Why should someone who goes out to work for a living pay a higher rate of tax than someone living off their wealth?
It’s a question that will puzzle many people in the wake of the Institute for Public Policy Research’s finding that a staggering £90 billion could be raised for public services if capital gains were taxed the same as income. This was a key recommendation from our The World we Want report. Capital gains are the profits from selling something, such as a business, property or a piece of art.
Wealthy people are more likely to get income from wealth and can end up paying less tax than they would if their income was from work. The easiest way is to be paid in company stock, rather than cash, cutting the tax rate for higher earners from 45% to 20%. This is how a hedge fund manager can pay a lower tax rate than their cleaner.
Even Thatcher thought income and capital should be taxed equally
At the height of Margaret Thatcher’s reign the same basic unfairness was ended.
In 1988, using words remarkably similar to the IPPR’s, the Chancellor of Exchequer, Nigel Lawson said: “There is little difference between income and capital gains and many people effectively have the option of choosing which to receive… it is by no means clear why one should be taxed more heavily than the other.”
To say we’ve come full circle since 1988 is something of an understatement. Wealthy people living a low tax lifestyle today benefit from even lower capital gains rates than they would have 30 years ago.
Clearly something has gone wrong, but it’s equally clear how politicians of all persuasions can put it right. We need to ensure that those who live off their wealth pay at least the same level of tax as those who live off their own work.
Tax Justice UK and Oxfam supported the IPPR on the report Just Tax: Reforming the taxation of wealth and work by Henry Parkes and Shreya Nanda which is available to download here
Read our short explainer on taxing income and wealth the same.
The salvo of cash promised in today’s spending review shows anti austerity arguments have won out. But these promises needed to be backed up by a fairer tax system.
Tax Justice UK’s Executive Director, Robert Palmer, said: “It’s clear the anti-austerity movement has won the debate that we need more public spending. However, we must go further to undo the cuts that have caused real hardship for millions.
“Nine years of cuts have helped entrench inequality in the UK. Until politicians address the low tax lifestyles open to the wealthy and commit to a fair tax system that invests in decent public services, “ending austerity” will be a meaningless headline for hungry Chancellors.”
With no Office for Budget Responsibility report to provide economic and fiscal context to today’s statement, it seems there is no-one around to check the Chancellor’s sums.
When it comes to tax Briton’s wealthy have ‘never had it so good’.
Recent research found that the unearned income of the most well off more than doubled in recent years while taxes on wealth are often lower than those on income from work. It is no wonder that wealth inequality is now estimated to be double that of income inequality.
Today’s report by Oxfam ahead of the G7 summit calls for an end to the low tax lifestyle enjoyed by the wealthy. It urges the creation of a new wealth tax and an end to the lower tax rates enjoyed by people who make a living from their property and assets. We really welcome putting this issue on the agenda.
Until recently income and capital gains taxes were charged at roughly the same rate. Prior to April 2008, capital gains were treated as the top slice of income, and the tax was charged at the same rates of tax as savings income (10%, 20% and 40%). Today income tax rates are 20, 40 and 45%, whereas the main Capital Gains Tax rates for individuals are 10 and 20%.
Bringing Capital Gains Tax back in line with tax on work was a key recommendation in IPPR’s Economic Justice Commission report, as well as the 2011 IFS Mirrlees report on reforming the tax system. It was last done by a Conservative government under Margaret Thatcher.
A decade on from the start of the financial crisis austerity has placed a huge strain on public services and a clear public majority has emerged that is in favour of increasing government spending and of accompanying tax rises.
As set our in our report ‘The World We Want’, Tax Justice UK believes unearned income should be treated the same as income tax and we are working with Oxfam and the Institute for Public Policy Research on proposals to bring them into alignment.
It is no longer justifiable for the wealthy to continue to benefit from a low tax lifestyle while the rest, toiling on stagnant wages, face the full income tax whack.
A review of inheritance tax released by the government today illustrates why the tax is ripe for reform. The Office of Tax Simplification highlighted how a number of features of inheritance tax, including some that benefit the very wealthy, are hard to justify.
