How do you raise a trillion pounds from taxpayers? That is what the government now aspires to do: the UK will spend £1.14trn, £1.05trn, £0.99trn and £1.03trn over the next four years, according to the Office for Budget Responsibility, up from £885bn in the past year.
British governments typically run deficits – ie they almost never raise enough in taxes to cover all spending – but most aim to get close to balancing the budget. That is Rishi Sunak’s task over this parliament, which he began this week by pledging to spend now and tax later.
The Chancellor announced two main tax rises in his Budget. First, an increase in corporation tax, which will in theory rise from 19 per cent to 25 per cent in 2023, reversing most of the cuts made by George Osborne, who inherited a rate of 28 per cent in 2010 and set about slashing it in what was, alongside austerity, his signature policy.
Second, Sunak – who cannot raise income tax if he is to abide by the 2019 Tory manifesto – will freeze income tax thresholds, which will increase revenue over time owing to inflation. These two policies will do most of the work in beginning to reduce government borrowing.
But could Sunak have done more? More specifically, could he have done what many on the left would have liked, and simply “soaked” the rich?
That term originated during the Great Depression. It was used to describe legislation passed by US president Franklin D Roosevelt in 1935, the blandly named Revenue Act, which was nonetheless emotive enough to inspire a film within a year and reverberate through the culture in the decades since.
Whenever tax needs to be raised in a crisis, the rich – however they are defined – are perceived by some as a ready source of revenue. “If You Soak the Rich, Will They Leave?” asked the Atlantic in October last year (the question was just for show; the answer offered was a categorical no). “Should We Soak the Rich? You Bet!” ran a column in the New York Times a year before that. Others, such as the Wall Street Journal in the wake of the 2008 financial crisis will, in turn, always sombrely warn: “Soak the Rich, Lose the Rich”.
Should Sunak have soaked or at least mildly mopped the wealth of the rich this week? He certainly could have raised their taxes or changed the rules under which they pay them. But he could not have covered the cost of the Covid recession by doing so. He may yet soak them in the autumn, or in next year’s Budget, when the UK’s economic recovery is more fully under way. Under the current tax system, he has three ways of doing so.
First, he could raise the top or additional rate of income tax on earnings over £150,000 (which Osborne, in another flagship policy, cut from 50 per cent to 45 per cent). Second, he could increase the rates at which people pay tax on their “capital gains” – the money they make from their ownership of wealth, rather than the income they are paid for their labour. And third, he could reform inheritance tax.
Let us start with that third idea. Inheritance tax is paid by those who receive assets upon someone’s death, typically that of their parents or grandparents. But if you hand over any assets – a house, for instance – seven years before you die, you can avoid this tax altogether.
This arguably perpetuates wealth inequality. Some have therefore suggested inheritance tax be replaced by a lifetime receipts tax. Any major gifts received during a person’s life would be taxed, regardless of when they receive them. But as the centre-left think tank Demos recently reported, this would be deeply unpopular. A Labour government is unlikely to do it, let alone Sunak.
As for the first policy – raising the top rate of income tax – Sunak is hemmed in by the 2019 Tory manifesto, or rather his insistence on sticking to it. It is also not certain, although it is possible, that a higher top rate of tax would raise a great deal more revenue. Any effect on the UK’s public finances would likely be minor. There are simply not enough people who pay the top or additional rate of income tax (only 1.5 per cent of earners)
That leaves only one route under the existing system: raising rates or lowering thresholds on “capital gains”, ie the sale of one’s assets. There is a clear path for Sunak to raise tax on this front. Capital gains could be accurately described as a tax on the “1 per cent”: it is paid by just under 0.9 per cent of taxpayers. There is scope to tax them because, at present, the average rate they pay on asset sales is only 15 per cent. In contrast, the 32 million people in the UK who pay income tax do so at an average marginal rate of around 24 per cent.
Equalising tax rates on income and capital gains – as a Conservative chancellor, Nigel Lawson, once did – could plausibly raise a further £5bn a year from capital gains tax, up from a current annual rate of around £10bn. Such a move was rumoured ahead of the Budget. It may yet happen over the next year. (Buy-to-let landlords were delighted this week when it did not.)
New taxes on wealth could also always be introduced. The British were, after all, once taxed according to how many windows they owned. (This will explain the next bricked-up window you see on the side of a grand house.)
But calls for a new wealth tax, meekly advanced last year by the Labour Party, have since faded. Despite a pandemic in which the savings of the richest rose, while those of the poorest fell, there is at present little political momentum for soaking the rich in any fashion.
In fact, Labour spent much of this week objecting to Sunak’s tax rises for being too hasty – a stance which improbably aligned Keir Starmer’s party with the right wing of Sunak’s.