Wealth taxation for the UK - Tax Research UK · • Restrict some inheritance tax reliefs in...

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1 Wealth taxation for the UK Professor Richard Murphy FCA Director of Tax Research UK and Professor of Practice in International Political Economy, City University, London i ______________ 1. Summary This brief report looks at the financial wealth of the UK, its distribution and its taxation and suggests reforms to: Create a fairer tax system; Reduce inequality; Release funds for use to benefit those who have lost out under Conservative and Coalition governments; Boost investment; Encourage greater tax compliance. It does this by: Suggesting an investment income surcharge be included in the income tax system that would increase the tax rate on the savings and investment income of higher rate taxpayers by 15%. This might raise £6.5 billion of new revenues per annum; Reforming capital gains tax to: o Halve the annual allowance o Have the tax paid at income tax rates o Abolish entrepreneur’s relief o Improve tax compliance These reforms might raise £9 billion a year; Restrict some inheritance tax reliefs in advance of more thorough-going reform to raise £0.5 billion a year; Review the long term possibility of a wealth tax. These changes raise a total of £16 billion a year. The report also looks at the interaction of tax reliefs and pension contributions given that 40% of UK wealth is in private pension funds. It suggests:

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WealthtaxationfortheUK

ProfessorRichardMurphyFCA

DirectorofTaxResearchUKandProfessorofPracticeinInternationalPoliticalEconomy,

CityUniversity,Londoni______________

1. SummaryThisbriefreportlooksatthefinancialwealthoftheUK,itsdistributionanditstaxationandsuggestsreformsto:

• Createafairertaxsystem;• Reduceinequality;• ReleasefundsforusetobenefitthosewhohavelostoutunderConservativeand

Coalitiongovernments;• Boostinvestment;• Encouragegreatertaxcompliance.

Itdoesthisby:

• Suggestinganinvestmentincomesurchargebeincludedintheincometaxsystemthatwouldincreasethetaxrateonthesavingsandinvestmentincomeofhigherratetaxpayersby15%.Thismightraise£6.5billionofnewrevenuesperannum;

• Reformingcapitalgainstaxto:o Halvetheannualallowanceo Havethetaxpaidatincometaxrateso Abolishentrepreneur’sreliefo Improvetaxcompliance

Thesereformsmightraise£9billionayear;• Restrictsomeinheritancetaxreliefsinadvanceofmorethorough-goingreformto

raise£0.5billionayear;• Reviewthelongtermpossibilityofawealthtax.

Thesechangesraiseatotalof£16billionayear.Thereportalsolooksattheinteractionoftaxreliefsandpensioncontributionsgiventhat40%ofUKwealthisinprivatepensionfunds.Itsuggests:

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• Restrictingallhigherratepensionscontributionreliefs,raisingmaybe£8billionoftaxayear;

• Requiringthat20%ofallpensioncontributionsbeinvestedinemploymentcreatingopportunitiesinexchangeforthetaxreliefsavailabletopensionfunds.Thismightdirect£20billiontowardsnewemploymentcreatingopportunitiesayear.

Intotalthenthisreportsuggeststhesourceof£24billionoftaxrevenuesand£20billionofinvestmentfundsayearasaresultofareviewoftherelationshipbetweenwealthandtaxationintheUK.

2. TheUK’swealthWealthinequalityintheUKissubstantial.AccordingtothelatestdatapublishedbytheUK’sOfficeforNationalStatisticstheUK’swealthisdistributedasfollowsii:

Almosthalfthecountry’swealthisownedbythetoptenpercentofwealthownersinthepopulationasawhole.Theaboveestimatesmaywellunder-estimatethevalueofprivatelyownedbusinesses.Thefigureswillexcludethevalueofassetshiddenintaxhavens.In2014FrenchacademicGabrielZucmanestimatedthat$284billionoffinancialwealth(£215billionat2016exchangerates)washiddenintaxhavensbytheUK’swealthiestpeopletoevadetax.