Responding to the review, Robert Palmer, Executive Director of Tax Justice UK said: "Inheritance tax is broken. The public dislike it and the very wealthy can get away with not paying it. This review has pointed to a number of features of the tax which are hard to justify,
for example that no tax is due on shares on the AIM stock exchange. However, we need a more ambitious reform agenda to make inheritance tax work properly.”
Tax Justice UK’s recent report into inheritance tax reliefs found that a small number of the wealthiest families in the country are sharing up to £666 million a year in inheritance tax breaks on agricultural and business property. The Office of Tax Simplification pointed out that these reliefs will cost £5.85 billion over the next five years but due to its limited scope, the review stopped short of suggesting major reform.
Our report on inheritance tax 'In Stark Relief' recommends:
Latest figures show the UK is missing out on billions annually in lost tax revenue with amount rising for the second year in a row.
Statistics from HMRC estimate a shortfall of £35 billion in 2018/19 between the tax that should have been paid and the amount actually collected, up £2billion on the previous year and an increase of 17% since 2015/16.
Robert Palmer, Executive Director of Tax Justice UK, said: “The missing billions that HMRC claims make up the UK’s tax gap is equivalent to the entire budget for housing and the environment. While we’ll never collect all of this, more needs to be done.
“But there is a strong argument that the £35 billion gap is an understatement. Some argue that the actual figure could be as high as £120 billion as HMRC’s calculations miss out whole parts of the problem. To track down these missing billions HMRC needs to be properly resourced. The government must also close tax loopholes and take action against tax professionals who enable tax dodging.”
Analysis of tax returns recently published by Dr Arun Advani and the Social Market Foundation found HMRC had significantly reduced the number of spot checks it carries out. Dr Advani’s research also found that targeted spot checks are effective at finding instances of underreporting and influence taxpayer behaviour in subsequent years.
Politicians are giving some of the wealthiest families in the UK generous tax breaks, money that cuts into the cash that could be spent on doctors or teachers.
Tax Justice UK’s new research finds the government is handing out up to £666 million a year in inheritance tax reliefs on land and business property to families who are already well off.
Inheritance tax is unpopular, but most people don’t own enough to pay it since every couple can pass on up to £950,000 of their wealth tax free.
Our research shows that if you're very well off there are additional ways of cutting your bill.
This graph taken from the Office for Tax Simplification gives a sense of how the effective inheritance tax rate goes down for the really wealthy.
Part of the reason the rate drops is the tax reliefs that are available. Agricultural property relief reduces inheritance tax at a rate of up to 100%, while business property relief reduces tax by between 50 and 100%.
The idea is to make it easier to keep farms and businesses in the family after death. On paper farmers and family businesses often look wealthy - they own lots of land or buildings - but might have limited amounts of cash to pay any inheritance tax. But these reliefs are expensive - costing a billion pounds a year.
So who’s actually benefiting from this tax break? Tax Justice UK asked HMRC and what we found is deeply worrying. Up to £666m annually is going to already wealthy families. In 2015/16 - the latest years we have figures for - over 71% of the tax break went to families with farm and business property worth over £1m. At the very top, 51 well off families with business property assets shared roughly £6.4m each in tax breaks.
For more detail read our report: ‘In Stark Relief: how inheritance tax breaks favour the well off’, which you can find here.
Beyond the fact that these reliefs give an unfair government subsidy to the already wealthy, this is driving up the price of farmland. Estate agents are marketing agricultural property as a tax efficient place to park money. Big money is buying up land, hoovering up farming subsidies and on top of that getting a massive tax break. This has a big impact for ordinary farmers who are struggling to buy farmland. Recent research from Guy Shrubsole has shown how deeply unequal land ownership is.
At the very least the government should cap the amount of relief that can be given out and a range of think tanks have suggested further reforms. Any reform should be part of a broader look at the subsidies and tax breaks that landowners get.
When it comes down to it politicians have to make choices about priorities. Choosing to give tax breaks to wealthy families, comes at the expense of longer wait times to see a GP or larger class sizes and less money to invest in the future of the country.
