Tightening up five of Britain’s existing wealth taxes and subsidies could raise almost £7bn a year by 2022-23 – and provide a down payment on covering the £36bn a year increase in the cost of public services by 2030 – the Resolution Foundation says today (Thursday) in a new briefing note.
The Foundation says that while the first three months of this year will inevitably be dominated by Brexit, the last three months of 2019 are likely to be dominated by the Spending Review, as the Chancellor sets out his spending priorities for the remainder of the parliament.
One of the biggest challenges for this and future spending reviews, the Foundation says, is how to fund the rising cost of public service provision as the population ages.
It notes that this demographic headwind and rising health cost pressures are set to increase the cost of the current welfare state by £36bn a year by 2030, and by £83bn by 2040. This figure for 2040 is equivalent to almost doubling the basic rate of income tax, from 20p to 39p, if funded entirely through income tax, rather than wealth taxes.
The briefing note says that with Britain’s record £13 trillion of wealth undertaxed relative to the size of its economy, a wider debate about the role of wealth taxes is needed. The Foundation says that there is a strong case for scrapping council tax and inheritance tax altogether, and replacing them with a genuine property tax and a Lifetime Receipts Tax.
However, the briefing shows how significant progress can be made even if the politics of Brexit and a governing party without a majority make wholesale reform of headline wealth taxes difficult. The Chancellor could raise almost £7bn a year by 2022-23, by making five tweaks to existing wealth taxes or subsidies ahead of his Spending Review:
- Limiting entrepreneurs’ relief. New figures show that the cost of this policy is due to rise to £3.9bn in 2023-24, with three-quarters of the relief going to just 5,000 people. Returning the lifetime cap back to its previous level of £1m, rather than the current £10m, would raise £1.6bn a year.
- Going Scottish on council tax. Council tax is Britain’s biggest, and arguably its worst, wealth tax. Replicating modest recent Scottish reforms – including increases in the top bands only – in England would raise £1.4bn a year. This could also be used to cut the tax for lower bands.
- Clamping down on inheritance tax loopholes. Freezing the inheritance tax threshold after 2020 would raise £200m a year. Introducing a ‘farmer test’ and increasing minimum ownership periods for agricultural and business property reliefs, which together cost £1.2bn a year, would also help prevent super-rich individuals from using these reliefs to avoid paying inheritance tax and would raise £500m a year.
- Making pension taxation more progressive. Making pensions tax relief slightly less skewed to the richest households by capping the tax-free lump sum at £40,000 would raise £2bn a year.
- Scrapping Osborne’s ISAs. While the Foundation supports action to help young people afford their first home, there are far more effective policies than the Lifetime ISA and Help to Buy ISAs, which are poorly targeted and absurdly expensive. Scrapping them would raise £900m a year.
Torsten Bell, Director of the Resolution Foundation, said:
“Britain has unfortunately got used to weak income growth but soaring wealth, which is now worth seven times the size of our economy. It’s time our tax system caught up with that fact.
“Maintaining our valued public services in the face of the big cost pressures of an ageing population, requires better wealth taxation to help fund this gap.
“Yes this is politically difficult, but the good news is that relatively large sums can be raised simply by tightening up our existing wealth taxes and subsidies. That is how we protect our public services without placing all the burden of taxation on hard earned income from work.”
Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said:
“Britain’s wealth is undertaxed, and the wealth taxes we do have are in serious need of reform.
“There’s a strong case for scrapping council tax and inheritance tax altogether, and replacing them with proper wealth taxes that are more progressive and harder to avoid.
“The Chancellor can make small steps in this direction by tightening up five of our existing wealth taxes and subsidies – raising almost £7bn in the process.