3. IncomederivedfromwealthTheincometaxpaidonthiswealthin2013/14taxyearasdisclosedbyHMRevenue&Customsstatisticsisasfollowsiii:

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Tosummarisethis:

SixtyeightpercentofallinvestmentincomeintheUKisfromdividendspaidonthesharesofcompanies,atrendthathasbeenexaggeratedbythesubstantialnationalinsurancesavingstheself-employedcanmakebysettingthemselvesupaslimitedcompanies,payingthemselvesminimalsalariesandthendrawingalmostalltheirearningsasdividendstoavoidpayingnationalinsurancethatwouldotherwisebedueontheirearnings.Propertyincomeisthenextsignificantsourceofearningstothosewhoenjoyinvestmentincome:itisnowestimatedthat18%ofallUKpropertyisownedbythecountries1.75millionbuy-tolandlordsiv.Thatis4.9millionpropertiesintotal.Itis,ofcourse,unlikelythat18%ofpropertybyvalueisinthebuytoletsector:ifitwerethosehousesmightbeworth£700billion.If,morerealistically,eachbuytoletpropertyisworthroughlyhalfanaveragehouseeachbuytoletproperty,aftertheoffsetofmortgagesdue,wouldbeworthabout£71,000.Theaveragerateofdeclaredreturnonthesepropertiesis4.1%onthisbasis.

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4. IncometaxespaidonunearnedincomeThetotalamountsoftaxpaidonUKinvestmentincomedependsuponitsinteractionwithotherincomesources.Asummaryofthetaxpaidin2013/14taxyear,referringtothesame£81.6billionofinvestmentincomeasisdetailedintheabovetables,isasfollowsv:

Ineffectall25.6millioninreceiptoftheUK’s£81.6billionoftaxableincomealsohadotherincomefromemployment,selfemploymentorapensiontousetheirpersonalallowancein2013/14.Ofthetotalinvestmentincome£66.3billion(81%)wasreceivedbythoseearning£30,000ormoreoftaxableincome.67%oftaxpayersearnedlessthan£30,000.Unsurprisinglyinvestmentincomeisbiasedtowardsthosewithhigherincome.53.6%ofallinvestmentincomeispaidtothoselikelytopayhigherratesoftax,whorepresentabout10.3%ofalltaxpayers.

5. Effectivetaxrates,earnedandunearnedincomeThisisnottheplaceforalongdiscussionofeffectivetaxratesonalllevelsofearnedandunearnedincomeintheUK,whichhasbecomeaconsiderablycomplicatedissue.Itshouldhoweverbenotedthatifnationalinsuranceonemploymentistakenintoaccounttheeffectiverateoftotaltaxpaid(withoutconsideringstudentloans)onanadditionalincomeof£1,000forapersonearning,say,£30,000ayearislikelytobe:

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Aswillbenoted,oncetherealcostofpayingtheemployeetheirsalaryistakenintoaccountthetotaleffectivemarginaltaxrateforabasicratetaxpayingemployeecaninpracticeafternationalinsuranceistakenintoaccountbemorethan40%.Forapersononthesameincomelevelreceivingtheirincomefrominvestmentsthemarginaltaxratemaybe20%,orless.Forapersonearningmorethan£150,000ayearthattaxrateoninvestmentincomeshouldnotexceed45%.Itisveryclearthatthetaxsystemasitstandsatpresentisverybiasedagainstthoseworkingforalivingonaverageearnings.

6. ReasonsforchargingadditionaltaxesonwealthTherearewiderangeofreasonsforchargingadditionaltaxonthosewithwealthorincomefrominvestments.Theseinclude:

• Endingtheprejudicewithinthetaxsystemagainstthosewhoworkforaliving;• Endingtheincentivetoavoidtaxthatsomanypeoplewhouselimitedcompaniesto

offertheirservices,oftenincompetitionwiththoseonPAYE,exploitatpresent;• Increasingtheeffectiverateoftaxforthoseonhigherincomessothatwehavea

moreprogressivetaxsystemasmovestowardsincomeequalitydemands;• Ensuringthatthosewiththegreatestcapacitytopaydoso;

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• Tacklingthewealthgap;• Providingtheresourcesrequiredtoprovidepublicservicestothosemostinneedin

ourcommunities.

7. WealthtaxationItistemptingtoaddressalltheseissueswithawealthtaxthatmightreplacethecurrentlyineffectiveinheritancetaxinuseintheUK.Induecoursethiswillbeappropriatebutsuchataxwouldtaketimetodesignandimplementandtheneedforthereformofthetaxationofwealthispressing.Inthatcasearangeofothermeasuresaredesirableinsteadinthemeantime.Theseareoutlinedinthefollowingsectionsofthisreport.

