More tax reform is needed to repair the economic damage Covid-19 will wreak. But tax hikes are not the way forward. Richard Murphy explains.
We can only hope the worst of the pain and death has happened with Covid-19 . That hope is however, in vain when it comes to the economic impact of this crisis. We know that most of the consequences of coronavirus have yet to happen and the onus on economists to plan for what might happen next is high.
Some are rising to this challenge and discussion on how to pay for the crisis is commonplace. The role of tax features highly. But while the Financial Times said in July 2020, “tax rises will be needed to fill Britain’s fiscal hole,” I argue that is wrong.
Tax rises are currently the last thing we need. If anything, in the face of an economic crisis created by a lack of demand, tax cuts are what we need. I could live with the status quo on overall yield. But I would, however, add that not wanting overall tax increases at present does not mean we should not be reforming taxation right now. I strongly suggest that we should, with three objectives in mind:
- greater equality in society, which we need because the more equal society is the greater the potential demand for goods and services it generates, and that demand will be our way out of recession;
- simpler tax system because for far too long we have had complication for no apparent reason, as the Public Accounts Committee noted in July 2020; and
- sustainability – we need to use the tax system to encourage activity that will get us out of recession in a sustainable fashion.
Were these three priorities to inform a programme of reform then some obvious actions follow.
First, and most obviously, we need to increase taxation on those with the greatest wealth. I have shown that had increases in wealth in the past decade been taxed at the same rate as income, then up to £174 bn of additional tax revenue could have been secured in the tax year 2017/18. However, I do not think this is the moment for a wealth tax. The reality is that this might raise little revenue: I have estimated it to be no more than £9 bn a year. Worse, it might take years to agree the basis for such a tax. What we need to do instead is what is possible now, and that is to increase the taxes paid on income or gains from wealth, which are seriously undertaxed at present when compared to income derived from work.
There are numerous ways to achieve this. The tax rate on capital gains could be equalised with that on income, as Nigel Lawson did when he was Chancellor under Margaret Thatcher. Alternatively, we could have an investment income surcharge, as existed until the 1980s, which would charge an additional 15% income tax on annual investment income in excess of (say) £5,000, with a higher allowance for pensioners. In addition, all tax allowances and reliefs might be restricted to the basic rate of tax. Do this and considerably more revenue than might be raised by a wealth tax could be collected.
“While lower taxes for those on low pay sound good there are better ways to achieve redistribution.”
However, if the goal is not to overall collect more tax then this extra revenue must be given away with the same goal of reducing inequality in mind. While lower taxes for those on low pay sound good there are better ways to achieve redistribution. Lower national insurance for employees is one good way to do this, which would be aided by extending the revised rate to all incomes, rather than have the current system which caps most contributions for the higher paid. And Universal Credit could be increased whilst the so-called taper that removes Universal Credit as additional income is earned could be eased and child benefits could be enhanced. Greater equality is possible.
So too is simplification: the already proposed reduction of all tax reliefs to the basic rate of income tax would help achieve that goal. The remaining reliefs, allowances and exemptions should then all be subject to a tax spillover assessment, which not only checks their worth but whether they can also undermine the integrity of the tax system as a whole.
That then leaves the third objective, which is making sure that the tax system supports the sustainable recovery of the economy.
One way to do this is, perversely, by increasing the corporation tax rate for large companies. If this was set at 30% (as it was only a decade or so ago) with companies given increased tax allowance for green investment, then the incentive to build our future would be higher – exactly what we require.
But that is not all that could be done. As research I have done with Andrew Baker of Sheffield University has shown, around 80% of wealth in the UK is held in tax incentivised assets, from property, to pension funds to ISAs. Pension funds and ISAs are especially costly. Depending on how you measure the subsidy to these, the costs vary between £40bn and £60bn a year. That encourages £70 bn a year to go into ISAs. More than £100 bn goes into pensions.
Now, however, suppose that all ISAs were in the future required to be invested in government-backed bonds which funded the Green New Deal. And suppose 25% of all pension contributions had also to be invested in schemes to create the Green New Deal as a condition of getting tax relief on the contributions made. Add these two sources of tax-incentivised funding together and almost £100 bn a year might be available – without using a single additional penny of tax, but simply by redirecting existing tax incentives, and £100 bn is widely considered to be the most needed for this purpose.
There is, then, considerable scope for tax reform after coronavirus. Doing so could transform the society we live in. Critically though, we do not need tax increases to achieve this. We can do better without them.
Richrd Murphy is professor of Practice in International Political Economy, City, University of London