‘In taxing times, there is scope for raising more money without breaching election promises’

This is not an easy time to be Chancellor of the Exchequer: a terrible fiscal inheritance; public services in need of serious investment and a turbulent international environment. We came to power with promises not to raise taxes on ordinary people and commitments to control debt and run responsible public finances, which we need to keep.

But lower than expected growth and rising long-run borrowing costs may mean revisiting the position later in the year. On the financial markets, chatter is all about the need for spending cuts – but those chattering are not those dependent on public services. Moreover stop-start is inefficient; for example, the cost of major capital projects in Britain is higher than in other European countries, because construction firms don’t have a regular pipeline of contracts.

So while not advocating tax rises, we should have a look at the possibilities. Tax reform should be based on clear principles-people should pay what they can afford ie it should be progressive; different income sources should be treated alike. It should be transparent and discourage avoidance. Finally, it should reflect the economy as it is today – not as it was 25 years ago.

It is really important not to raise the burden on Ms Average Working-Person; this would be bad for her and for the economy. We shouldn’t tax the same people over and over, we should look at where activity is under-taxed.

Cracking down on loopholes in the tax system

Rachel Reeves said she wanted to close loopholes and she’s made a start, but there are more which could raise significant sums.

First: equalising the rate of capital gains tax with income tax. I’m sure many readers will recall their surprise on seeing Rishi Sunak’s tax return showing that he paid 23% on an income of £2.2m; compared with many public servants in schools and hospitals paying 40% on their £51,000pa salaries and a top rate payable on income over £125,000 of 45%. This was because income from capital gains is charged at a lower 28%.

Bringing these into line would raise an estimated £11bn pa, without including main homes. This idea is not some half-crazed Marxism – it is in fact what Tory Nigel Lawson did in 1988.

READ MORE: ‘Rachel Reeves faces a similar challenge to Labour’s Iron Chancellor in 1931’

The tax treatment of pension contributions for high earners is over-generous. A person earning up to £50,000 gets 20% tax back on their pension contributions. Above that threshold, the subsidy rises to 40%. This leads those with high incomes to make huge pension provision as deferring income leads to a lower tax bill. Giving everyone the same 20% relief would raise a staggering £13bn.

Finding a way to tackle the city lawyers’ loophole whereby they pay less tax than equally high-paid employees because of the legal structuring of their partnerships should also be on the agenda. Some estimate this at £8bn [2].

Changing the tax system to match the changing structure of the economy

Famously Faraday told Gladstone that he could tax electricity, though with current energy bills raising VAT on this would hardly be popular! But the underlying point is right – don’t tax things no one uses anymore, instead tax new developments.

The failure to tax internet giants is a distortion against normal retailers on struggling high streets as well as being straightforwardly unfair. These multinationals move their profits around globally, so to deal with this the French have introduced a 3% turnover tax. We should follow suit. This could provide a useful billion and finance the long overdue reform of business rates.

READ MORE: LabourList readers say PM should back Reeves – but not for whole parliament

Another change is the growing wealth disparity in Britain, partly explained of course by some of the loopholes addressed above. According to ONS statistics 23% of us have no savings at all; 50% of the people own 9% of assets; 10% own 43% of assets and 1% (and there are 700,000 of them) own 25% – with household assets of over £3.6m.

Part of this relates to housing where the IFS have found that half of new homeowners access the bank of Mum and Dad; others are cut out of home ownership. Council tax is based on a housing valuation undertaken in 1991 since which time London house prices have increased over six times and even those in the North East have gone up fourfold. It would therefore be reasonable and sensible to add some higher bands to council tax. This would raise at least another £1bn pa.

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‘There is scope for raising money without breaching our election promises’

I have not gone into the details here; work to get reforms well-designed would take a little time, but that is a reason for starting now and for building a consensus with the public that high public service standards have to be financed realistically. 

What I think this short survey shows is that there is scope for raising money without breaching our election promises or venturing into the politically difficult territory of wealth and inheritance taxes.

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