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…