8. AninvestmentincomesurchargeThiswouldbeanadditionalincometaxchargeonallthosewho:

• Arehigherratetaxpayers• Haveincomefromsavingsorrents• And,ifovertheageof66haveincomeofmorethan£5,000fromsuchsources

Thetaxwouldbechargedatanadditional15%oninvestmentincomealone.ThiswastherateatwhichthissurchargewaslevieduntilabolishedbyMargaretThatcherin1985.ThechargewouldalsobepayableonincomecreditedtoISAs.Thechargewouldraiseapproximately£6.5billionintaxayear.

9. ChargingcapitalgainsatincometaxratesOneoftheattractionstomanysharebasedsavingsisthattheincomefromcapitalgainsissubjecttoareducedrateoftax(aslowas10%atpresentandneverexceeding20%)aftertheoffsetofwhatisineffectanadditionalorsecondpersonalallowanceprovidedtothosewithwealthbutnottothosewhohavetoworkforaliving.AccordingtothelatestdatafromHMRevenue&CustomsoncapitalgainstaxvithehistoryofcapitalgainstaxintheUKinrecentyearshasbeenasfollows:

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RevenuesfromthistaxpeakedasthebubblebeforetheGlobalFinancialCrisisof2007-08reacheditsclimax,andhavefallenoffsignificantlysincealthoughtotalcapitalgainswereonlybelowthepre-Crisispeakinthetwoyears2008/09and2009/10.Almostidenticallevelsofcapitalgainsin2007/08and2011/12and2012/13yieldedalmostexactly50%ofthetaxtakeinthelatteryearstothesumpaidin2007/08.IfevidencewaseverneededthattheLaffercurvedoesnotworkandthatcuttingtaxratesdoesnotincreaseyieldthenthisisit.Theeffectivetaxrateongainsin2007/08was33.8%overallandin2012/13was16.3%,thefallbeingalmostentirelyduetothecutinthetaxratefromincometaxrates(albeitwithwhatwascalledtaperrelief)in2007/08toamaximumof28%in2012/13.Itisestimatedthatthecapitalgainstaxallowancemadeavailabletoindividualscostsabout£3.3billionayearvii,orratherlessthanthesumoftaxcollectedin2012/13.Ithasbeenestimatedthattheamountofcapitalgaintaxevadedeachyearmightbeveryhigh.Forexample,although1.75millionpeoplearebuytoletlandlordsandmostarelikelytobeinvestingatleastinpartforcapitalgainsthesaleofonly55,000housesubjecttoacapitalgainstaxcharge(bynomeansallofwhichneedhavebeenbuy-to-letproperties)weredeclaredin2012/13taxyearviii.Thismightimplythattheaveragebuytoletpropertyisgoingtoberetainedfor32years:thisseemsveryunlikely.

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Capitalgainstaxisalsosubjecttosomeexceptionalreliefs.OfthesebyfarthemostimportantisEntrepreneur’sReliefix.Insummary,thisnowreducestherateoftaxonthesaleofabusinessbyanindividualto10%.In2013/14thisreliefcost£1.8billionandwasenjoyedbyjust3,000peopleatanaveragecostof£600,000eachx.Thatspenddidnotencouragenewinvestment,risktakingorthegrowthofentrepreneurialactivityintheUK:itwasgiventothosesellingoutoftheirbusinesseswhenreliefisalwaysreallyneededforthosestartinganenterprise.Thesenotessuggestthreechangestocapitalgainstax.First,theannualallowanceshouldbehalved:thereisnoreasonwhyapersonshouldenjoytwofullequivalentannualallowancesbecausetheyhavetheadvantageofbeingwealthy.Inthefirstinstancethismightraiseatleast£1.5billionofrevenue.However,capitalgainstaxratesshouldbealignedtoincometaxrates:thereisnoreasonwhytheyshouldbetaxedataratelowerthanthatpaidworkingforaliving.Thismaynowapproximatelydoublethecapitalgainstaxyield,whichincludingtheadjustmentalreadynotedtoallowancesmightyieldmorethan£5billionayear.Thirdly,entrepreneur’sreliefshouldbescrapped,yieldingmaybe£3billionayear.Finally,HMRevenue&Customsshouldrequirethatallthosemanagingthesaleofland,buildingsandotherfinancialassetsonbehalfofclientsshouldnowreportgrosssaleproceedstoHMRCeachyearasananti-taxevasionmeasure.Thisislikelytosignificantlyincreasetaxyield.Amodest£1billionisestimated:itislikelytobemore.Intotalthesechangeswouldyield£9billionayearwithoutanydetrimentalimpactonthefundsavailabletoUKbusinessforinvestmentinproductiveactivity.

