wealth taxation for the uk - tax research uk · • restrict some inheritance tax reliefs in...
TRANSCRIPT
1
WealthtaxationfortheUK
ProfessorRichardMurphyFCA
DirectorofTaxResearchUKandProfessorofPracticeinInternationalPoliticalEconomy,
CityUniversity,Londoni______________
1. SummaryThisbriefreportlooksatthefinancialwealthoftheUK,itsdistributionanditstaxationandsuggestsreformsto:
• Createafairertaxsystem;• Reduceinequality;• ReleasefundsforusetobenefitthosewhohavelostoutunderConservativeand
Coalitiongovernments;• Boostinvestment;• Encouragegreatertaxcompliance.
Itdoesthisby:
• Suggestinganinvestmentincomesurchargebeincludedintheincometaxsystemthatwouldincreasethetaxrateonthesavingsandinvestmentincomeofhigherratetaxpayersby15%.Thismightraise£6.5billionofnewrevenuesperannum;
• Reformingcapitalgainstaxto:o Halvetheannualallowanceo Havethetaxpaidatincometaxrateso Abolishentrepreneur’sreliefo Improvetaxcompliance
Thesereformsmightraise£9billionayear;• Restrictsomeinheritancetaxreliefsinadvanceofmorethorough-goingreformto
raise£0.5billionayear;• Reviewthelongtermpossibilityofawealthtax.
Thesechangesraiseatotalof£16billionayear.Thereportalsolooksattheinteractionoftaxreliefsandpensioncontributionsgiventhat40%ofUKwealthisinprivatepensionfunds.Itsuggests:
2
• Restrictingallhigherratepensionscontributionreliefs,raisingmaybe£8billionoftaxayear;
• Requiringthat20%ofallpensioncontributionsbeinvestedinemploymentcreatingopportunitiesinexchangeforthetaxreliefsavailabletopensionfunds.Thismightdirect£20billiontowardsnewemploymentcreatingopportunitiesayear.
Intotalthenthisreportsuggeststhesourceof£24billionoftaxrevenuesand£20billionofinvestmentfundsayearasaresultofareviewoftherelationshipbetweenwealthandtaxationintheUK.
2. TheUK’swealthWealthinequalityintheUKissubstantial.AccordingtothelatestdatapublishedbytheUK’sOfficeforNationalStatisticstheUK’swealthisdistributedasfollowsii:
Almosthalfthecountry’swealthisownedbythetoptenpercentofwealthownersinthepopulationasawhole.Theaboveestimatesmaywellunder-estimatethevalueofprivatelyownedbusinesses.Thefigureswillexcludethevalueofassetshiddenintaxhavens.In2014FrenchacademicGabrielZucmanestimatedthat$284billionoffinancialwealth(£215billionat2016exchangerates)washiddenintaxhavensbytheUK’swealthiestpeopletoevadetax.
3. IncomederivedfromwealthTheincometaxpaidonthiswealthin2013/14taxyearasdisclosedbyHMRevenue&Customsstatisticsisasfollowsiii:
3
Tosummarisethis:
SixtyeightpercentofallinvestmentincomeintheUKisfromdividendspaidonthesharesofcompanies,atrendthathasbeenexaggeratedbythesubstantialnationalinsurancesavingstheself-employedcanmakebysettingthemselvesupaslimitedcompanies,payingthemselvesminimalsalariesandthendrawingalmostalltheirearningsasdividendstoavoidpayingnationalinsurancethatwouldotherwisebedueontheirearnings.Propertyincomeisthenextsignificantsourceofearningstothosewhoenjoyinvestmentincome:itisnowestimatedthat18%ofallUKpropertyisownedbythecountries1.75millionbuy-tolandlordsiv.Thatis4.9millionpropertiesintotal.Itis,ofcourse,unlikelythat18%ofpropertybyvalueisinthebuytoletsector:ifitwerethosehousesmightbeworth£700billion.If,morerealistically,eachbuytoletpropertyisworthroughlyhalfanaveragehouseeachbuytoletproperty,aftertheoffsetofmortgagesdue,wouldbeworthabout£71,000.Theaveragerateofdeclaredreturnonthesepropertiesis4.1%onthisbasis.
