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.