Suppose the chancellor wanted to follow Scottish Power’s advice, and give Britain’s most hard-up households £1,000 towards their energy bills this winter? Would it be possible to raise the £10bn needed in a way that didn’t just tax the same people he would be trying to help? I can think of at least three options, any of which would do the job, and all of which would make the tax system better as well.
Capital gains
First, Rishi Sunak could raise capital gains tax rates to match income tax rates, and reintroduce an inflation allowance, as his predecessor Nigel Lawson did in 1988. It was the top recommendation by Sunak’s own advisers, the Office of Tax Simplification, in 2020. This could raise up to £16bn. While some people will doubtless delay cashing in gains to avoid the tax, the chancellor should comfortably reach £10bn even accounting for this. A reformed capital gains tax would also be fairer, reducing the opportunity for some to game the system to pay lower effective tax rates.
raising cash graphic
National insurance
Second, he could apply national insurance contributions consistently across all sources of income. If you earn an average income, you’ll be paying 13.25% in national insurance on every extra pound you earn. Someone with a higher income – your MP, for example, on a salary of almost £85,000 – is paying only 3.25%. And landlords pay a tidy 0%. Other oddities include that national insurance is currently at zero after pension age, even for those in work, and effectively 1.25% on dividends. Fixing all these inconsistencies to tax all income consistently would raise more than £30bn, so the chancellor would have some money to spare to cut taxes, invest in education, or undo the cuts to the aid budget.
Wealth tax
Third, he could introduce an annual wealth tax of 1.1% on individual wealth above £10m, after netting off mortgages and other debts. This would raise £10bn from the wealthiest 0.04% of the population. For this group the usual economic arguments against a wealth tax, for example that it discourages savings, do not apply. There are also practical benefits, as existing taxes on wealth are not effective at raising tax from this group: a government report in 2018 showed that they are able use reliefs to pay just a 10% effective rate of inheritance tax – half the rate paid by individuals with £2m in wealth.
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Each of these options is good economics, raises some much-needed money, and would improve the tax system. But none should deter the chancellor from a fourth bit of good economics: a windfall tax on energy companies. Their current higher profits are nothing to do with their own efforts, and everything to do with the economic fallout of the pandemic and the war in Ukraine. Labour says this could raise £2bn as a one-off, but there are no independent estimates yet. However, it is Economics 101 that such windfalls should be taxed highly. Whatever it raises can then be put to constructive use, whether supporting low-income households or funding incentives for green investment.
There are plenty of options for the chancellor to ease the cost of living crisis. Imagine if he were brave enough to implement them all.
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Arun Advani is assistant professor of economics at the University of Warwick’s Cage research centre and a research fellow specialising in tax at the Institute for Fiscal Studies
