Labour’s £92bn prize

There is a transformational amount of money waiting to be claimed by a government that will reform the tax system. Keir Starmer and Rachel Reeves should act

April 10, 2024
 Image: PA/Alamy
“Labour could, if it wished, fund all the projects that might benefit this country,” writes Murphy. Image: PA/Alamy

Last weekend marked the start of a new tax year in which we will—almost certainly—have a new government. Looking ahead to that administration, I have published a new paper—the Taxing Wealth Report 2024—which explains the UK’s fundamentally wrongheaded approach to taxation and what should be done to fix it. 

The report has three objectives. Firstly, to show that the ideological assumption made by politicians of both our leading parties that there is no money left is wrong. By making 30 recommendations for reform to individual UK taxes, as well as to the administration of the UK tax system as a whole, the report suggests that up to £92bn of additional tax could be collected in the UK each year.  

Secondly, the report seeks to demonstrate that those with wealth or high incomes in the UK are at present under-taxed. Those in the lowest decile of earners in the UK currently have effective tax rates of around 44 per cent. For those in the top decile of earners, this tax rate falls to a little over 20 per cent on their combined income and capital gains—which was the rate paid by our prime minister in 2022–2023. The report estimates that the total under-taxation of those with wealth or high incomes in the UK might amount to £170bn a year. If that’s correct, the additional £92bn of revenues that might be raised from these groups does not even bring their effective tax rate up to that which most in the UK pay.  

Thirdly, the report aims to demonstrate that solving tax inequality does not require grand gestures such as a wealth tax or taxing the value of land. Instead, all that is required is the simple enaction of pragmatic reforms that remove some of the biases, subsidies and inequalities that benefit those with wealth and which are currently embedded within the UK tax system.  

The proposed reforms do include a suggestion that capital gains—for example, on the sale of shares—should be subject to tax at the same rate as income. There is no obvious reason why an additional pound in a person’s pocket from capital gains should be taxed at a lower rate than earnings from work, after all. Doing so would raise £12bn a year.  

The report also suggests that VAT should be charged on financial services, which are currently exempt from that tax. This is obviously unfair when those services are overwhelmingly consumed by those with wealth. Imposing such a charge would raise £8.7bn of revenue a year.  

National Insurance is a particular cause of inequality in the UK tax system. Simply applying it at the same rate on all incomes above the minimum threshold—by abolishing the lower rate currently charged on higher incomes—might raise more than £10bn a year. In addition, applying a surcharge of 15 per cent on all income derived from unearned sources—such as interest, dividends and capital gains—might raise £18bn a year, while still imposing a charge less than the overall rate of National Insurance on earnings from work.  

Individual tax reforms of this kind have the potential to raise much-needed revenue. But what about the system used to administer them? Here the report makes various recommendations. Giving HMRC an additional £1bn a year might not only massively improve the quality of the service that it supplies to taxpayers, but could provide the resources to collect the 30 per cent of tax owed by smaller companies in the UK that— according to HMRC’s own estimates—goes unpaid annually. This might raise £12bn a year. 

On top of all that, if new conditions were applied to the tax relief provided on ISA and pension savings, which currently costs the government £70bn a year in lost tax revenue—a sum bigger than the UK defence budget—then the extra funds might be made available to fund investment for public benefit in things like schools, hospitals, flood defences, sewage systems, transport, energy and so much more. 

The result is that there is much more money available to fund the transformation of UK society than politicians realise—and that can be spent without creating inflation. In other words, the report sets out a range of options such that every plausibly desirable activity that could reasonably be funded in this country could be undertaken if politicians wished.  

A major fear at present is that a Labour government might be elected in the forthcoming general election but that its inflexible fiscal rules will deliver austerity. The Taxing Wealth Report suggests that austerity is unnecessary and that Labour could, if it wished, fund all the projects that might benefit this country. It does, in other words, provide a totally different perspective on our economic future.  

The question is, why wouldn’t Labour want to adopt this approach?