4
4. IncometaxespaidonunearnedincomeThetotalamountsoftaxpaidonUKinvestmentincomedependsuponitsinteractionwithotherincomesources.Asummaryofthetaxpaidin2013/14taxyear,referringtothesame£81.6billionofinvestmentincomeasisdetailedintheabovetables,isasfollowsv:
Ineffectall25.6millioninreceiptoftheUK’s£81.6billionoftaxableincomealsohadotherincomefromemployment,selfemploymentorapensiontousetheirpersonalallowancein2013/14.Ofthetotalinvestmentincome£66.3billion(81%)wasreceivedbythoseearning£30,000ormoreoftaxableincome.67%oftaxpayersearnedlessthan£30,000.Unsurprisinglyinvestmentincomeisbiasedtowardsthosewithhigherincome.53.6%ofallinvestmentincomeispaidtothoselikelytopayhigherratesoftax,whorepresentabout10.3%ofalltaxpayers.
5. Effectivetaxrates,earnedandunearnedincomeThisisnottheplaceforalongdiscussionofeffectivetaxratesonalllevelsofearnedandunearnedincomeintheUK,whichhasbecomeaconsiderablycomplicatedissue.Itshouldhoweverbenotedthatifnationalinsuranceonemploymentistakenintoaccounttheeffectiverateoftotaltaxpaid(withoutconsideringstudentloans)onanadditionalincomeof£1,000forapersonearning,say,£30,000ayearislikelytobe:
5
Aswillbenoted,oncetherealcostofpayingtheemployeetheirsalaryistakenintoaccountthetotaleffectivemarginaltaxrateforabasicratetaxpayingemployeecaninpracticeafternationalinsuranceistakenintoaccountbemorethan40%.Forapersononthesameincomelevelreceivingtheirincomefrominvestmentsthemarginaltaxratemaybe20%,orless.Forapersonearningmorethan£150,000ayearthattaxrateoninvestmentincomeshouldnotexceed45%.Itisveryclearthatthetaxsystemasitstandsatpresentisverybiasedagainstthoseworkingforalivingonaverageearnings.
6. ReasonsforchargingadditionaltaxesonwealthTherearewiderangeofreasonsforchargingadditionaltaxonthosewithwealthorincomefrominvestments.Theseinclude:
• Endingtheprejudicewithinthetaxsystemagainstthosewhoworkforaliving;• Endingtheincentivetoavoidtaxthatsomanypeoplewhouselimitedcompaniesto
offertheirservices,oftenincompetitionwiththoseonPAYE,exploitatpresent;• Increasingtheeffectiverateoftaxforthoseonhigherincomessothatwehavea
moreprogressivetaxsystemasmovestowardsincomeequalitydemands;• Ensuringthatthosewiththegreatestcapacitytopaydoso;
6
• Tacklingthewealthgap;• Providingtheresourcesrequiredtoprovidepublicservicestothosemostinneedin
ourcommunities.
7. WealthtaxationItistemptingtoaddressalltheseissueswithawealthtaxthatmightreplacethecurrentlyineffectiveinheritancetaxinuseintheUK.Induecoursethiswillbeappropriatebutsuchataxwouldtaketimetodesignandimplementandtheneedforthereformofthetaxationofwealthispressing.Inthatcasearangeofothermeasuresaredesirableinsteadinthemeantime.Theseareoutlinedinthefollowingsectionsofthisreport.
8. AninvestmentincomesurchargeThiswouldbeanadditionalincometaxchargeonallthosewho:
• Arehigherratetaxpayers• Haveincomefromsavingsorrents• And,ifovertheageof66haveincomeofmorethan£5,000fromsuchsources
Thetaxwouldbechargedatanadditional15%oninvestmentincomealone.ThiswastherateatwhichthissurchargewaslevieduntilabolishedbyMargaretThatcherin1985.ThechargewouldalsobepayableonincomecreditedtoISAs.Thechargewouldraiseapproximately£6.5billionintaxayear.
9. ChargingcapitalgainsatincometaxratesOneoftheattractionstomanysharebasedsavingsisthattheincomefromcapitalgainsissubjecttoareducedrateoftax(aslowas10%atpresentandneverexceeding20%)aftertheoffsetofwhatisineffectanadditionalorsecondpersonalallowanceprovidedtothosewithwealthbutnottothosewhohavetoworkforaliving.AccordingtothelatestdatafromHMRevenue&CustomsoncapitalgainstaxvithehistoryofcapitalgainstaxintheUKinrecentyearshasbeenasfollows:
7
RevenuesfromthistaxpeakedasthebubblebeforetheGlobalFinancialCrisisof2007-08reacheditsclimax,andhavefallenoffsignificantlysincealthoughtotalcapitalgainswereonlybelowthepre-Crisispeakinthetwoyears2008/09and2009/10.Almostidenticallevelsofcapitalgainsin2007/08and2011/12and2012/13yieldedalmostexactly50%ofthetaxtakeinthelatteryearstothesumpaidin2007/08.IfevidencewaseverneededthattheLaffercurvedoesnotworkandthatcuttingtaxratesdoesnotincreaseyieldthenthisisit.Theeffectivetaxrateongainsin2007/08was33.8%overallandin2012/13was16.3%,thefallbeingalmostentirelyduetothecutinthetaxratefromincometaxrates(albeitwithwhatwascalledtaperrelief)in2007/08toamaximumof28%in2012/13.Itisestimatedthatthecapitalgainstaxallowancemadeavailabletoindividualscostsabout£3.3billionayearvii,orratherlessthanthesumoftaxcollectedin2012/13.Ithasbeenestimatedthattheamountofcapitalgaintaxevadedeachyearmightbeveryhigh.Forexample,although1.75millionpeoplearebuytoletlandlordsandmostarelikelytobeinvestingatleastinpartforcapitalgainsthesaleofonly55,000housesubjecttoacapitalgainstaxcharge(bynomeansallofwhichneedhavebeenbuy-to-letproperties)weredeclaredin2012/13taxyearviii.Thismightimplythattheaveragebuytoletpropertyisgoingtoberetainedfor32years:thisseemsveryunlikely.
8
Capitalgainstaxisalsosubjecttosomeexceptionalreliefs.OfthesebyfarthemostimportantisEntrepreneur’sReliefix.Insummary,thisnowreducestherateoftaxonthesaleofabusinessbyanindividualto10%.In2013/14thisreliefcost£1.8billionandwasenjoyedbyjust3,000peopleatanaveragecostof£600,000eachx.Thatspenddidnotencouragenewinvestment,risktakingorthegrowthofentrepreneurialactivityintheUK:itwasgiventothosesellingoutoftheirbusinesseswhenreliefisalwaysreallyneededforthosestartinganenterprise.Thesenotessuggestthreechangestocapitalgainstax.First,theannualallowanceshouldbehalved:thereisnoreasonwhyapersonshouldenjoytwofullequivalentannualallowancesbecausetheyhavetheadvantageofbeingwealthy.Inthefirstinstancethismightraiseatleast£1.5billionofrevenue.However,capitalgainstaxratesshouldbealignedtoincometaxrates:thereisnoreasonwhytheyshouldbetaxedataratelowerthanthatpaidworkingforaliving.Thismaynowapproximatelydoublethecapitalgainstaxyield,whichincludingtheadjustmentalreadynotedtoallowancesmightyieldmorethan£5billionayear.Thirdly,entrepreneur’sreliefshouldbescrapped,yieldingmaybe£3billionayear.Finally,HMRevenue&Customsshouldrequirethatallthosemanagingthesaleofland,buildingsandotherfinancialassetsonbehalfofclientsshouldnowreportgrosssaleproceedstoHMRCeachyearasananti-taxevasionmeasure.Thisislikelytosignificantlyincreasetaxyield.Amodest£1billionisestimated:itislikelytobemore.Intotalthesechangeswouldyield£9billionayearwithoutanydetrimentalimpactonthefundsavailabletoUKbusinessforinvestmentinproductiveactivity.
10. Secondproperties
Secondpropertiesnotusedforlettingdonotyieldaninvestmentreturnandsowouldnotbesubjecttosomeofthechargesnotedsofar.Theydohoweverimposeasocialcostonsociety.Councilscannowdecidetochargeadditionalcounciltaxchargesinthesecases.Becausethesearedevolveddecisionstheyareforlocalauthoritiestodecideuponbuttheywillbestronglyencouragedtoapplyasignificantpremiuminallsuchcases.
11. CounciltaxesCounciltaxisonlychargeduptoBandH.TherearemanyanomaliesintheCouncilTaxsystemthatsuggestthatinthelongtermitshouldbereplacedbylandvaluetaxation.Inthemeantimeallcouncilsshouldbepermittedtoaddatleastfouradditionalcounciltaxbandstothosealreadyinusetomakeappropriatechargesforthosepropertiesworthsubstantially
9
morethanthosethatmightremaininCouncilTaxBandH.Thesefundswouldgotoimprovelocalcouncilservices.
12. InheritanceTaxTherearesubstantialproblemswithinheritancetaxationthatrequireitslongtermreplacement.Intheshorttermanumberofreliefsareappropriateforreviewincludingrestrictionsontheavailabilityofagriculturalandbusinesspropertytoonlythosecaseswhereaclearbusinesscasecanbeprovenfortheexemptiontobemadeavailable,whichisnotconsideredlikelyinmostcases.£500millionmightberaisedasaresultxi.
13. PuttingpensionwealthtoworkThefinalpartoftheworldequationispensions.FortypercentoftheUK'swealthisinprivatepensionfunds,allofwhichhaveattractedtaxreliefsinthecreation.This,then,automaticallysuggestthatthereisnopointinimposinganadditionaltaxchargeonthesefunds,butthatdoesnotpreventcreativethinkingabouthowthesefundsareusedforconstructiveeconomicpurposes.Tworeformsareessential.Firstly,thetimehascometoreducetherateoftaxreliefavailabletohigherratepensionfundcontributorssothatthetaxbenefittheyobtainfrommakingtheirpensioncontributionisexactlythesameasthatwhichisenjoyedbyapersonwhoisabasicratetaxpayer.Whenthebenefitsofpensionfundssavingarealreadyheavilyskewedtowardsthealreadywealthythereisnosenseinthestatespendingconsiderablesumstosubsidisethesavingsofthosewhoarebetteroffthanaverage.Itisnotclearpreciselyhowmuchhighratepensioncontributiontaxreliefcostsatpresentxiibutithascommonlybeenestimatedtobemorethan25%ofthetotalofthatcost,whichwouldsuggestthatitmaybeatleast£8billionayear.Second,givenbutthetotalcostofsubsidisingcontributionstopensionfundshasnowreached£48billionayearxiii,whichisasuminexcessofspendingonverymanyothermajorpartsofgovernmentspendingasshownbytheHMTreasurychartxivfromMarch2016thenthetimehascometoaskwhetherthisismoneywellspent.
10
Ifitwaspresumedthatthecostoftaxreliefwasreducedforhigherratetaxreliefandsobecome£40billionayearitwouldseementirelyreasonablethatforprovidingthislevelofsubsidythatthegovernmentshouldhavesomesayonhowthesefundswereinvested,butithasverylittleindeedatpresent.Themajorityofpensionfundsarestillsavedinshares,whichdelivernonewfundstotheUKeconomyforinvestmentpurposesbutareinsteadboughtsecondhandfromtheirpreviousowners,orinlandandbuildings,mostofwhichare,again,boughtsecondhand.Inotherwordsthesefundsarespeculatedandnotinvested.ThisisabsurdwhentheUKeconomyiscryingoutforinvestment.AsaresultitshouldbearequirementthatUKpensionfundsmustinvestatleast20%ofallnewpensioncontributionsreceivedinassetsthatwillresultinthedirectcreationofnewemploymentopportunities.Thiscouldbeinvestmentlinkedgovernmentbondstofundinfrastructure,newcorporateshareissueslinkeddirectlytonewemploymentcreatinginvestmentopportunitiesornewbuildpropertybutjobcreationforlongtermvalueneedstobeattheheartofarebalancedpensionssectorifthesefundsaretoplaytheroleintheeconomythatwerequireofthem.Upto£20billionfornewinvestmentcouldbereleasedinthisway.
14. EconomicimpactThesechangesshouldhaveabeneficialchangeontheUKeconomyasawhole.First,theywillhelpreduceinequality:itisnowacceptedbyallmajoreconomistsandallmajoreconomicagenciessuchastheIMF,OECDandWorldBankthatthisimprovestheoverallqualityofeconomicwell-beingforallinaneconomy.
11
Second,thesefundswillimprovethewell-beingofthosewhohavesufferedsubstantialcutsintheirwell-beingasaresultofdiscriminationagainstthoseonbenefitsbytheCoalitionandConservativegovernments.Thirdthesetaxrevenueswillreleasefundsthatareurgentlyneededintheeconomywhenatpresenttheyaresimplyrepresentedbysavedmoney.AstheFThassaidofteninrecentyearstheworldisfacingaglutofsavingsxvandthewholejobofgovernmentistogetthosefundsbackintotheeconomy:thesetaxeshelpdothat.Fourththesetaxeswillnotreducethefundsavailableforinvestment:astheBankofEnglandadmittedxviin2014itisnotsavingsthatfundinvestment,butcredit.Andinvestmentonlyhappenswhenthereisspending,whichrequiresafallinthelevelofsavingsormoregovernmentspendingtotakeplace.Thesechangeswillthenencourageandnothinderinvestment.Fifth,theproposedchangestopensionfundinvestmentruleswillalsohavethisimpact.Pensionsarenotpaidfromspeculation:pensionsarepaidfromlongtemreturnsfrominvestmentofwhichthiseconomyisdesperatelyshortatpresent.Directingthat£20billionofpensionfundsayearbeusedforthisproductivepurposeoutofatotalpensionwealthof£4,458billionisnotgoingtoharmpensionfundwell-beingbutitwillchangetofocusofpensionfundmanagementawayfromtheCityofLondonandspeculativeactivitytowardstheuseofthesefundsforrealwealthcreationonbehalfoftheirmembers,whichispreciselywhatweneedintheUKeconomyatpresent.Sixth,changingpensiontaxreliefsisasimplematterofsocialandeconomicjustice:thereisnoreasonwhythesavingsofthosewelloffshouldbesubsidisedmorethanthoseofpeopleonaverageearnings.Thisanomalyhastochange.Finallywithregardtotaxes,thesechangeshelpleveltheplayingfieldandmakeourtaxsystemfairer.Thisisvitalifwearetobeatthetaxgapthatdeniesthegovernmentthefundsitneeds.Peoplearemorewillingtopaytaxeswhentheyrealisethatthetaxsystemisfairandrightnowitisnot:thesemeasureshelpcorrectthat.
15. Endnotes
iForRichardMurphy’sCVseehttp://www.taxresearch.org.uk/Blog/richard-murphy/iihttp://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp171776_428631.pdfDatarelatesto2014andwaspublishedinDecember2015iiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503472/SPI_National_Statistics_T3_1_to_T3_11.pdfivhttps://www.uswitch.com/blog/2014/10/22/private-rental-properties-have-doubled-in-number-since-introduction-of-buy-to-let/
12
vhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503472/SPI_National_Statistics_T3_1_to_T3_11.pdfvihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/493165/CGT_National_Statistics_2015.pdfviihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/487119/Dec15_expenditure_reliefs_Final.xlsx.pdfviiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/493165/CGT_National_Statistics_2015.pdfixhttp://www.gannons.co.uk/services/tax-law/entrepreneurs-relief/xhttp://www.taxresearch.org.uk/Blog/2015/10/30/in-2013-14-just-3000-people-got-tax-relief-of-at-least-600000-each-at-a-total-cost-of-at-least-1-8-billion/xiBasedonhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/487119/Dec15_expenditure_reliefs_Final.xlsx.pdfxiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503200/PEN6__2001-02_to_2014-15___for_publication.pdfxiiihttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503200/PEN6__2001-02_to_2014-15___for_publication.pdfxivhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508193/HMT_Budget_2016_Web_Accessible.pdfxvhttps://next.ft.com/content/b2df748e-8a3f-11e5-90de-f44762bf9896xvihttp://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx