When you tell people about the British tax system they don’t think it’s fair. Of course that’s true with respect to multi-nationals like Google, using legal loopholes to pay tiny taxes on their profits. But it’s also true when it comes to the balance of tax between rich, middling and poor families.
People know that, as you earn more, you pay a higher rate of income tax. So when the Fabian Society told a series of focus groups that, looking across all taxes, low income families pay a higher share of their income, the participants were puzzled and angry.
But the uncomfortable reality is that poorer families pay lots of other taxes which are both less visible and less progressive than income tax: national insurance, VAT, council tax and sin taxes. And they don’t start with much money in the first place, so any liability represents a bigger share of their income.
We either need to increase the incomes of low earning families, through benefits, pensions and pay. Or we need to reform the tax system to reduce their liabilities (and raising the income tax personal allowance won’t cut it – this benefits the rich more than the poor).
The mismatch between tax liabilities and people’s ability to pay gets even greater when you look at wealth as well as income. Most low income families have few assets to their name (indeed, many are in debt). While at the top, wealth has been rising much faster than incomes, both over the long-term (the Piketty effect) and since the financial crisis. This means that wealth inequality is far higher than income inequality, and yet we tax wealth far less than income.
The participants in our research told us that people with the broadest shoulders should pay more. So we concluded that the public is ready to be persuaded that wealth should be better taxed.
But there is an obstacle in the way. The same people who want the rich to pay more also loath the most prominent wealth tax we have right now: inheritance tax. For good or ill, the tax is too toxic to save, because citizens think it is a tax on grannies and grief, not on lucky heirs.
Our solution is to introduce a range of new ways of taxing wealth, but at the same time to scrap inheritance tax. The most obvious way of doing this is to stop taxing estates and instead to tax the recipients of all gifts and transfers, on the same basis as we tax their income. After all, it makes little sense to tax income generated through hard work the most, income generated from investments a bit less, and money we are lucky enough to receive for free the least.
Alongside this, other ways of taxing wealth are needed. Property or land should be taxed in a more proportionate and less intrusive way. The combination we have today of council tax (regressive) and stamp duty (progressive but distortive) makes no sense. A proportionate annual land or property tax should take their place. Meanwhile, there are lots of proposals kicking around for the reform of taxes on capital gains.
With that we would address the future taxation of wealth. But what of all the wealth accumulated over so many decades of minimal taxation? Perhaps it is time to consider a one-off, retrospective tax to pay for future public investment. A forthcoming Fabian report will make that case, with a particular emphasis on valuing and taxing wealth hidden in off-shore tax havens.
Selling all this won’t be easy, but people’s instincts are that people with a lot should pay more. The detail of the reforms will need to go with the grain of public opinion. That’s why there will need to be some give and take. But on taxing wealth, we have a wealth of options.
Andrew Harrop is General Secretary of the Fabian Society, the Labour Party’s main policy think tank.
If you have a policy idea in response to this piece, please submit it to editor@kingsthinktank.org by 12th February 2016. The best ideas will be published in the March edition of our journal, The Spectrum.