Assets and earnings – taxes and other policies
- rpwills
- 58 minutes ago
- 4 min read
To conclude this series of posts on taxes on earnings and wealth some final thoughts and proposals.
Introduction
Analysis of the data on earnings and wealth reveal that it is neither possible nor sensible to treat them as separate issues. A silo approach is not appropriate as they are obviously closely linked. People with high earnings find it easier to accumulate assets than people on low earnings. It is debateable whether high earnings are appropriate anyway. People with certain assets get a higher income than those without.
Comments by politicians and others about taxing wealth rather than earnings display a lack of understanding of the subject. On the surface it appears a sensible and popular line to take yet is flawed in that analysis of assets and earnings reveals a more nuanced and complex picture.
Summary
A range of policy changes could lead to the creation of a fairer tax system, one that looks at both assets and earnings and also incorporates non-tax measures to improve fairness. Income tax could be applied to all earnings whether from employment or other sources and subsumes National Insurance. Changes to the system of tax reliefs is a necessary part of reforms – with cuts in relief for private pensions and Interest Savings Accounts.
VAT is the main tax on spending there are however certain anomalies - cars and car repair work is liable yet aircraft are exempt. VAT could also be charged on the supply of financial services. Taxes on consumption can reduce demand for activities, which create negative externalities. Jet fuel is exempt from the taxes, which are applied to fuel for vehicles. Additional taxes here would meet two criteria for taxation namely offsetting the cost of the externalities and impacting more on high earners.
Inheritance taxes require reform. Options include IHT payable by beneficiaries; .abolition of IHT on farms and other businesses; removing pension assets from the category of wealth.
Non-tax policy changes such as limiting what and how much people can own in terms of property. Changes to planning use classes could restrict the use of dwellings for non-residential purposes.
So what are the options?
Earnings
Contrary to what might appear to be the case, taxation is not progressive. Although income tax is generally progressive other taxes such as VAT or council tax are not. National Insurance Contributions are paid on employee income only and not on other sources of income such as savings, rent or shares. Whereas employees earning between £12,584 and £50,284 pay 8%, those over this threshold pay 2%. Hence high earners pay less than the general population. Because of the inconsistencies in the tax system people on low incomes dependent on earnings, pay a higher share of their gross income in taxes than would be the case if taxes were as progressive as income tax.
It is essential that all earnings be treated for tax purposes in the same manner. It is unfair that income from investments, property and savings are not treated in the same way as income from earnings. National Insurance is in effect a tax on employees and employers. Ideally this should be subsumed into the income tax system with the option of additional charges as a share of income tax for specific areas of spend. For example, charges for local government expenditure could be based on a % uplift on income tax.
Tax exemptions
Tax relief is currently available for Interest Savings Accounts (ISAs) and Pension saving. The total amount in ISAs an individual could hold could be limited while relief for pension savings could be reduced to a lower rate. Another option would be to limit both ISAs and pension relief to those on lower tax levels.
VAT is the main tax on spending with the remainder derived from Fuel duty and tobacco and alcohol taxes. There are however certain anomalies in what is and what is not liable for VAT. Cars and car repair work is liable yet aircraft are exempt in both cases. It might be more equitable to charge VAT on all forms of transport and relevant repairs. VAT could also be charged on the supply of financial serExpenditurevices.
Environmental taxes
Taxes on consumption can play an important function in reducing demand for activities, which create negative externalities. In some cases affluent households preponderantly use such activities. Jet fuel is exempt from the taxes, which are applied to fuel for vehicles. This makes air travel more competitive and means that the environmental impacts of emissions are ignored. Additional taxes here would meet two criteria for taxation namely offsetting the cost of the externalities and impacting more on high earners.
Assets
Basing inheritance taxes on houses on the status of the beneficiary. This would enable those with little housing wealth to gain whereas those already holding property would pay more;https://www.cornwallecon.com/post/to-inherit-or-not-to-inherit-that-is-the-question
Abolish IHT on farms and other businesses. For agriculture this post sets out some options for fairness for businesses;
Remove pension assets from the category of wealth;
Taxing conspicuous assets – yachts, multiple properties.
At the same time increasing taxes on earning at the higher levels would be a useful mechanism for limiting the ability of high earners to accrue wealth.
Non tax options
There are legitimate concerns about concentrations of wealth/assets. The approach here should be to limit what and how much people can own in terms of property. In many European countries there are restrictions on who can own farmland. These would play an important role in limiting the super rich from buying land, which they see as an asset rather than something to farm or use for environmental services. Changes to planning use classes could restrict the use of dwellings for non-residential purposes.
Conclusion
To create fairness in society with regard to earnings and asset holdings cannot be resolved with a simple solution. The issues are complex and a range of policy changes is required. These include reform of the tax system particularly on earnings and environmentally damaging activities as well as changes to planning and regulations regarding who can own certain types of property. There is no simple solution and those who pretend otherwise are just deluding themselves and the electorate.
[The list of options does not cover all possible proposals, instead concentrating on the most significant ones].
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