The UK’s wealth is spread deeply unevenly, with knock on effects on people’s life chances. Tax Justice UK’s vision is for a society where there is sufficient investment in public services to pay for the roads, schools and public services we all use, and deserve. We believe this vision is shared by the majority of people in the UK and that delivery of such a vision will require boldness and a new approach. It will mean taxing many of us more and taxing the wealthiest the most.
This new report puts into stark relief the unfairness at the root of the UK’s current system of inheritance tax reliefs and sets out steps the government could take to reform it.
Read the report here.
In his Spring Statement earlier today the Chancellor, Philip Hammond, confirmed that the country is sitting on higher than expected public finances, and acknowledged that this opened the door for more spending.
“Today’s announcement sets up the Chancellor to get his cheque book out and give a cash boost to government spending,” said Robert Palmer, Executive Director of Tax Justice UK. “Whatever happens with Brexit, public services are creaking and the public wants to see more spending.”
“The Prime Minister promised to end austerity: we now need to see this happen. Street homelessness is through the roof, prison violence at a record high. With the demands of an ageing population and rising numbers of children at risk placing ever higher demands on local councils, the government must draw a line under austerity. We want to see decent public services backed in part through fair taxes.”
The Chancellor is set to announce how much money government departments will get in a spending review due over the summer. If there is an orderly Brexit, the Chancellor has an extra £26.6bn to potentially spend from 2020-21 due to better than expected borrowing and tax figures. In the case of no deal, more spending is also likely, but this time to prop up key sectors of the economy.
Tax Justice UK Executive Director, Robert Palmer, is available to comment on the Spring Statement. To arrange an interview, contact: Paul Hebden, Head of Communications, Tax Justice UK: firstname.lastname@example.org / 07413 729 505.
The Chancellor Philip Hammond must be accustomed to Theresa May stealing his thunder. She bounced him into spending an £18 billion tax windfall on the NHS last year, so it can’t have been a surprise when she kicked the can on Parliament’s meaningful Brexit vote right into the middle of his planned Spring Statement.
The Spring Statement does not generally affect tax and spend. Instead Hammond has previously used it to give an update on how the economy is performing.
But other than responding to whatever MPs decide on Brexit, what else could happen during the 13 March statement? The elephant in the room is the promised 2019 spending review, which will give an idea of the total amount of money available to government departments outside of the welfare bill. This is a lot of money - currently £288 billion a year - spread across government departments such as the Department of Health, the Home Office and others. It’s unclear whether Hammond will set out the amount of spending for the next few years or play safe with a one year plan.
The big question is will the Chancellor stick to the precedent he set last October, of topping up spending for favoured departments whilst promising continued cuts to non-protected departments and tax cuts to business.
The government has already promised to protect more than half of departmental spend, covering overseas aid, defence and the NHS, which comes to £156 billion a year. This means that the Chancellor has little room for maneuver when it comes to other parts of government.
If these budgets remain protected, then the IFS estimates that, over the four years from 2019–20 to 2023–24, the Chancellor would need to find an extra £2.1 billion to avoid real cuts in non-protected areas; £5 billion to avoid this spending falling in per-capita terms and £11 billion to avoid it falling as a share of national income.
Can the Chancellor possibly find these sums by taking money from other areas, for example working age benefits or pensioners? It would be difficult given the crisis in Universal Credit and previous commitments made to older people through the pensions triple lock. Or will Hammond be lucky again and be able to use better than expected tax receipts to ease any cuts, as the Financial Times has reported?
However, without a surge in tax receipts, will cuts continue? This will be politically difficult as further cuts will bring even more serious hardship. For example, in local government, a number of councils are thought to be on the verge of insolvency and the prison system is in disarray with levels of violence remaining at record levels.
With real terms spending on public services predicted to be lower in 2023, than in 2011 (despite 13 years of GDP growth) perhaps the Chancellor will borrow to fund a shot in the arm for public services, whilst praying that a recession isn’t around the corner?
