Britain is at its most dangerous economic juncture for decades. We are living so far beyond our means that we’re becoming detached from reality. GDP flatlined in April and our best case scenario for 2024, a full two years after the pandemic ended, is around 1pc growth. Total government revenues from taxes and other sources are scheduled to reach 41pc this year compared with 37pc in 2019-20 and 32pc in the 1990s.
Yet still, politicians are in denial.
How else to explain the insistence that the problems facing the country can be resolved with the old saw of “taxing the rich”? They’re all at it: the Greens with their wealth tax and the Lib Dems with their plan to impose a 500pc council tax surcharge on second homes. In their 80-page manifesto, the Tories failed to mention “success” once, other than in self-congratulatory references to their own, questionable record.
An extra three million workers will be dragged into the 40pc rate of income tax over the next five years thanks to fiscal drag and another 400,000 will be paying the 45pc rate of income tax. Jeremy Hunt abolished the “non-dom” regime in March, rehearsing the tired line that those with the “broadest shoulders” should pay more. The IFS now calculates just 1pc of taxpayers pay 29pc of all income taxes.
Yet Labour looks set to double down. Hostility towards wealth, business and landlords will intensify. The party is promising a “proper” windfall tax on the North Sea oil and gas firms which already face a headline rate of 75pc. They will impose VAT on private school fees and replace the Tories’ “semi-skimmed” non-dom measure with a “full-fat” one.
And why wouldn’t they? Raising taxes has never been so politically easy. The consensus now is that, with high levels of debt and no scope to slash public spending, Treasury coffers will need to swell after the election regardless of who is in power. That our ageing population necessitates higher government revenues and, in any case, people would rather fiscal headroom was spent on public services than cutting taxes.
Against this backdrop, reports have emerged that Labour may soon bring capital gains tax (CGT), levied at a variety of rates ranging from 10pc to 28pc depending on the asset class and the taxpayer’s income, in line with income tax. Shadow ministers have issued non-denial denials, but the first salvo in class warfare is almost always to raise taxation on capital gains. Much like windfall and wealth taxes, it has superficial appeal. Why should people pay less tax on asset sales than others do on income?
But there’s a reason Larry Summers said in the 1980s that eliminating it in the US could increase both steady-state output and consumption. That reason was laid bare in 1990, when the federal government took in 10pc less revenue at the 28pc rate than it had done five years previously at the 20pc rate.
Hiking CGT diminishes the incentive to save, leading to lower long-term growth and, ultimately, lower living standards. Since the tax is levied at the point of sale, it creates a “lock-in” effect, as people stop selling to postpone the tax. When those assets include small businesses which might benefit from new management, the problem is obvious.
Under Hunt’s chancellorship, the annual allowance has been slashed from £12,300 to £3,000. It hasn’t been indexed since 2008, meaning it’s not just real gains being taxed but inflation too. None of this is to mention that typically these assets are purchased using income that has already been taxed.
As Art Laffer has warned, raising the CGT rate lowers total profits, lowers total investments, and reduces wages and total employment. As a result, it lowers income tax receipts, payroll taxes, profits taxes, sales taxes and property taxes. It also means fewer job opportunities and higher welfare payments. How would Labour square this with promises to be “on the side” of working people?
But here’s the question which ought to give Starmer prickles of cold sweat: what happens when the tiny section of the population that funds the Government’s largesse decides to walk away?
In a globalised economy, money is mobile. It was reported last year that the UK a world leader for the number of high net worth individuals that have left the country. Every person who leaves drains us of tax revenue and spending power. And the more super-rich individuals who leave, the more middle earners will be pulled into paying higher taxes.
Perhaps the Left will reassure themselves that emigration is difficult for Middle England. Costs may be prohibitive. Those with young families will not rush to pull their children out of school. Those nearing retirement may want to see their grandchildren grow up.
But there is an alternative for hard-working Brits worried they’ve become the nation’s rhetorical punchbag, who are watching, powerless, as politicians clobber them with higher taxes and lambast them for refusing to pay their “fair share”.
They could give up.
Some 54pc of UK households (36 million people) already receive more in benefits, including the imputed value of health and education, than they pay in tax. Why not join their ranks?
The mood in Britain is clear: higher taxes on the “rich” and more burdens on businesses to pay for an unreformed public sector and a soaring benefits bill. When you allow people to keep more of what they earn, they work more. When you raise taxes, you get less risk-taking and less wealth generated.
As bad as the situation has been over the past 14 years, Labour will make it far worse.
