Yes to rad­i­cal tax re­form but no wealth taxes please, we’re Bri­tish

The Chan­cel­lor will need to take a deep dive into the tax sys­tem if min­is­ters are se­ri­ous about lev­el­ling up

The Daily Telegraph - Business - - Business Comment - JEREMY WARNER

Ken­neth Clarke, for­mer chan­cel­lor of the Ex­che­quer, used to say that he gave up on se­ri­ous tax re­form af­ter re­al­is­ing that what­ever he did, there would be win­ners and losers, and that po­lit­i­cally you would al­ways be cru­ci­fied by the losers while be­ing af­forded no credit what­so­ever by the win­ners, whose gains tend to be more dif­fuse and there­fore far less ob­vi­ous.

That may be too cyn­i­cal, but there is no doubt about it; mean­ing­ful tax re­form is a po­lit­i­cal night­mare.

Some­times it is better just to let sleep­ing dogs lie. Even so, all new chan­cel­lors feel duty bound to give it a go, if only even­tu­ally to be con­sumed by the leviathan of even greater tax com­plex­ity, with each new set of cir­cum­stances re­quir­ing a whole new layer of sup­posed reme­dies.

There won’t be much of an at­tempt at it in to­day’s eco­nomic up­date, which will be fo­cused on the more im­me­di­ate chal­lenge of pro­tect­ing and cre­at­ing jobs, but if the Gov­ern­ment is se­ri­ous about its pledge to “build back better”, then at some stage it must take a deep dive into the tax sys­tem.

There is, more­over, no time like a cri­sis to push through rad­i­cal re­form. Covid has high­lighted some deep un­fair­nesses in so­ci­ety, par­tic­u­larly as they af­fect the low paid and the young, so there may be more of an ap­petite for it than usual.

Here, I am go­ing to briefly ex­am­ine three spe­cific pro­pos­als for re­form: wealth taxes, a point-of-sales tax par­tially or wholly to re­place the in­creas­ingly bro­ken busi­ness rates sys­tem, and the trans­for­ma­tion of na­tional in­sur­ance into a fully hy­poth­e­cated sys­tem of so­cial in­sur­ance to fund health and so­cial care.

How­ever im­ple­mented, the first of th­ese taxes is very likely to be a bad idea. It’s not even cer­tain it would be par­tic­u­larly pop­u­lar. Peo­ple tend to be over­whelm­ingly in favour of wealth taxes, but only if hous­ing and pen­sion wealth is ex­cluded. Un­for­tu­nately, this is the great bulk of UK wealth; if you left them out you wouldn’t raise much money. Yet the Gov­ern­ment’s needy de­sire to be loved by the masses, and the gi­ant hole in the public finances left by Covid, never mind the whole “lev­el­ling up” agenda, con­sid­er­ably raise the pres­sure for ad­di­tional sources of rev­enue. Tar­get­ing the sup­pos­edly wealthy ticks a lot of po­lit­i­cal boxes.

Ac­cord­ing to the lat­est IMF Fis­cal Mon­i­tor, the tax bur­den in Bri­tain is about mid­dle of the pack for ad­vanced economies, at 36.6pc of GDP last year.

At the top is Den­mark with a 53.6pc bur­den, closely fol­lowed by France at 52.8pc. At the bot­tom are Hong Kong and Sin­ga­pore at less than 20pc, so there’s one thing three mil­lion Hong Kongers of­fered a path­way to Bri­tish cit­i­zen­ship won’t be too happy about. Whether they would con­sider high taxes a price worth pay­ing for free­dom re­mains to be seen.

And given the UK Gov­ern­ment’s “lev­el­ling up” pre­ten­sions, taxes are inevitably head­ing higher still. You can­not be both a big state and a low tax econ­omy. By the way, the Ger­man tax bur­den is 46.8pc. It seems un­likely we will get that high; look­ing at post-War ex­pe­ri­ence, the UK econ­omy al­most in­vari­ably stum­bles once the bur­den rises much above 40pc.

