With the government spending billions of Pounds they do not have on fighting Coronavirus with lockdowns, a gaping hole has opened up in public finances: Britain’s government is on course to run a £400 billion net deficit in the 2020/21 tax year, and with businesses devastated and more than a million Britons thrown into unemployment, the strain on the Treasury is set to continue far beyond when the virus is but an unpleasant memory.
So, Rishi Sunak, the Chancellor, is scrambling for ideas to raise revenue, and of course, taxing the so-called “rich” is the most straightforward option: those in the top income brackets are too few to be an important electoral constituency and the Tories do not want to be perceived to punch down in their attempt to steady the ship in an environment where the popular perception is that inequality is on the rise.
But is inequality rising? Not really: according to the Office for National Statistics (ONS), pre-tax income inequality in the UK today is broadly comparable with the 2011 level and lower than the levels reached prior to the great financial crisis of 2008. And it turns out that those with the highest income pay a very high – and increasing – proportion of income taxes: the highest 1% of income taxpayers (who make up less than 0.5% of the population) account for 27% of all income tax and the top 5% over half. 20 years ago, the top 5% paid less than 40%, though their proportion of total earnings before tax today is almost exactly the same as it was by the turn of the millennium. The numbers bear out that, when it comes to post-tax income, inequality in the UK is, in fact, steadily falling.
But even if you ignore this evidence in a pursuit of generally popular taxes on high incomes, the question remains how much you can squeeze the high paid? As the 2009 experiment with a 50% income tax bracket proved, it is very difficult to raise any meaningful government revenue with very high rates of income taxes, because they affect people’s incentives to make the marginal Pound and are, to a large extend, avoided by creative tax accounting.
Perhaps recognising this, campaigners have their eyes set on a different kind of tax altogether: a wealth tax. Taxing wealth has always been popular with the left, but very few countries have had any success in implementing it. France had a wealth tax from 1989 to 2018, but it suffered from two inherent problems in taxing wealth: many of those liable to pay the tax had very modest incomes despite their nominal wealth and, like income taxes, many of those with substantial income and large wealth tax liabilities employed tax planning schemes to avoid paying. As a result, it raised only about 1% of France’s total tax revenue.
Undeterred by the dismal track record of wealth taxes, The Wealth Tax Commission, a lobby group, are now advocating for a 1% annual tax on the wealth of Britons with assets worth over £1 million, a tax they claim would raise £260 billion over the 5 years they propose it be in effect. It is unclear why a British wealth tax would not suffer from the same problems the French did and why it would be able to raise so much more revenue, but more fundamentally, the idea of a wealth tax misunderstands the very nature of what wealth is: it isn’t cash stacked in piles in bank vaults but investments in the productive capacity of the economy, and taxing it will hit production and, in turn, income.
In 2019, Britain’s tax revenues made up 33% of GDP, in line with the OECD average, with income tax making up around one quarter of government revenue (higher than the OECD average), the other major contributors being National Insurance (in effect another income tax) and VAT. Britain is already a highly taxed country, and even ignoring a libertarian’s ideological opposition to taxation, it is difficult to see how the public finances can be repaired to any meaningful extend by attempting to increase revenue, whether by taxing income or wealth – unless you tax the broad mass of salaried income that is paid to the middle class: this is where the numbers are big and where tax accounting is unlikely to be widely utilised to avoid paying. The problem is, no government can survive significant tax hikes targeting large voter constituencies.
With the nominally Conservative government also seemingly committed to avoiding cutting government spending in another round of “austerity”, it is therefore totally unclear how they intend to go about restoring some semblance of fiscal responsibility. It is already given that the cost of the lockdown policies will be parked in long-term “war bond”-like financial instruments to be addressed by our grandchildren, but how about the running deficit? Perhaps it doesn’t actually matter, except for appearances. The inescapable truth is that it is already much too late to repair the public finances: the government owes £1.9 trillion away (plus a similar amount in off-balance sheet future pension liabilities) and haven’t run a surplus since 2001. They are already indebted beyond salvation – except by the stealth tax of inflation (for which they can find dubious theoretical grounds in Modern Monetary Theory). As all western governments, the UK Treasury is being kept afloat by their central bank. And in the long term, apart from the government, that benefits those who own real assets: the rich.