Saving sustainably

We already encourage saving - why not encourage sustainable saving instead?

The post-Budget row over tax relief for charitable giving has obscured the fact that there are many tax reliefs given for profitable activities without any consideration for the public benefit of the activities being effectively subsidised. Around £40bn a year of relief against income or capital gains tax goes to support pension saving, ISAs and protect individual gains from the sale of residential property. In times of austerity shouldn’t we be looking more closely at how this money is used? Could the Government use the policy leverage created by such subsidies to encourage more responsible behaviour in the financial sector that benefits the taxpayer as well as the individual investor?

Britain’s economy before the credit crunch was based on high borrowing to fuel increasing consumption which drove economic growth. As individuals we didn’t save enough for our own financial security, and as a country, we haven’t invested enough in our economic future. To face the long term challenges to our economic prosperity like an ageing population or climate change, we will need a more resilient economy that has far stronger foundations of savings and investment.

So what happens to the money that we combine with the tax subsidy in order to save for the future?

Well, we know that pension funds and institutional investors place much of this in the stock market, but the evidence shows that more and more of this capital is used for high frequency trading rather than long term investing. Andy Haldane of the Bank of England is one high profile regulator who is very concerned with this development. Cash placed in ISAs earns a very low rate of interest and, in as much that these funds bolster bank balance sheets and help fund lending to the economy, we also know that the majority of such lending actually funds property loans and financial speculation. Less than 20 per cent of UK bank lending goes to the productive economy of growing businesses. Finally we know that fees and charges in the investment and banking sectors are notoriously opaque, and competition is far from perfect.

So there is an understandable lack of trust in the finance sector, yet the government has to find a way to convince the public not just to save more, but channel those savings into productive investment. One way to do this is for the government to be more explicit about encouraging savings and investments that apply responsibility criteria and enhance social and environmental well being, as well as financial returns. Moreover, it should be using the existing subsidies to enforce this principle. In an era where all subsidy has to be made to work harder for the public interest, there should be a principle that, in return for tax relief, savers and investors should be able to demonstrate a contribution to the public good. This will not be easy to do, but there is a growing set of voluntary standards and codes of practice which investment organisations can apply to demonstrate they are taking a responsible approach, looking a long term interests, not just short term profits.

In my recent report for Green Alliance, Saving for a sustainable future, I make the case for these principles to be used in public policy and set out a few ways in which it could be applied:

  • Pension tax relief could be made conditional on responsible standards being applied.

  • Banks could only be able to offer tax-free Cash ISA accounts if they could demonstrate responsible and transparent lending practices.

  • Capital gains tax relief for the sale of a residential property could be made conditional on certain energy efficiency improvements being made to the building.

There is political consensus on the need to rebalance our economy and reshape British capitalism in way that better incorporates the values of society. Applying these ideas to existing taxpayer subsidies is a good start.

Green - well, yellow - Britain. Photograph: Getty Images

Chris is an independent environmental policy consultant working on sustainable finance, climate change, energy policy and the green economy. He is a fellow of the Finance Innovation Lab, and an associate of Green Alliance, where he has written on the Green Investment Bank, environmental tax reform and sustainable savings policy.

He was previously head of Climate Change at the Environment Agency and senior research fellow for sustainability at IPPR. Follow @chrisjhewett on twitter.

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Taxation without benefits: how our tax system increases inequality

We often hear the progressive income tax used as a proxy for all tax when it actually accounts for just over a quarter of the tax take.

Tax may not be the burning issue on everyone’s minds over the next month, but the Panama Papers leak has proven that the thorny issues of who pays what, and what level of tax is fair, are ones that are never too far away from the public consciousness.

One of the most important annual publications on tax is the Office for National Statistics’ Effects of Taxes and Benefits on Household Income. Published today, it shows, among other things, the proportion of income paid in tax by people at different points on the income spectrum. This may sound like the natural domain of the data nerd, but it actually tells us some rather interesting facts about our system of taxes and benefits.

First, the good news. Our much maligned welfare system is in fact a beacon of progressiveness, drastically reducing the level of income inequality we see in this country. In fact, overall, taxes and benefits are quite substantially redistributive. Without them, the income of the richest 20 per cent of households would be 14 times higher than the poorest 20 per cent. With them, that gap falls to only four times.

The benefit system as a whole decreases the Gini coefficient, the most frequently used measure of inequality, by 14 percentage points. For anyone who sees taxes and benefits as a key component in reducing economic inequality, or boosting the incomes of the poorest, or, frankly, tackling social injustice, this is rather welcome news.

But now for the bad news.

While our welfare system is undoubtedly progressive, the same cannot be said of our tax system when looked at in isolation. The poorest face a disproportionately heavy tax burden compared to the richest, paying 47 per cent of their income in tax, compared to just 34 per cent for the richest. Last year (2013/14) this difference was 45 per cent – 35 per cent, and the year before (2012/13) the gap was 43 per cent – 35 per cent. So while the proportion of income paid in tax has fallen slightly for the richest, it has increased for the poorest.

While some taxes like income tax are substantially progressive, those such as VAT and Council Tax are not. Even after adjusting for rebates and Council Tax Benefit, the poorest 10 per cent pay 7.1 per cent of their income in council tax while the richest 10 per cent pay only 1.5 per cent.

Should this matter, if our system of benefits continues to narrow the gap between rich and poor? Well, yes, not least because that system is under severe pressure from further cuts. But there are other good reasons to focus on the tax system in isolation from the benefit system.

Polling by Ipsos MORI has shown that the public believes that the tax system by itself reduces inequality, and it is often spoken of by politicians as if that is the case. We often hear the progressive income tax used as a proxy for all tax, for example, when it actually accounts for just over a quarter of the tax take.

Understanding why the tax system does not by itself reduce inequality is therefore important for both thinking about how tax revenues could be better raised, and for understanding the importance of the benefit system in narrowing the gap between the richest and the poorest.

John Hood is Acting Director of the Equality Trust