- No, because that will discourage saving (4%, 7 Votes)
- I'm abstaining, but show me the results anyway (4%, 7 Votes)
Total Voters: 198
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We should certainly equalise the tax rate for individuals whether earned income, unearned income or capital gains.
For me, the question is how best to achieve this from (a) a practical/administrative perspective and (b) a political perspective.
Is this best done through an investment surcharge or via extension of NI to all income or abolition of NI/increase Income Tax? All would deliver pretty similar results – but which is most likely to get acceptance at the ballot box? I am not sure.
Fiddling with scope/rates of NI and Income Tax is potentially political dynamite so it is perhaps best to introduce a “new” tax – the investment surcharge – but my preferred approach is to gradually cut NI rates and raise Income Tax rates over a decade long process to allow current and prospective pensioners a chance to adjust/plan. We would then just have a single Income Tax covering (as it does now) all income from wherever it comes.
Finally, we should not omit EmployERS NI from this equation – that is still a tax that workers effectively pay.
The problem with merging IT and NI is that pensioners do not pay NI and as a result they will not vote for it and their votes appear to have triple weight attached to them.
If we were to merge Income Tax & NI it would presumably be administratively simple to have a higher Tax Allowance for Pensioners to compensate?
That is possible
Age allowances have been used before now
Yes, that is a problem. But I am not sure that any system that tries to equalise earned/unearned income will get the pensioners vote – almost by definition, pensioners get unearned income. The key has to be to galvanise working people to outvote us pensioners!
Perhaps the key to this is to ensure that the switch is fiscally neutral and demonstrate the benefits to workers in reduced NI/IT rates.
Incredibly hard to achieve….
Increasingly many people above state pension age are able to, want to, or need to, continue to work for some years. It is not at all clear to me why they don’t pay NICs like other earners.
Me neither
And I will benefit in a year’s time without any apparent justification
Another possibility might be to reform Social Security, in particular ‘Contributory’ benefits such as The State Pension, Unemployment and Sickness benefits so those of us who pay it would get something for our payments?
You do get something
I think you are saying you want more
But that does not solve the inequality inherent in the tax system
Why do we need tax on income at all? The modern income tax was, after all, only introduced as a temporary measure by Robert Pitt the Elder in 1842. Taxing spending (sales tax) is much harder to avoid. When VAT was introduced the idea was that it would be applied at varying rates depending on the luxuriousness of the goods – so very soon after it started in the UK in 1973, (I remember it well and was registered from day 1) the rate for certain goods was 12.5% as opposed to 8% for everything else. I never understood why that was dropped.
That way you earn your money by whatever means and you pay tax when you spend it.
And lets not lose sight of the fact that taxes do not fund government expenditure anyway. Money is introduced by the government via the banking system and it is withdrawn by way of taxation. The actual rate of tax and what is taxed determines the velocity at which withdrawal happens.
Indirect taxes have always, so far, been deeply regressive – whatever the IFS has to say on the issue, where they bluntly base the data to claim otherwise.
IT is progressive
Until we have a progressive indirect tax – which would be on financial flows and not on spending as the rich do not spend all their income on consumption and the less well off basically do – then we need an income tax
Why do we need a tax on income? Well, the revenue has to come from somewhere (or to put it in MMT terms, public spending has to be taxed back somehow). Income tax raises about £200 billion in the UK, and VAT about £130 billion. If we abolish income tax, would you be content for VAT to rise to 50% – probably more, given the behavioural change it would cause – to compensate?
VAT was introduced on 1 April 1973 with a flat rate of 10%. Quite a lot of the complexity that we still have today – including the bizarre categorisation games in the zero rate for food – comes from the decades of purchase tax before that, which levied different rates according to a politician’s changing perception of “luxuriousness” as between, for example, chocolate cakes (ordinary) and chocolate biscuits (luxury). Some 18 months later, the new Labour government reduced the standard rate to 8% and added a higher rate of VAT for “luxury” goods which remained in place for just five years from 1974 to 1979 (first 12.5% then 25% then 12.5% again) but the higher rate was abolished by Geoffrey Howe in June 1979 and never came back. Given the standard rate is 20% there is not that much scope to increase it again, I would suggest. The highest rate in the EU – Hungary – is 27%, with a few at 25%, but most around 20%.
There is an interesting question as to whether the VAT zero rates – for food, for example – make products any cheaper for consumers in the UK compared to EU countries that charge VAT on them, albeit often at reduced rates. I believe the empirical evidence suggests not.
Sweden has low VAR exemptions BUT makes up for it with high transfer payments to those with need
There is an argument that is more progressive than what we have
“introduced as a temporary measure by Robert Pitt the Elder in 1842”
I think you meant William Pitt the Younger in 1799.
It’s a moot point. I agree the first UK appearance of income tax was during Pitt the Younger’s administration in 1799. The tax was reintroduced as a temporary measure by Robert Peel in 1842. Not Pitt the Elder as I misread. Should’ve gone to Specsavers.
And thanks to those who put me right about the need for an income tax at all.
How is everyone on Land Value Tax? I see it isn’t in the glossary expcept for a mention under the heading of Land Taxes. A friend of mine is heavily into LVT and is a member of the Labour Land Campaign.
Give me time….I have been kind of busy of late
250 articles in a very few months is quite good going
But as for LVT – fine…but it’s not a replacement for anything but council tax and to pretend it is is to wholly misunderstand where value comes from in society
Pitt the Younger introduced the first income tax from 1799, but it was abolished in 1802.
Robert Peel reintroduced income tax in 1842, and that is the tax we still have more or less.
Both – at least arguably Tories, incidentally. (Pitt described himself as an “independent Whig” but he led the “new Tories” against Fox’s Whiggish opposition.)
Levy CGT on property equity release – and on private residential property gains above a certain threshold – but mitigated by taper relief.
Age allowances have been used before now
I know. I just missed out on them!!
🙂
It is basically pensioners who live off unearned income with the vast majority having worked and paid tax for 50yrs. So you wish to hit them hard at a time in life when they have no earning power. I suggest you rethink!!
First, this would not apply to pensions to a reasonable level. I have always made that clear.
Second, it is not pensioners who live off unearned income, it is the wealthy
As usual for a troll, you are taking all your claims up
Am trying to put together a very crude budget report- type, fairly aggregate breakdown of spending and income for next three or so years . The idea being to challenge Labour etc what could be done.
Would love to see estimated total income for some of these options .
Sorry, but what options precisely?
If you were to design an updated capital gains tax system would you do anything more than just increase the rate to the marginal rate of tax? Would you consider allowing for indexation for inflation? This can reduce the impact of a gain to just that of a real gain. What about averaging of the gains over the last five years of taxable income? Would you keep the current exemptions? Would you apply all of these changes for assets sold after the announcement date, or just for those purchased after that date?
There are so many problemmatic areas built into the taxation system from years of tinkering and lobbying from vested interests. Why not go so much further with some ideas to clean out the inherent inconsistencies and inequalities built into the current system?
And my apologies for not getting this comment to you earlier, but enjoying being outside in the spring sunshine, which makes you realise our manmade systems and processes are there to protect only a small part of society.
I would not allow indexation because there is no appropriate index
I would reconsider exemptions for private residences on death or last sale
I see no reason for the excessive entrepreneur’s rate. Up t £500,000 it may have a role. Beyond that, not at all
Reinvestment rules need review
And the spouse exemption also needs very careful review