Taxation is the means by which governments raise revenue and fund the welfare and public services on which a civilised society depends. The IPPR Commission on Economic Justice identified a need to move to a higher tax, higher spend economy – with future public spending challenges likely to increase over time (CEJ 2018). We also seek a tax system that is more progressive – so that those with the greatest ability to pay contribute the most – as well as being more transparent and efficient. The UK is one of the most unequal countries in the developed world (Joyce and Xu 2019), and income inequality could be set to worsen as capital and property ownership become more important sources of income generation. Redistribution is essential for economic justice.
This briefing paper focusses on two sets of proposals designed to make the taxation of income simpler, more progressive and better able to raise more public money. The proposals are united by a simple principle that income, regardless of source, should be taxed equally across individuals. Currently, this is far from being the case. If wealthy people make their fortune purely from the buying and selling of second or third homes, they will pay lower rates of tax on that income than an ordinary worker struggling to get on to the property ladder. If someone lives purely off dividends from inherited shares, they will pay lower rates of income tax than workers earning the same amount through work. We think this is fundamentally unfair, distorts economic behaviour, and creates opportunities for tax avoidance.
This situation is even worse when we consider that the wealthiest people are less likely to generate their income from labour than the rest of us. Among the richest 1 per cent, recent analysis has found that over one-quarter of total income is generated from dividends and partnership income alone (Joyce et al 2019). Combined with the fact the wealthiest are more able to avoid their tax obligations by shifting their income and offshoring, this means that those who obtain their income from wealth may end up paying a lower proportion of their income in tax than average and low-income workers.
First, we propose that income from wealth should be taxed the same as income from work. This would entail bringing capital gains into the income tax schedule, taxed at the same rates. Modelling the impacts of this on total revenue are complex. However, we estimate this could raise up to £120 billion over five years, falling to £90 billion when accounting for potential behavioural effects. Removing the exemption of capital gains upon death could raise up to an additional £25 billion over the same time period, falling to £15 billion with behavioural effects. Although there are limitations to our methodology, this estimate is a substantial sum, such that even if behavioural impacts were larger, these changes would still raise significant funds, while also improving fairness in the system.
Second, we propose a formula-based system for income tax, with a single, gradually-rising tax schedule which is applied to all sources of income regardless of origin. We propose illustrative tax schedules which could raise in excess of £15 billion for the Exchequer, while protecting the lowest paid and avoiding marginal rates of income tax no higher than 50 per cent for the highest earners.
One year on from the final report of the IPPR Commission on Economic Justice, which included these two tax policies, this briefing sets out how their adoption could lead to greater economic justice alongside more sustainable public finances. We believe both reforms warrant serious consideration for any government wishing not only to raise significant revenue but to make the taxation of income fairer.