It would re­quire some big struc­tural changes to make con­ti­nen­tal lev­els of tax com­pat­i­ble with de­cent lev­els of growth here in the UK. The tax bur­den none­the­less must rise some­what if we are to pay for all those prom­ises of ex­tra health and so­cial care spend­ing, never mind the planned “in­fra­struc­ture rev­o­lu­tion”, ed­u­ca­tion, train­ing, the po­lice, the de­fence bud­get... The re­sult­ing short­fall can­not in­def­i­nitely be bor­rowed.

Mar­kets are for the mo­ment very for­giv­ing, but it will not ever be thus. Wealth taxes there­fore make an ob­vi­ous tar­get. But how de­sir­able, and in­deed prac­ti­cal, are they in the flesh?

In an­swer­ing this ques­tion, I’m draw­ing heav­ily on anal­y­sis aired by Arun Ad­vani, as­sis­tant pro­fes­sor of eco­nomics at the Univer­sity of War­wick, Emma Cham­ber­lain, a lead­ing tax lawyer, and Gus O’Don­nell, a for­mer Cabi­net sec­re­tary, at the re­cent launch of an In­sti­tute for Fis­cal Stud­ies in­quiry into the case for wealth taxes.

There have been many past at­tempts at them in Europe, but only in Switzer­land has a com­pre­hen­sive wealth tax achieved any suc­cess in rais­ing de­cent sums of money, and that’s pos­si­bly be­cause Switzer­land doesn’t im­pose much in the way of in­her­i­tance tax.

Al­most ev­ery­where else, wealth taxes have been largely aban­doned be­cause of the chal­lenges of val­u­a­tion, ad­min­is­tra­tion and the fact that many ap­par­ently wealthy peo­ple, though as­set rich, are in­come poor.

In­ter­est­ingly, there have also been two goes at it in the UK, once un­der Lloyd Ge­orge’s 1909 “Peo­ple’s Bud­get”, which im­posed un­prece­dented taxes on the land and in­come of the wealthy to fund new so­cial wel­fare pro­grammes (sound fa­mil­iar?), and then by De­nis Healey in the midSeven­ties. The same prob­lem be­dev­illed both at­tempts.

Healey ob­served in his mem­oirs that he found it im­pos­si­ble to de­sign a tax that would raise enough money to cover its ad­min­is­tra­tive costs. Maybe Boris John­son and Rishi Su­nak will find a way, but I’m scep­ti­cal. In any case, to be tax­ing wealth at a time when the coun­try des­per­ately needs to be at­tract­ing tal­ent and in­vest­ment to bol­ster its post-Covid, post-Brexit econ­omy doesn’t ob­vi­ously make sense, even if it ap­peals to their new Red Wall taskmas­ters.

A new point-of-sales tax as an al­ter­na­tive to busi­ness rates? With the growth of on­line re­tail­ing and the des­o­la­tion of the high street, both of which have been given added im­pe­tus by the Covid lock­down, this makes more sense. In the end, all sales taxes, how­ever levied, are paid for by con­sumers, not by com­pa­nies, but it would help level out the play­ing field be­tween the likes of Ama­zon and the bedrag­gled shop owner, as well as pro­vide lo­cal author­i­ties with a specif­i­cally lo­cal tax to play with.

As for so­cial in­sur­ance, that’s a must if sig­nif­i­cantly higher lev­els of na­tional in­come are to be de­voted to health and so­cial care. Wealth taxes are un­likely to raise enough to plug that gap.

What O’Don­nell calls the “burn­ing plat­form” of Covid gives Su­nak a once in a gen­er­a­tion op­por­tu­nity to push through mean­ing­ful tax re­form.

There has long been an ur­gent need for it; maybe the cri­sis has also cre­ated an ap­petite for it.

But even with an 80-seat ma­jor­ity, build­ing the po­lit­i­cal con­sen­sus for it will be hard.

And it will re­quire a de­gree of lead­er­ship which has not been much in ev­i­dence since this lot came to power six months ago.

Boris John­son and Rishi Su­nak visit a Pizza Pil­grims restau­rant in east London. The Prime Min­is­ter and Chan­cel­lor are likely to raise taxes to fund the ex­pan­sion in spend­ing

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