Suppose the Chancellor wants to follow Scottish Power’s advice and give the heaviest British households £ 1,000 in energy bills this winter? Would it be possible to raise the required £ 10 billion in a way that does not just tax the same people he is trying to help? I can think of at least three options, each of which could handle it and all of which would also improve the tax system.
First, Rishi Sunak could raise capital gains tax rates to match income tax rates and reintroduce the inflation contribution, as did his predecessor, Nigel Lawson, in 1988. This was a major recommendation of Sunak’s own advisers, the Office for Simplification. taxes, by 2020. That could fetch up to £ 16 billion. While some people will no doubt postpone collecting profits to avoid the tax, the Chancellor should comfortably reach £ 10bn, including this. A reformed capital gains tax would also be fairer and reduce the opportunity for some of them to play with the system and pay lower effective tax rates.
Second, he could apply national insurance contributions consistently to all sources of income. If you earn an average income, you will pay 13.25% on national insurance for every additional pound you earn. Someone with a higher income – for example, your MP with a salary of almost £ 85,000 – pays only 3.25%. And landlords pay a net 0%. Other peculiarities include that national insurance is currently at zero after reaching retirement age, even for those who are at work, and in fact 1.25% on dividends. Correcting all these discrepancies by strictly taxing all income would generate more than £ 30 billion, so the Chancellor would have some money she could save on tax cuts, investment in education or lifting cuts in the aid budget.
Third, it could introduce an annual wealth tax of 1.1% on individual assets over £ 10 million, after mortgages and other debts. That would raise £ 10bn from the richest 0.04% of the population. The usual economic arguments against wealth tax, such as discouraging savings, do not apply to this group. There are also practical benefits because existing property taxes are not effective in raising taxes in this group: a 2018 government report showed that they are able to take advantage of only 10% of the effective inheritance tax rate – half the rate paid by individuals with property 2 millions of pounds.
Each of these options is a good economy, getting some much needed money and improving the tax system. But nothing should deter the Chancellor from the fourth piece of a good economy: unexpected taxes for energy companies. Their current higher profits have nothing to do with their own efforts and everything has to do with the economic impact of the pandemic and the war in Ukraine. Labor claims it could gain £ 2 billion in one go, but there are no independent estimates yet. However, it is Economy 101 that such windfall revenues should be highly taxed. Whatever it brings can then be used constructively, whether to support low-income households or to finance incentives for green investment.
The Chancellor has plenty of options to alleviate the crisis of her life. Imagine having the courage to implement them all.