Personal Finance

Overhaul urged for ‘unfair and outdated’ tax system

A leftwing think-tank has proposed a “radical overhaul of the UK’s unfair and outdated tax system” that it says could raise £90bn of extra revenue for the government over five years by taxing capital gains at the same rate as income.

A looming general election is set to put tax rates firmly back on the agenda as parties seek policies that raise additional funds for public spending while appealing to voters. The opposition Labour and the Liberal Democrat parties outlined proposals ahead of the 2017 vote that set out to raise an additional £6bn of tax revenue a year.

The study from the Institute for Public Policy Research called for a two-stage transition to a new framework which would be “simpler, more progressive and better able to raise public money”. The first phase would see capital gains taxed at the same rate as income and tax reliefs on capital gains abolished.

“We estimate this could raise up to £120bn over five years, falling to £90bn when accounting for potential behavioural effects,” the study said.

Since 2008, capital gains have been taxed at 18 per cent for lower rate taxpayers and 28 per cent for others. By contrast, income is taxed at 20 per cent, 40 per cent and 45 per cent, depending on the earnings band. The difference has contributed to rising income inequality, the paper said.

“It is fundamentally wrong that people who get their income from betting on the stock [market] or playing the property market pay less tax than those who go out to work,” said Tom Kibasi, director of the think-tank. “The current tax system works for the rich.”

Stuart Adam, a senior research economist at the Institute for Fiscal Studies, another think-tank, expressed doubts about the accuracy of the forecasted additional revenues for the government.

“I would not give the headline numbers much credence as deriving a figure is very difficult to do,” he said. “Would I believe these numbers of £90 billion and £120 billion? No.”.

However, Mr Adam admitted that the capital gains tax proposals had merit and under certain conditions implementing the suggestions could improve the current tax framework.

The second part of the proposal suggested a “fundamental reform” to income tax by merging it with national insurance contributions and applying a single, gradually rising tax schedule between 2 per cent and 50 per cent for the highest earners. Moving to the proposed framework would result in average tax bills falling for more than three-quarters of income taxpayers and annual income tax savings of £1,000 for those on a salary of £26,000, according to the study.

But Mr Adam was sceptical of the proposal, noting that the IPPR was “barking up the wrong tree” as the idea demonstrates a misunderstanding of how the UK tax system works.

The proposal suggested that income tax bands can distort behaviour as people might refuse a slightly higher paid job if it nudges them into a higher tax bracket. But Mr Adam said the higher rate of tax only applied to the slice of income that is above the bracket, rather than the whole salary.

“They’re proposing a complicated reform for a problem that doesn’t exist,” he said.

But, Henry Parkes, a senior economist at IPPR, said the government had to modernise and simplify the income tax system which “harks back to the pre-digital age”.

“Our analysis shows that this could be done in a progressive way which raises public money whilst protecting the lowest paid and avoiding excessively high rates of marginal tax on the highest earners,” Mr Parkes said.


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