10. Secondproperties

Secondpropertiesnotusedforlettingdonotyieldaninvestmentreturnandsowouldnotbesubjecttosomeofthechargesnotedsofar.Theydohoweverimposeasocialcostonsociety.Councilscannowdecidetochargeadditionalcounciltaxchargesinthesecases.Becausethesearedevolveddecisionstheyareforlocalauthoritiestodecideuponbuttheywillbestronglyencouragedtoapplyasignificantpremiuminallsuchcases.

11. CounciltaxesCounciltaxisonlychargeduptoBandH.TherearemanyanomaliesintheCouncilTaxsystemthatsuggestthatinthelongtermitshouldbereplacedbylandvaluetaxation.Inthemeantimeallcouncilsshouldbepermittedtoaddatleastfouradditionalcounciltaxbandstothosealreadyinusetomakeappropriatechargesforthosepropertiesworthsubstantially

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morethanthosethatmightremaininCouncilTaxBandH.Thesefundswouldgotoimprovelocalcouncilservices.

12. InheritanceTaxTherearesubstantialproblemswithinheritancetaxationthatrequireitslongtermreplacement.Intheshorttermanumberofreliefsareappropriateforreviewincludingrestrictionsontheavailabilityofagriculturalandbusinesspropertytoonlythosecaseswhereaclearbusinesscasecanbeprovenfortheexemptiontobemadeavailable,whichisnotconsideredlikelyinmostcases.£500millionmightberaisedasaresultxi.

13. PuttingpensionwealthtoworkThefinalpartoftheworldequationispensions.FortypercentoftheUK'swealthisinprivatepensionfunds,allofwhichhaveattractedtaxreliefsinthecreation.This,then,automaticallysuggestthatthereisnopointinimposinganadditionaltaxchargeonthesefunds,butthatdoesnotpreventcreativethinkingabouthowthesefundsareusedforconstructiveeconomicpurposes.Tworeformsareessential.Firstly,thetimehascometoreducetherateoftaxreliefavailabletohigherratepensionfundcontributorssothatthetaxbenefittheyobtainfrommakingtheirpensioncontributionisexactlythesameasthatwhichisenjoyedbyapersonwhoisabasicratetaxpayer.Whenthebenefitsofpensionfundssavingarealreadyheavilyskewedtowardsthealreadywealthythereisnosenseinthestatespendingconsiderablesumstosubsidisethesavingsofthosewhoarebetteroffthanaverage.Itisnotclearpreciselyhowmuchhighratepensioncontributiontaxreliefcostsatpresentxiibutithascommonlybeenestimatedtobemorethan25%ofthetotalofthatcost,whichwouldsuggestthatitmaybeatleast£8billionayear.Second,givenbutthetotalcostofsubsidisingcontributionstopensionfundshasnowreached£48billionayearxiii,whichisasuminexcessofspendingonverymanyothermajorpartsofgovernmentspendingasshownbytheHMTreasurychartxivfromMarch2016thenthetimehascometoaskwhetherthisismoneywellspent.

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Ifitwaspresumedthatthecostoftaxreliefwasreducedforhigherratetaxreliefandsobecome£40billionayearitwouldseementirelyreasonablethatforprovidingthislevelofsubsidythatthegovernmentshouldhavesomesayonhowthesefundswereinvested,butithasverylittleindeedatpresent.Themajorityofpensionfundsarestillsavedinshares,whichdelivernonewfundstotheUKeconomyforinvestmentpurposesbutareinsteadboughtsecondhandfromtheirpreviousowners,orinlandandbuildings,mostofwhichare,again,boughtsecondhand.Inotherwordsthesefundsarespeculatedandnotinvested.ThisisabsurdwhentheUKeconomyiscryingoutforinvestment.AsaresultitshouldbearequirementthatUKpensionfundsmustinvestatleast20%ofallnewpensioncontributionsreceivedinassetsthatwillresultinthedirectcreationofnewemploymentopportunities.Thiscouldbeinvestmentlinkedgovernmentbondstofundinfrastructure,newcorporateshareissueslinkeddirectlytonewemploymentcreatinginvestmentopportunitiesornewbuildpropertybutjobcreationforlongtermvalueneedstobeattheheartofarebalancedpensionssectorifthesefundsaretoplaytheroleintheeconomythatwerequireofthem.Upto£20billionfornewinvestmentcouldbereleasedinthisway.

