Time For A Just Tax System - One That Promotes Work, Not Ownership

The view that the Conservative Party defends a tax code that incentivises, and rewards hard work is as much a fantasy as the deal Boris Johnson is currently trying to negotiate with the EU. At present our tax code is rigged in favour of those who own our economy rather than those who work in it. Earned income remains the most highly taxed form of income and this feature of the tax code reduces distributive justice while fuelling inequality.

The big problem with the UK’s tax code is the difference in tax rate for different earnings. The tax on profits on stocks is lower than your standard income tax. This leads to the odd situation that effective tax rate is not always proportional to total earnings. This quirk of the tax code overwhelmingly benefits the wealthy who are more likely to earn from capital such as profits from stocks, housing and other goods.

However, this is not a quirk – it is a designed feature of our tax code that benefits the rich at the expense of employees.

To show the difference in tax receipts, let’s compare two people; a doctor and a stock trader who both earn £75,000 per annum. The doctor pays £23,000 in tax if they miss all tax exceptions and deductions, such as paying into a pension. In comparison the stock trader pays a maximum tax bill of £15,000. £8,000 better off from speculation than from hard work.

Furthermore, there are loopholes and exceptions that mean sole traders can pay as little as 10% tax on their capital gains or lower still in ISA’s. It is a similar case with corporation tax, where the top rate is lower for corporations than workers. The message from the tax code seems to be “don’t work, own”.

In a recent report, the IPPR called this “unfair and outdated” but it’s not genuinely outdated as we are yet to outgrow capitalism. A tax code designed for the rich is synonymous with a neoliberal economy.

This doesn’t only create an unfair culture for taxing individuals but also creates a tax system that feeds inequality and further societal problems. There are strong positive returns to wealth meaning that the lightly taxed who own capital will find their wealth increasing exponentially. This increases the divide in wealth between labour and capital and leads to an unequal society with low social mobility and cohesion. This erodes social contract and moves the UK further away from a meritocracy.

The IPPR are calling for the tax code to be reformed so that all sources of income (earnings, dividends and savings) are taxed together and equally under a single tax schedule. This will not only help make tax fairer, rewarding work not wealth, but also help raise more revenue for the challenges ahead. Bringing the capital gains tax in line with income tax would raise additional revenue of up to £120 billion over five years. This money could be used to help mend the problems caused by inequality, rebuild our public services and stimulate the economy.

A move to equalise the taxes of capital gains and salaries would be, surprisingly, copying Republican President Ronald Reagan. The arch- neoliberal president equalised the top tax rates for capital and income in 1986. This ‘trial run’ of the policy shows us that the policy does not hurt investment and the wider economy. The value of the S&P 500 continued to grow and the late 80s and 90s delivered a long period of growth for the US economy. It might add to the tax of the economy but creating a fair tax rate will not doom our economy.

Labour on this issue fall a long way from the mark. They offer very little in reform to capital gains tax, wanting a minor change to the rate paid on selling houses that are second homes. Labour should adopt a policy to bring the top rate of tax for capital gains in line with the top rate for income and use the IPPR recommendations as a model for reforming the tax code to be more progressive.

In fact, with rising inequality Labour should be looking at following the example set by Elizabeth Warren with her plans to tax wealth as well as income. Land Value Tax is also another exciting proposal for making our tax code more progressive while lowering the tax burden on spending in the economy.

If we want a just tax code, we must start taxing capital fairly and justly. Not doing so will only fuel inequality and erode the feeling of a social contract, but in the age of neoliberalism it is expected for the state to favour the rich in such a dramatic and obvious way. In their next manifesto Labour must adopt these proposals to create a just tax code for the UK.