It’s clear that the UK – along with the rest of the world – is facing the worst economic crisis for many years. But how will the Government pay for the vast sums being borrowed? Peter Webb, our International Tax Manager, explores the possible options.

When it comes to taxation, the UK has a precedent for using it to pay for significant events; Income Tax was first introduced in the UK to help cover the cost of the Napoleonic wars. So it’s reasonable to consider that an increase in tax rates could be used to offset the enormous borrowing the Government is currently undertaking, particularly given the vast sums involved. Indeed, the budget deficit for the 2020/2021 financial year is expected to total around £280 billion.

This week, an economic expert, Richard Murphy from City University, London, has suggested that £176 billion could be raised by the UK Government by taxing wealth at the same rate as income. His research has determined that between 2011 and 2018 income was taxed at almost 10 times the rate of wealth. During this period income had been taxed at 29.4% while wealth – mostly as a result of increasing house prices and the rising value of personal pensions – had been taxed at 3.4%.

It’s clear from this research that the structure of the UK tax system is highly disproportionate – those enjoying gains from rising wealth are likely to be more financially secure, owning their own homes and contributing to pensions. Conversely low-income households are using more of their pay for Council Tax, VAT, the BBC licence fee and duties on alcohol and tobacco.

Richard Murphy’s research also noted that the effective tax rate for the wealthiest 10% of the population (with income and wealth combined) was 18%. For those in the bottom 10% it was 42%. It’s inevitable that the overall tax burden will increase to repay the Government’s borrowing to alleviate the effects of the Coronavirus. The argument that austerity measures don’t work and a booming economy is the best way to repay debt seems to be getting little press at the moment. So with that in mind the question is whether that increased tax burden fall on the shoulders of those most able to afford it?

The Government do have a number of ‘wealth tax’ options open to them – which could be perceived as pretty fair given the circumstances. These include introducing a new Capital Gains Tax charge on main residences passed on after death, equalising Income and Capital Gains Tax rates or removing tax reliefs for some of the top tiers of pension contributions.

Another suggestion would be an annual “wealth” tax. France has an annual wealth tax with rates ranging between 0.5% and 1.5%. In Australia it has been suggested that Government Sales Taxes (broadly the equivalent of our “VAT”) are increased to repay borrowing rather than increasing Income Tax and Corporation Tax. This is seen as desirable as it is believed it will avoid increasing the tax burden of low earners and will not restrict business recovery. It will be interesting to see, as we move through the crisis and beyond, just how tax will be used to help aid economic recovery.

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Peter Webb, International Tax Manager

This entry was posted on Thursday, 30th April 2020 at 1:51 pm and is filed under Capital Gains Tax, News, Tax. You can follow any responses to this entry through the RSS 2.0 feed.

Tags: capital gains tax, income tax, uk tax