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10 December 2019updated 08 Sep 2021 2:31pm

Labour’s dividend and capital gains tax proposals will make the tax system fairer

People with the same earnings should contribute the same amount in tax.

By Henry Parkes

In Jeremy Corbyn’s grilling last week, Andrew Neil turned the screws on the Labour leader with respect to his tax plans. In particular, he discussed the example of a low-income pensioner who would pay more tax under a Labour government as a result of plans to tax dividends at the same rate as income. Neil’s claim has kicked up a storm in the tabloids, raising the threat that this was a tax on ordinary people, a far cry from the claim that only the richest 5 per cent of people would pay more tax under a Labour government.

Firstly, it has to be said – it is true that some people on less than £80,000 of income would pay more because of Labour’s dividend income tax policy. Clearly, people on incomes less than £80,000 are not barred from owning shares – and therefore they could be impacted if they owned enough of them. However, the extent to which these are “ordinary people” can and should be challenged.

According to the Financial Times, the average dividend rate in 2019 is expected to be 4.2 per cent. That is, if someone has £1000 in shares, they would expect, on average, to get a return of £42 in income across the year. Given that Labour has proposed a de minimis allowance of £1,000 in dividend income before you have to pay any tax, the number of shares you would need to own before you pay a penny would need to be in excess of £23,000. Dividend rates are particularly high at the moment, and had we been considering this at the start of the decade when average returns were less than 3 per cent, you’d be looking at over £33,000 in shares to breach the £1,000 dividend income threshold.

It’s worth asking how many people would likely be impacted by this and their circumstances. According to our analysis of the latest publically available Wealth & Assets Survey (2014-2016), a major UK study based on self-reported data,  7 per cent of pension age people own over £23,000 of relevant assets, and this group have an average (median) net property wealth of £225,000. It’s also not a huge tax rise for many of those who are impacted. A pensioner with £50,000 in shares say would expect to pay up to £9 a week extra in tax, potentially less if they hadn’t used up their personal allowance on, say, a private pension.

These figures matter because the tax-advantaged wealthy shouldn’t be let off lightly to spare a small number of wealthy pensioners a modest tax rise. The current preferential tax treatment for dividends overwhelmingly favours groups who are beyond comfortable. The wealthy are far more likely to generate income from dividends and the different rates encourage tax avoidance as those with resources can use financial advisors to “convert” their income into forms which are more lightly taxed. The Office for Budget Responsibility has reported a big rise in recent years in people incorporating as single-director companies, in part to take advantage of the lower tax rates. And UK taxpayers earning over £150,000 (barely 1 per cent of all taxpayers) captured around 22 per cent of all direct income from UK dividends.

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This is fundamentally unfair – people with the same earnings should contribute the same amount in tax. And this proposal, coupled with taxing Capital Gains at the same rates as income, moves us towards a system which treats people more equally, where income from wealth is taxed like income from work.

And of course, these proposals also raise significant revenue which enables us to increase funding for public services in a sustainable way. All policies generate winners and losers and it is right to consider the trade-offs – but older people on low and average incomes will likely benefit the most from improvements in the both the NHS and Social Care, as well as the continuation of the “triple lock”.  This reform makes good economic sense.

Henry Parkes is a senior economist at the IPPR.

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