5 tax changes for fairness and revenue

The richest 10% of British households own 43% of all wealth, so it’s not surprising that wealth taxes are a popular idea.

A recent survey by YouGov, testing support for tax reforms on the country’s wealthiest people, found that 73% of the population would back an additional 2% tax on wealth over £5 million and an extra 1% on wealth in excess of £10 million.

That public support crosses party lines. Among Conservatives, 69% support the additional tax at the £5 million threshold, and 77% at the £10 million threshold. Labour voters are more likely to support additional taxes at either threshold, with 83% in support of applying a tax at £5 million and 86% at £10 million.

More surprising than the cross-party support, according to Rachael Henry, Head of Advocacy and Policy at Tax Justice UK, is that even 66% of wealthy people thought they were under-taxed and supported higher wealth taxes

So, why is such a wealth tax not yet a reality?

“We did a survey of a representative section of MPs to see how they felt about wealth taxes, and just 38% of MPs think that there should be more wealth taxes in the UK,” Henry says.

“So, the politicians are out of step. Politically, tax is apparently a contentious area. It incites big emotions. But it’s also a very important aspect of public policymaking.”

Never has the UK so urgently required a tax system that delivers the funding the nation needs. The NHS has more than its fair share of problems, while recent HMRC failures include MTD, helpline closures and process shortfalls that impact vulnerable citizens. The incomes of the poorest 14 million people in the UK fell by 7.5% in 2022. Something has to give.

We know from government reporting that the tax gap for 2021/22, or the difference between tax that is collected and tax that is theoretically due, was £36 billion. That’s a £5 billion increase on the previous financial year, and is mainly due to tax avoidance, tax evasion and failures within HMRC.

That’s a significant figure in itself – it would more than cover the inflation-matching pay rises that the entire public sector desperately needs, Henry says.

But the tax gap is not the biggest issue, says Helen Miller, Deputy Director and Head of the Tax Sector at the Institute for Fiscal Studies (IFS).

“The tax gap, I think, is relatively low by international standards,” Miller says. “Of course, we want to get it down, but it won’t solve the big problems.”

Those problems, Miller says, will only be solved by a structural re-design of the tax system.

“We have unfairness issues, not because of straight up evasion but because certain groups can simply use tax law to reduce tax,” she says.

She points to one example – the difference between the tax rates available to employees and the lower rates available to business owners and the self-employed, arguing that this causes a serious revenue issue as the proportion of self-employed taxpayers increases and restricts Treasury’s ability to increase tax revenue.

“It really caps what we can do at the top end because if we increase income tax rates, more people will simply switch into self employment or into receiving dividends.”

There are similar problems in the VAT and council tax systems, Miller says. They have been designed in such a way that certain groups or activities are taxed at lower rates.

When it comes to the design of the tax system, something drastic has to be done, she says.

“UK public finances aren’t in very good shape, even though our taxes are historically high,” Miller says. “We’ve never raised more as a percentage of GDP but, despite that, spending is still tight. We’ve had a decade of austerity, of spending cuts. A lot of departments are still struggling. And our debt interest bill has gone up a lot.”

The tax reform we need

1 Create equality between employed and self-employed

Rather than tweaking the current tax system, Miller says, it’s time to reform it completely. This should start with greater consistency among individual tax rates, particularly between employees and the self-employed, or those earning investment or capital income.

“Most business owners are doing really good things, but they’re not necessarily entrepreneurs and they’re not necessarily going to employ a lot of people,” she says, arguing that there’s not an economic justification for tax breaks across this cohort relative to employees.

The problem, Miller says, is that employees can trade in their jobs for consultancy gigs, do the same work, earn the same income and pay less tax – so they are.

2 Increase capital gains tax

Currently, Miller says, the UK has a preferential capital gains tax rate for business owners. This is not unusual. Many countries have a similar policy around capital gains.

“When people put money into a business and they get returns as capital income it is different to employment income,” she says. “People are taking risks and putting their money into a company, buying tractors or laptops, etc.

“The mistake people have made in policy circles is to treat business income differently through tax rates. What they should be doing is treating it differently through the tax base.”

Miller says that anyone investing in a company should be able to deduct their costs and losses entirely, thereby subsidising entrepreneurship through the tax base: “We get much more bang for our buck if we do it up front.”

Henry agrees, saying the equalisation of capital gains tax rates with income tax rates would raise up to £15 billion annually.

This policy has the support of 62% of voters, according to a Political Calculus study from the University of Oxford.

3 Apply a 1–2% wealth tax on assets over £10 million

The majority of wealthy people agree with the concept of a wealth tax.

A tax on assets of over £10 million would only affect extremely wealthy people – about one in every 2,500 people, Henry says.

“If you tax them 1–2% on those assets, we have calculated that you would get in the region of £22 billion,” she says. “That’s from just 20,000 people.”

4 Apply National Insurance to investment income

Applying National Insurance to income from investments, including from rental property, share dividends and savings interest, would make tax rates fairer, Henry says – it’s all income. She also cites an £8.6 billion annual revenue increase from such a policy.

5 Invest in HMRC

Finally, Henry says, an underperforming government department doesn’t work to the best of its abilities. And when that department is responsible for the nation’s tax systems, it will not collect as much tax as it otherwise would.

Henry refers to the work of Dr Arun Advani, who called the reduction in auditing resources “a clear case of short termism” and calculated a return on investment so great that the work of each additional auditor would cover their own salary plus those of four nurses.

“So if we just invested more in HMRC, we would start to recoup more and more of that tax gap and could look to bring in significantly more revenue to the Exchequer with relatively low levels of investment,” Henry says.