With an election on the way, all parties will be looking for ways to fund their pledges. The IPPR has a proposal that should appeal to parties on both the left and the right: reform our tax system so that those who earn their income from wealth are treated the same as those who earn their income from work.
At the moment, income from wealth is taxed significantly more lightly. For example, someone who makes £100,000 in capital gains will pay about £14,000 in tax, while someone who makes the same amount in earnings will pay £33,000, or closer to £40,000 once employer National Insurance contributions are taken into account. And the biggest beneficiaries of this are the wealthy – 90% of capital gains made are over £100,000, and 60% over £1 million.
Aligning the taxation of income from work and wealth has a history of broad support. Nigel Lawson first equalised the tax rates on earnings and capital gains in 1988, declaring: “In principle, there is little economic difference between income and capital gains, and many people effectively have the option of choosing to a significant extent which to receive. And in so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other.” The systems remained aligned until the Brown reforms of 2008. And when George Osborne raised the top capital gains tax rate to 28% in 2010 he argued: “Some of the richest people in this country have been able to pay less tax than the people who clean for them. That is not fair.” (He later lowered it again, to 20 per cent for most assets.)
It’s also more economically efficient. All taxes create economic distortions and inefficiencies, but spreading the burden of taxation more evenly across the economy allows the Chancellor to raise revenue with the minimum of economic cost.