So, you want to raise £10 billion?Friday 20 May 2022
Suppose that the Chancellor wanted to raise £10 billion, so that he could cut a £1000 cheque to 10 million households this winter. Would it be possible to raise the money, in a way that doesn’t just tax the same people he would be trying to help? I can think of at least three options, any of which would do the job, and all of which would make the tax system better as well.
First, he could raise capital gains tax rates to match income tax rates, and reintroduce an inflation allowance, as his predecessor Nigel Lawson did in 1988. It was also the top recommendation by his own advisors, the Office for Tax Simplification, in 2020. This could raise up to £16 billion. While some people will doubtless delay cashing in gains to avoid the tax, the Chancellor should comfortably reach £10 billion even accounting for this. A reformed capital gains tax would also be fairer, reducing the opportunity for some to game the system to pay lower effective tax rates.
Second, he could apply National Insurance Contributions consistently across all sources of income. If you earn an average income, you’ll be paying 13.25% in National Insurance on every extra pound you earn. Someone with a higher income – your MP, for example, on a salary of almost £85,000 – is paying only 3.25%. And landlords pay a tidy 0%. Other oddities include that National Insurance is currently at zero after pension age, even for those in work, and effectively 1.25% on dividends. Fixing all these inconsistencies to tax all income consistently would raise more than £30 billion, so the Chancellor would have some money to spare to cut taxes, invest in education, or undo the cuts to the aid budget.
Third, he could introduce an annual wealth tax of 1.1% on individual wealth above £10 million, after netting off mortgages and other debts. This would raise £10 billion from the wealthiest 0.04% of the population. For this group the usual economic arguments against a wealth tax do not apply, and there is a “principled economic case for a recurrent tax on wealth”. There are also practical benefits, as existing taxes on wealth are not effective at raising tax from this group: a government report in 2018 showed that they are able use reliefs to pay just a 10% effective rate of inheritance tax – half the rate paid by individuals with £2 million in wealth.
Each of these options is good economics, raises some much-needed money, and would improve the tax system. But none should deter the Chancellor from a fourth bit of good economics: a windfall tax on energy companies. Their current higher profits are nothing to do with their own efforts, and everything to do with the economic fallout of the pandemic and the war in Ukraine. While there are no independent estimates yet of exactly how much it would raise, it is Economics 101 that such windfalls should be taxed at “arbitrarily high rates”. Whatever it raises can then be put to constructive use, whether supporting low income households or funding incentives for green investment.
There are plenty of options for the Chancellor to ease the cost of living crisis. Imagine if he were brave enough to implement them all.
Arun Advani, Associate Professor, University of Warwick and CAGE
A version of this opinion piece was first published in the Guardian: Three ways Sunak could raise £10bn to help people struggling with energy bills