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
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