Or acknowledging the long-term pressures the UK faces, for example as a consequence of an ageing population, will Philip Hammond take heed of the public’s support for more spending, paid for by high taxes, for example on wealth.
That said should MPs fail to rule out “no-deal” on the 13 March, will anything the Chancellor says about future spending simply be drowned out by the uproar about Brexit that will follow?
The cost of unjustified tax breaks to business and wealthy landowners continues to soar, new figures show
The cost of tax breaks awarded by the government to businesses and the already wealthy continued to soar in 2018, according to new figures released on the same day that millions will file their tax returns.
Figures from the HMRC released today show billions were awarded in tax breaks for ‘entrepreneurs’ and already wealthy landowners, despite public services in the UK continuing to be affected by austerity.
Tax Justice UK Executive Director, Robert Palmer, said: “Many of the reliefs are simply giveaways to companies and the wealthy. HMRC rarely looks at whether they are good value for money and are actually doing what they are meant to.”
Just two tax giveaways that need to be re-examined include:
Robert Palmer said: “Many of these reliefs are simply giveaways to companies and the wealthy. HMRC rarely looks at whether they are good value for money and are actually doing what they are meant to.”
“As millions of people across the UK file their tax returns, many will be appalled at the levels of tax breaks doled out. While some of these reliefs are sensible, there are still billions of pounds spent on unjustified giveaways to the wealth and big companies, which make little, or no, economic sense.”
Notes to editors:
Details of the costs of tax reliefs given out last financial year are available here.
With the 31 January self assessment deadline looming, Tax Justice UK highlight statistics showing the ongoing unfair tax advantage available to self-employed business owners
Figures from the Institute for Fiscal Studies (IFS) show that an employee earning £40,000 a year will pay £12,262 in tax. This is £4,556 more than a self-employed person who earns the same but has opted to incorporate as a self-employed company manager/owner. The overall rate of tax paid by self-employed manager/owners can be as low as 19%, far less than the 32% rate likely to be paid by an employee earning the same salary.
Robert Palmer, Executive Director of Tax Justice UK said: “At a time when people will be rushing to file their tax returns ahead of the self-assessment deadline, it seems unfair that a self-employed company owner can pay significantly less overall than someone doing the same job for the same wage, but as an employee of a company.”
In recent years the difference in tax between the employed and self-employed has regularly been highlighted by the Institute for Fiscal Studies (IFS) * and the Office for Budget for Responsibility (OBR) **.
Instead of paying employment income tax and national insurance, people who incorporate can pay income tax on dividends, which are wholly untaxed up to £2,000 and avoid national insurance contributions altogether, whereas a normal employee is liable for income tax and national insurance
Treasury takes a £3.5 billion hit, but the economic benefits are questionable
Despite self-employment being a significant driver of employment since 2008, the OBR predicts tax revenues will be £3.5 billion lower in 2021/22 as the rate of people incorporating grows faster than employment. Research by the IFS has shown that the number of owner managed businesses (one owner and manager) has increased by 600% to 300,000 since 2007/08. People working in ‘business services’ make up by far the biggest proportion (30%) and owner managers earn up to 4.5 times more than others in self-employment. Meanwhile the share of these business owners investing, or employing others has dropped dramatically in recent years, according to the IFS research.
Mr Palmer said: “Self-employment has been a significant driver of overall employment in recent years, but the move from employment to self-employment can come at a cost in terms of overall tax revenue This reduces the money available to fund public services like health, housing and social care.
“The government needs to explain why owner managers are able to pay less tax and consider removing the tax difference between owner managers and those in other forms of employment, altogether.”
* Institute for Fiscal Studies, IFS Autumn Budget, 2018, Helen Miller: ‘Patching up business taxes.’ (from 10 mins 14 secs)
** Office for Budget Responsibility: Fiscal Risks Report, July 2017 (pg 112)
*** Institute for Fiscal Studies: Self employment and entrepreneurship: tax records and challenges for policy 4 Jun 18)
More information is included in the IFS publication: ‘Tax, legal form and the gig economy’ (Section 7)