14. EconomicimpactThesechangesshouldhaveabeneficialchangeontheUKeconomyasawhole.First,theywillhelpreduceinequality:itisnowacceptedbyallmajoreconomistsandallmajoreconomicagenciessuchastheIMF,OECDandWorldBankthatthisimprovestheoverallqualityofeconomicwell-beingforallinaneconomy.

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Second,thesefundswillimprovethewell-beingofthosewhohavesufferedsubstantialcutsintheirwell-beingasaresultofdiscriminationagainstthoseonbenefitsbytheCoalitionandConservativegovernments.Thirdthesetaxrevenueswillreleasefundsthatareurgentlyneededintheeconomywhenatpresenttheyaresimplyrepresentedbysavedmoney.AstheFThassaidofteninrecentyearstheworldisfacingaglutofsavingsxvandthewholejobofgovernmentistogetthosefundsbackintotheeconomy:thesetaxeshelpdothat.Fourththesetaxeswillnotreducethefundsavailableforinvestment:astheBankofEnglandadmittedxviin2014itisnotsavingsthatfundinvestment,butcredit.Andinvestmentonlyhappenswhenthereisspending,whichrequiresafallinthelevelofsavingsormoregovernmentspendingtotakeplace.Thesechangeswillthenencourageandnothinderinvestment.Fifth,theproposedchangestopensionfundinvestmentruleswillalsohavethisimpact.Pensionsarenotpaidfromspeculation:pensionsarepaidfromlongtemreturnsfrominvestmentofwhichthiseconomyisdesperatelyshortatpresent.Directingthat£20billionofpensionfundsayearbeusedforthisproductivepurposeoutofatotalpensionwealthof£4,458billionisnotgoingtoharmpensionfundwell-beingbutitwillchangetofocusofpensionfundmanagementawayfromtheCityofLondonandspeculativeactivitytowardstheuseofthesefundsforrealwealthcreationonbehalfoftheirmembers,whichispreciselywhatweneedintheUKeconomyatpresent.Sixth,changingpensiontaxreliefsisasimplematterofsocialandeconomicjustice:thereisnoreasonwhythesavingsofthosewelloffshouldbesubsidisedmorethanthoseofpeopleonaverageearnings.Thisanomalyhastochange.Finallywithregardtotaxes,thesechangeshelpleveltheplayingfieldandmakeourtaxsystemfairer.Thisisvitalifwearetobeatthetaxgapthatdeniesthegovernmentthefundsitneeds.Peoplearemorewillingtopaytaxeswhentheyrealisethatthetaxsystemisfairandrightnowitisnot:thesemeasureshelpcorrectthat.

15. Endnotes

iForRichardMurphy’sCVseehttp://www.taxresearch.org.uk/Blog/richard-murphy/iihttp://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp171776_428631.pdfDatarelatesto2014andwaspublishedinDecember2015iiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503472/SPI_National_Statistics_T3_1_to_T3_11.pdfivhttps://www.uswitch.com/blog/2014/10/22/private-rental-properties-have-doubled-in-number-since-introduction-of-buy-to-let/

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vhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503472/SPI_National_Statistics_T3_1_to_T3_11.pdfvihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/493165/CGT_National_Statistics_2015.pdfviihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/487119/Dec15_expenditure_reliefs_Final.xlsx.pdfviiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/493165/CGT_National_Statistics_2015.pdfixhttp://www.gannons.co.uk/services/tax-law/entrepreneurs-relief/xhttp://www.taxresearch.org.uk/Blog/2015/10/30/in-2013-14-just-3000-people-got-tax-relief-of-at-least-600000-each-at-a-total-cost-of-at-least-1-8-billion/xiBasedonhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/487119/Dec15_expenditure_reliefs_Final.xlsx.pdfxiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503200/PEN6__2001-02_to_2014-15___for_publication.pdfxiiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503200/PEN6__2001-02_to_2014-15___for_publication.pdfxivhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508193/HMT_Budget_2016_Web_Accessible.pdfxvhttps://next.ft.com/content/b2df748e-8a3f-11e5-90de-f44762bf9896xvihttp://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx