Richard Murphy – Five tax Policies for a Progressive Government

It is time to talk about tax again. As many are coming to comprehend that taxes do not pay for government expenditures if a nation has its own currency, why does one need them and with which purpose? Richard Murphy explains.

Richard Murphy is Professor of Practice in International Political Economy, City University of London. He campaigns on issues of tax avoidance and tax evasion, as well as blogging at Tax Research UK

Cross-posted from Progressive Economy Forum

In my book ‘The Joy of Tax’ I argued that tax was the single best instrument available to any government to shape the society for which it was responsible.

Any incoming progressive government will face massive social challenges. Leaving aside green issues, the biggest of these will be the income and wealth inequality that is crippling our society and leaving many in poverty. The policies that I recommend here are all designed to tackle this issue. That is because I do believe that tax has to be seen as an instrument of social policy.

1. Equalise capital gains and income tax rates

It is quite extraordinary that those with wealth, and who do as a result make capital gains, pay lower rates of tax on those unearned gains than those who have to work for a living pay on their incomes. It is even more extraordinary that those with capital gains get a second annual tax-free allowance over and above that allowance that they, and others, can offset against their earned income. This situation has to change. There are two ways to do this, and both are easy to introduce. The first is to equalise the rates at which income and capital gains are paid by a person. This last happened under Tory governments in the 1980s and 1990s. The second is to substantially reduce the annual capital gains tax allowance. A sum of £2,000 is suggested instead of the current £12,000. This remains more generous than that offered in most countries.

2. Make the UK main corporation tax rate 25% with a small company rate 20%

The current UK corporation tax rate is 19%. It is planned to reduce to 17% in 2020. This rate is well below the Organisation for Economic Cooperation and Development and European Union averages, which are both around 25%. It is also less than the basic income tax rate of 20%. This low tax rate creates a number of perverse incentives. First, it encourages the diversion of any income into a company to save tax. No tax system should undermine itself in this way. Secondly, it encourages increasing wealth inequality as those with wealth can let it accumulate at low tax rates. Third, it reduces the impact of fiscal policy as tax incentives and allowances have limited value. Most importantly though, there is no evidence that the reduction in UK corporation tax rates has encouraged investment or job creation, and business appears unenthused by such low rates. A main corporation tax rate at the OECD average does then make sense. If it was thought necessary, a small company rate set at the same rate as the basic rate of income tax would help remove many incentives to tax avoidance.

3. Cap pension tax relief contributions at 20%

Tax reliefs for pensions cost in excess of £50 billion a year. It is unlikely that almost any new investment in UK business or other economic activity arises as a result. This cost is, then, simply a subsidy to saving, most of which is given to those who are already wealthy or high earners. Pension tax reliefs also create a perverse distortion. Since they are usually provided at a taxpayer’s highest marginal income tax rate many higher rate taxpayers get twice as much tax relief for each pound that they pay into their pension as does a basic rate taxpayer. This double rate of subsidy serves to increase income and wealth inequality in the UK. The problem can very easily be solved: tax relief on pension contributions should only be available at the basic income tax rate in future.

4. Introduce an investment income surcharge

Another perversity of the UK tax system is that those who work for a living tend to have much higher tax rates than those who live off unearned income. This is largely because those who work for a living have to pay national insurance contributions in addition to income tax and those who have unearned income do not do so. Despite this, those with unearned income do have access to the full range of state services and might even qualify for some benefits if, for example, their income fell in old age. This system is then another contribution to the creation of income and wealth inequality in the UK. It can easily be addressed. Until well into the 1980s the UK had what was called an ‘investment income surcharge’ rate of income tax. This charged an additional 15% income tax on investment income and rents over a specified annual allowance, which could be significantly increased for those of pensionable age, but might otherwise apply to income in excess of £12,000 per annum, which limit would imply that the taxpayer to whom it would apply had considerable wealth holdings.

5. Reducing the rate of national insurance for those on low earnings

Those on low earnings in the UK face very high marginal rates of tax because of the interaction of the income tax, national insurance and benefits systems, whichever version might apply to them. There is no easy answer to this problem, but one option that would help would be to apply a lower rate of national insurance to the first £10,000 of earnings subject to national insurance. National insurance is payable on earnings over £6,136 per annum in 2019/20, which is less than half the level at which income tax starts to be charged. The usual rate charged is 12%. If this was reduced to 4% for the first £5,000 of earnings and to 8% for the next £5,000 then it is likely that a valuable, if small, contribution to solving this problem would be made, and a clear political message would be delivered.

There are, of course, a multitude of other tax reforms that could be offered. Those noted do however share a point in common: each is clearly linked to the creation of a more just society, and that is a fundamental role of tax in our society. 

If you like this kind of article and want to see more writing free of state or corporate media bias and free of charge, please donate here. We welcome your support.

Be the first to comment

Leave a Reply

Your email address will not be published.