Measures that are economic and electoral good senseby Shreya Nanda / February 17, 2020 / Leave a comment
Following his sudden rise, the new chancellor Rishi Sunak will face the task of financing the government’s “levelling up” agenda and manifesto spending pledges, while also dealing with the party’s more traditional low-tax, low-spend instincts. Here are some ideas for how to create a fairer and more dynamic economy while also marrying these competing interests.
First up: rethink the taxation of unearned income. When we think of “income” we typically think of earnings from employment; but not all forms of income are created equally. The classic example is income from land—land requires no effort to “produce,” so the bulk of the rent on a plot of land accrues not from any work by its owner, but by what is located around it: parks, transport links, businesses, schools, hospitals.
But the phenomenon of unearned income isn’t restricted to the land market. Any business with monopoly power benefits, to a degree, from unearned income. A train line with only one operator; a drugs company with exclusive patent rights far beyond the amount needed to recoup their risky initial investment; a digital monopoly that benefits from its position as one of the largest online marketplaces.
In all of these cases, the business owners, on top of any income resulting from their own efforts, are receiving unearned income as a result of their monopoly power or control. How can it be right that this income is taxed at the same rate as—or, as is often the case, more lightly than—the income of someone who goes out to work every day? Not only is this unfair; by draining talent and resources away from productive uses and into rent-seeking, it also acts as a drag on innovation and growth. The tax system should remedy this by differentiating between these different forms of income, and making sure that unearned is taxed at least as heavily as earned.
Secondly, the government should reform the property market. This is an existential issue for the Conservatives—polling by Election Maps UK found that, had December’s election been decided by the votes of 18-24 year olds alone, the Tories would have won just four out of 650 seats. Homeowners in prosperous parts of the country have made massive capital gains, but these have come at the expense of everyone else, with rents rising, and saving up for a deposit increasingly out of reach for young people. Instead of being shared, the gains from growth in the wider economy have to a significant extent been monopolised by one group. Parental wealth is an increasingly important determinant of one’s chances of homeownership.
Worse, whole industries are out of reach for young people who cannot afford to put themselves through unpaid internships and work experience in cities with sky-high rents. All of this is incompatible with the idea of a meritocratic society.
One way of dealing with the problem is through property taxation, such as the mansion tax idea floated and then dropped by the government last week. The key objection raised against property tax reform is that it would unduly hit those who are asset-rich but cash-poor and force them to sell their homes, thus violating a basic desire for security. But it is not beyond the wit of man or government to devise a policy to reconcile these competing objectives. For example, we at IPPR we have recommended a progressive property tax, with a mechanism to allow deferral for such households. Similarly, Oxford economist Paul Collier has proposed a modified form of property taxation dependent on income—only those who could afford it would have to pay.
Also needed is a big increase in housebuilding, and affordable homes in particular. Whichever of these options is taken up, meaningful action must be taken—the current status quo is untenable.
Thirdly, the chancellor should deal with anomalies in the tax system that allow the wealthy to get away with paying less tax than everyone else. The super-rich pay a lower average rate of inheritance tax than the simply rich; those with the means to do so can choose to pay capital gains tax on their earnings rather than income tax; large companies can shift their profits to corporate tax havens abroad. These loopholes should be closed. Plans for a Digital Services Tax to tackle tax avoidance, and the floated proposals to limit entrepreneurs’ relief on capital gains tax, are welcome, but more comprehensive action is needed to make the system work fairly for everyone: remedy the problems around inheritance tax; equalise the taxation of income and capital gains; and, in the absence of coordinated international action, introduce a backstop corporation tax to prevent avoidance across the board.
Most people in this country believe that inequality has become too high, that the economy works mainly in the interests of either the wealthy or big business, and that it does not work for young people and those outside the south. Whatever the balance of power between Nos 10 and 11, this Budget is an opportunity to change things. Let us hope that the chancellor is bold enough to take it.