This article looks at the committee's discussion from a capital taxes point of view.
The House of Commons Treasury Committee has taken evidence from a panel of tax experts on its inquiry called “Tax after Coronavirus”.
Capital taxes do not raise significant amounts of revenue. Two-thirds of the tax take comes from three taxes: income tax, VAT and National Insurance contributions. Capital Gains Tax (CGT) and Inheritance Tax (IHT) raise little money by comparison.
Taxes should not rise for two or three years. The experts were unanimous in calling for time for the economy to recover before introducing tax rises. The government waited for two to three years before introducing tax rises after the last financial crisis. However, the long-term outlook as described in a recent report by the Office for Budget Responsibility showed that in 50 years' time, national debt is likely to rise to 425% of GDP. This compares to national debt of 89% of GDP before coronavirus hit, the previous 50-year projection before coronavirus hit of almost 300%, and 250% at the end of the Second World War. This projection of very high debt is largely due to unsustainable spending on pensions, social care and healthcare.
Bring CGT in line with Income Tax. A recurring theme was that the rate of CGT should be brought in line with marginal income tax rates. The difference in rates was felt to encourage distortionary behaviour where taxpayers try to disguise income as capital gains. This harmonisation of rates is something that has been mooted by the Office of Tax Simplification and is certainly felt to be on the cards. If it is deemed to be addressing distortionary behaviour rather than simply raising tax, it could be introduced sooner.
No overall agreement on a wealth tax. A wealth tax could be sustainable throughout the next few decades. One expert remarked, “land is a perfect thing to tax; we just need to find a way of valuing it all.” Paul Johnson of the Institute for Fiscal Studies felt that the different tax treatment of income and wealth distorted economic activity. However, a wealth tax would not raise the money required to tackle the fiscal legacy of coronavirus (1-3% of national income). Furthermore, the UK has lower levels of wealth inequality than most other north European countries. Few wealth taxes have stood the test of time.
Abolish stamp duty on housing and increase council tax. Economists have for some time criticised stamp duty on housing, mainly because it discourages people from moving house. The experts agreed that abolishing it and raising council tax on high value properties (which are undertaxed by Council Tax) was a much more effective way of taxing wealth.
There should be a formal tax policy. Tax rules were felt to be introduced arbitrarily and without coherence. A tax policy would allow a more strategic approach and make it easier for people to manage their finances going forward. It would help people to understand what objectives the government is trying to achieve when passing tax measures.
Recent events have shown that the Chancellor faces resistance to tax rises from Conservative backbenchers. The Treasury Committee scrutinised the issues of wealth inequality and the role of the tax system in redistributing wealth, both from an ethical and from a practical point of view. It is likely that these discussions will move into the foreground as the economy recovers from the battering of the coronavirus storm. The government will be anxious to appeal to its new Northern constituencies with policies which may be less attractive to its traditionally wealthier voters.
Originally published by Wrigleys Solicitors, September 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.