Denis Healey is often misquoted as saying he wanted to “squeeze the rich until the pips squeak” in the 1970s. He never actually used that phrase. What Labour’s finance spokesman did predict, however, was that his proposed top tax rate would spark “howls of anguish from the 80,000 people” wealthy enough to pay. With Labour in power again, it seems plus ça change, plus c’est la même chose. On Thursday this newspaper reported that Rachel Reeves, Healey’s successor in the Treasury, was looking at taxing the rich more by increasing capital gains tax. That would be a very good idea. Yet “howls of anguish” fill the airwaves and can be found on newspaper front pages. Ms Reeves should ignore them.
For decades the rich have projected ideas that support their interests, notably by reframing political language to valorise “wealth creators”. Post the financial crisis, this has been a harder sell. But plutocrats won’t easily give up their muscle, privileges and wealth. In Britain, the grossly unfair distribution of power fuels the effort to protect 3,000 individuals in private equity from Labour’s plan to make them pay their fair share in tax. It’s absurd to think that successful capitalists require an annual state subsidy of £188,000 just to perform their roles. However, this is probably only the beginning of Labour’s efforts. On paper, Britain’s tax system seems relatively progressive, with a headline rate of 47% for those earning over £3m. In reality, nearly a quarter of this ultra-wealthy group pays less than 12% in taxes.
The true scale of income inequality in the UK has been obscured by the methods the wealthy use to generate income. Current measurements exclude the capital gains from selling or shutting down businesses – one of the primary ways the rich earn money and benefit from lower tax rates. A 2020 study found that the top 1%’s share of total income had stayed steady at 14% since 1997. However, when capital gains were included, that figure rose to 17%, with the bulk of the increase concentrated among the ultra-wealthy.
Ms Reeves should act to make Britain more productive. This week, the Institute for Fiscal Studies highlighted how the current tax system discourages investment, undermines productivity, and ultimately makes the country poorer. To reform capital gains tax the chancellor should look at the work of researchers from the Centre for Analysis of Taxation (CenTax). Their latest paper provides a blueprint for necessary reforms. It proposes aligning capital gains tax rates with income tax rates, introducing allowances to incentivise productive investment, taxing the increase in an asset’s value when it is inherited, and implementing an exit tax (common in major economies) to prevent individuals from dodging British taxes on gains made while residing in the UK. In total the package would raise £14bn.
Capital gains tax has morphed into a driver of inequality. The top 5,000 taxpayers account for over half of the taxable gains, receiving an average of nearly £7m each. In fact, the benefits per capita are four times higher in London compared with poorer UK regions. Creating a low-poverty, low-inequality society requires, as the Beveridge report declared in 1942, much more than “patching”. But powerful vested interests are pushing to make opposition to taxing the rich a key element of UK economic policy. Ms Reeves must remain committed to building a fairer and more productive economy, and taxing the rich is essential to achieving that goal.
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