Looking at the other side of the ledger

Often articles here in LDV advocate new spending commitments but rarely look at their costs, or consider what a fairer taxation system looks like. I like to start with what I call Harold Wilson’s ‘pound in your pocket‘ principle. Wilson was reassuring the public that devaluation didn’t mean that their £ was worth less in sterling, but I take a deeper message from it:: the ‘pound in your pocket’ buys exactly the same however you came by it, whether that was by working for it (earned income), from rents, interest or dividends on savings (unearned income) or by selling items for more than you paid for them (capital gains). The first of these is the primary source of income for the vast majority of the population, while the second and third particularly are principally used by the rich and super-rich.

My first principle of fairness is that all income should be taxed at the same rates, regardless of source. The simplest approach is to fold employee and self-employed National Insurance contributions and capital gains tax into income tax. If everyone of working age is getting UBI, corresponding to the new value of the personal tax allowance, then we do not need NI to fund Job Seekers’ Allowance, while a ‘Citizen’s Pension’ set at the Guarantee Credit level would eliminate the remaining justification for a separate NI. It would also remove the need to claim for income that people are entitled to by right.

Merging NI and capital gains tax into income tax gives:

£1-37500 32%
£37501-137,500 42%
£137,501-upwards 47%

Removing the personal allowance and replacing it by UBI removes the marginal rate of 62% paid on incomes between £100,000 and £125,000; a more progressive system (Maggie Thatcher had a 60% top rate of income tax for most of her Premiership) could look at something like:

£1-40,000 32%
£40,001-80,000 42%
£80,001-160,000 52%
£160,001-upwards 62%

The IFS says an income of £160k puts you in the top 1% of income tax payers, so a 62% tax rate seems quite reasonable for this group.

My second principle of fairness is to treat savings consistently. At present we have a mess of occupational pensions, some DB, most DC, and also savings through ISAs. Pensions come from pre-tax income and are subject to income tax, while ISAs come from after-tax income and withdrawals are tax-free. It is probably far too late to unify this, but one change we should make is to put the same limit on the tax-free amount that can be held in an ISA as in a pension. For 2020-21 this amount is £1,073,100. Anyone with more than this in an ISA should be subject to the same tax as for a pension. The lump sum taken out of a pension above the limit is taxed at 55%, comparable with the progressive tax rates above.

My third principle of fairness is that inherited wealth needs to be taxed in the same way as earned wealth. The use of trusts to avoid inheritance tax is one of the biggest loopholes in the tax system and while the Press concentrates on egregious examples like the Duke of Westminster, the reality is that the use of trusts is widespread amongst the one percent who can afford wealth managers. We need to abolish family trusts and encourage the spreading of wealth, for example by changing inheritance tax into lifetime gift taxes on the recipients.

* Laurence Cox has been a party member and activist since 1981. He was a local councillor for 10 years and served on the Pensions Working Party that created the Citizen's Pension policy in 2004.

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9 Comments

  • Interesting article, thanks Laurence.

    What do you mean by fair? Would a flat rate of tax above UBI/tax free threshold not be fairer than progressive rates on higher incomes?

    Intuitively I agree with you about consistent rates across all forms of income but are there downsides that need to be acknowledged – does it discourage investment and saving? Is it not double taxation (and do we care even if it is?)?

  • Nonconformistradical 12th Oct '20 - 11:14am

    @Freddie
    “What do you mean by fair? Would a flat rate of tax above UBI/tax free threshold not be fairer than progressive rates on higher incomes? ”

    Doesn’t the concept of “fair” include the degree of inequality? At present we have a serious problem with inequality and I don’t see how a flat rate tax would address that.

  • Daniel Walker 12th Oct '20 - 2:33pm

    @Freddie “What do you mean by fair? Would a flat rate of tax above UBI/tax free threshold not be fairer than progressive rates on higher incomes?

    Flat taxes are regressive, for the simple reason that not every £10 is equal in utility. Obviously, £10 buys someone on a low income the same amount of, say, dried pasta as it does a rich person, but that amount of pasta is the difference between starving and not for one of them, and something for the kids to make art for the fridge for the other¹. (absolute food expenditure per person increases as income increases, but the proportion of income spent decreases )

    So what you’re looking for is equality of sacrifice (as far as is possible), not equality of tax levels; hence progressive taxation.

  • Freddie Jewitt 12th Oct '20 - 2:44pm

    @Daniel

    You would be correct but that’s where the tax free threshold comes in. Question of course is where to set it.

  • Laurence Cox 12th Oct '20 - 4:45pm

    @Freddie, Nonconformistradical, Daniel

    The matter of whether we should have a progressive or a flat-tax approach is a matter of one’s political philosophy. My argument, based on the ‘pound in your pocket’ principle is one that I would be confident in arguing with anyone whether from right or left.

    My own view, which is closest to Daniel Walker’s amongst the comments so far is that taxation should be moderately progressive. Our existing tax rates, where someone earning, say, £10 million per year is paying less than half as much again per £ earned as even the lowest earners comes pretty close to a flat tax; I am just arguing that it would be acceptable if it was a little higher, say twice as much as the lowest earners. I am not arguing for the near-confiscatory levels of taxation under the Labour Government of 1974-79, but I would remind everyone that Maggie Thatcher was quite happy to live with a 60% top rate for most of her Premiership even though the country was running a big surplus thanks to North Sea oil. There was no pressure on her chancellors to cut higher rates of tax quickly, when lower rates were brought down.

    The word limit on the original article also meant that I didn’t have space to explore taxation of savings or on inherited wealth in more detail. For example from the last link:

    A spokesman for the Grosvenor Estate said the family trust paid inheritance tax of 6 per cent on the value of its assets every ten years.

    This is quite true, but 6% every ten years is just under 0.6% per year. A low-risk return on assets with inflation at 2% would probably be 6% (4% above inflation), so they would be paying an effective tax rate of 10%. For comparison, in 2019 the FTSE100 returned capital gains of 12% and dividends of 5.1% so there is plenty of room to reduce risk while keeping well ahead of inflation, particularly as anyone in the top one percent would be investing globally, not just in the UK..

  • Sue Sutherland 12th Oct '20 - 5:13pm

    I agree with you about trusts Laurence because they are a mechanism for passing wealth down through generations and are also used to pay for private education. They may be complicated to unravel, though, as they are used to keep our stately homes and other historic buildings going, for example.

  • Laurence Cox 13th Oct '20 - 10:21am

    @William Francis

    I think you have misunderstood UBI; it is tax-free and its cost is offset by removing the income tax personal allowance and the National Insurance Lower Earnings Limit. In effect someone already paying income tax and NI at the standard rate will be no worse off; those who previously did not earn enough to pay income tax will be better off.

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