Why we need (some) tax rises now

A strong post-Covid recovery will require public sector investment and progressive taxes to tackle wealth inequality.  

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Is now the right time to raise taxes? Ahead of this week’s Budget announcement, reports of the various tax rises Chancellor Rishi Sunak is supposedly considering abound, while Labour’s message is that “now is not the time for tax rises”. So, who is right?

The answer is that it’s complicated. The overall size and nature of the package is what matters – tax and spending cannot be considered in isolation. And not all tax rises are created equal. While some tax rises would slow the speed of the recovery, others that tackle wealth inequality will have a low short-term impact on growth. In the long term they will put the economy on a stronger footing.

The 12 years since the financial crisis have been marked by stagnant growth and falling living standards. Home ownership is 9 per cent below its pre-crisis peak, while average real wages have increased by £1 since 2008. This is in no small part due to high inequality, which has concentrated money in the hands of the wealthy, depressing demand and holding back long-term growth. The OECD estimates that income inequality alone wiped 8.5 per cent off GDP over 25 years.

Read more: Why an online sales tax isn’t the cure the high street needs

These concentrations in wealth that have built up over time have, in many cases, nothing to do with actual economic growth. House prices, for example,  have not risen by 32 per cent since 2007 because home owners have worked extra hard; they have risen because the owners of those homes were lucky enough to hold them during a period of low interest rates and quantitative easing, targeted subsidies, and restricted supply. Unwinding these inequalities, therefore, has little to do with growth either.

A package combining support for struggling businesses and households – foundational public services and critical green investment with progressive tax rises to tackle wealth inequality – is what is needed to ensure a fair and strong recovery. Without both of these elements we risk falling into a repeat of the past 12 years.

In a recent briefing by the IPPR think tank, we suggest four priority tax changes that could happen this year: bringing capital gains, dividends tax in line with income tax; replacing inheritance tax with a lifetime gifts tax; reversing recent cuts to corporation tax; and replacing our current system of property taxes with a land value tax on businesses and a proportional property tax on homes. 

Read more: How Rishi Sunak has borrowed from John McDonnell

These reforms are necessary to end the unfair biases in our tax system that allow the wealthy to get away with paying less. The evidence suggests that they would not have a detrimental impact on growth in the short term, and in the long term they will help strengthen the foundations of our economy. These should be accompanied by a £190bn stimulus plan – the amount needed to avoid falling into a low-growth trap. Overall, such a package would be highly positive for both growth and justice. 

But we still have a long way to go before we reach an economy where young people’s life chances are no longer determined by their parents’ wealth, where it’s possible for people on ordinary incomes to buy a decent house and afford a decent retirement, and where it’s easier to catch up than it is to pull further ahead. The time to start making these changes is now.

Shreya Nanda is an economist at the IPPR Centre for Economic Justice.

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