The prime minister’s tax return crept out with the house in recess. But the front page of the Financial Times splashed a blunt warning: “Sunak makes £1.8m capital gains as he struggles to engage with hard-up voters.” Does it matter when the Tory frontbench has always been packed with the enormously rich? After all, politicians are paid beyond most people’s wildest expectations, with the average UK worker earning less than half their MP’s annual salary.
Forelock-tugging Britain, which has elected five rich Etonian PMs since the second world war, may be undergoing a sea change in attitudes. A multimillionaire chancellor and a PM richer than the king are proving a political problem on the doorstep. In Wellingborough, participants in a More in Common focus group with 2019 Tory voters said the prime minister was “financially on another planet” and “abandoning hard-working people”.
Paying their bills was their top concern, so what do they make of Sunak paying an effective tax rate of only 23% on his vast capital gains? Income of the same amount gained through work would be taxed about twice as much as sitting back and letting rewards flow effortlessly in from rents, shares or self-inflating valuables.
On the day his tax return emerged, Sunak gave a long (and singularly platitudinous) interview to the Times, at a dentist’s surgery in Cornwall (that unfortunately turned out not to be taking new NHS patients). The Times’ front page read: “I’ll ease tax to reward hard work, vows Sunak.” There followed a rapturous homily on the virtue of work. His eulogy lauded “my values, the values of my party … where hard work should be rewarded” by cutting taxes “so when [people] are working hard they get to enjoy more of the rewards for themselves and their families”. Inevitably, he castigated people unable to work because of sickness: “We’re reforming the work capability assessment to make sure everyone who can work, does work,” he said, as if that test weren’t already a finely tuned instrument of torment. “Work gives you purpose, work gives you fulfilment.”
Well, yes, few would disagree on that broad point. But why tax work so much more than idleness? Recent tax rises quietly bring millions more people into tax and higher brackets, not nearly compensated for by that 2 percentage points national insurance cut. Those with good accountants get income expressed as capital gain, a lower rate displayed so succinctly in the PM’s tax return.
Dan Neidle of Tax Policy Associates lays out the yo-yo history of capital gains tax (CGT), where the pay of private equity executives expressed as “carried interest” attracts only 28% tax, avoiding the 45% top income tax rate. Another affront: the first £6,000 of capital gains attracts no tax. Add that to the basic £12,570 personal tax allowance and CGT payers get an £18,570 starting point. Who are the gainers?
In 1988, the Thatcherite chancellor Nigel Lawson equalised capital gains tax and income tax, rightly declaring: “There is little economic difference between income and capital gains.” This dismisses the handy myth that low CGT encourages investment: it doesn’t, the IFS proves.
It was, I’m afraid, Gordon Brown’s error to cut CGT to only 18% in 2008, amid the panic of the financial crash. George Osborne left office with it at 20% for higher-rate taxpayers. The Office of Tax Simplification (OTS) recommended that Sunak, when chancellor, equalise CGT and income tax again. Sunak shelved its report, then Liz Truss decided to abolish the OTS.
Another uncosted CGT gift to the rich is mocked by Paul Johnson in his book Follow the Money: any capital gains you owe on your death dies with you. Your shares, property or antiques may have swollen 1,000-fold in value in your lifetime: don’t sell and your heirs take it all without paying any CGT you owe, HMRC’s loss unknown.
In the wake of Sunak’s hymn to work, this is the moment Labour should proclaim it would level up CGT and income tax. The shadow chancellor, Rachel Reeves, has said she has no plans to do that, which is depressing – but she may have other plans. Neidle strongly advocates for it, but his advice comes with a warning against announcing any such thing in advance: it would need to be done straight away or else money would flee.
This equalisation would raise up to an estimated £8bn: that’s relatively small potatoes, when you consider what legacy Jeremy Hunt has written into his budget, a brutal trap with a gaping hole of £20bn in cuts. But this is only one of scores of tax reforms at her disposal, with billions more to be harvested from reforms that don’t break her rules.
So far Labour has announced no plans for raising Hunt’s missing £20bn, let alone to repair collapsing services. Only £5.6bn is due from its non-dom, private school and “carried interest” abolition. Pledges not to raise income tax, national insurance, capital gains or corporation tax feel like an iron corset. Whatever the plan for “growth” now that the £28bn green kickstarter has shrunk to £5bn a year, it takes time. But do you really think there will be nothing more in Labour’s first budget? That’s plain impossible.
So remember this: virtually nothing in Osborne’s killer budget of 2010 appeared in the Tory campaign; there was no mention of austerity among all that love-the-NHS and husky-hugging guff. In her conference speech and since, Reeves has talked of tax reliefs and loopholes she will shut down, wisely vague on particulars: why alert your opponents? Once in power, Labour can end subsidies to the wealthy without anything labelled as a wealth tax.
Take national insurance: better-off pensioners should pay it, as it pays for us. Why exempt NIC from other income, from shares and rents? Exempting the self-employed costs the Treasury £5.9bn, mostly from well-off “self-employed” partners such as City lawyers or private medics. It is “a deceit”, says Helen Miller, the creator of IFS Taxlab. No, those reforms would not be tax rises, just spreading the net wider.
Look at pension tax relief: those in the 40% tax bracket get twice as much gifted by the state as those on 20%. Ros Altmann, the former Tory pensions minister, says they should be equalised at 25%. Green taxes should be raised: ending the decade-long fuel duty freeze could raise £6bn. Why is domestic flying taxed less than driving? All that’s moderate, but for boldness look at the LSE’s wealth commission: a one-off raid on wealth above £2m, charged at 1% a year for five years, would bring in £80bn.
After the shock of Labour’s disappearing £28bn in green growth, after Reeves’ long list of what she won’t do, we will have to wait to see how many of these uncollected billions she plans to gather from this plethora of loopholes and injustices. They won’t be pre-announced, but how bold they are will define Labour’s vision for the future in her first budget.
Polly Toynbee is a Guardian columnist
