Governments in future will be obliged to move from taxing income to taxing assets, not least in the UK. Readers with net worth equal to the value of a nice South London semi should prepare themselves for stiff wealth taxes – particularly on property – within the next five years. Especially if the Tories regain power in 2020.
UK Budgets are not what they used to be
This is Budget week in the UK – still a preeminent parliamentary occasion at which the Chancellor of the Exchequer reviews the state of the economy and announces taxes for the year ahead.
In the good old days, Chancellors used to announce tax rates in the March budget to be implemented in the new fiscal year which in the UK, as we know, starts on 06 April. Under Gordon Brown’s long tenure at Number 11 Downing Street, however, most tax rates and bands – and in particular those for income tax – were set more than a year in advance and the Budget announcement normally pertained to the following year – although even these can be amended in the Autumn Statement which normally takes place in late November.
So we already know the tax rates and bands for fiscal 2017-18 – unless Mr Hammond chooses to amend them, which would be unusual. What Mr Hammond will announce to the House of Commons on Wednesday will be the rates and bands for fiscal 2018-19. Moreover, this year Mr Hammond has signalled that the March budget will be as uneventful as possible because he intends to shift the main event to the autumn – by which time the Brexit negotiations will be at full tilt.
Historically, the March Budget heralds the tax take – government revenues from taxation – and the November Autumn Statement focuses on the government’s spending plans. I know of no other advanced country which similarly announces spending plans for the year ahead nine months after the tax rates have been decreed. Anyway, Mr Hammond has said that he wants to align the two so that, hereon in, the Autumn Statement (which actually takes place in winter) will in fact be the Autumn Budget.
(When he became Chancellor in 1990, Norman Lamont announced exactly the same intention – but it didn’t happen. Never underestimate the power of the Sir Humphreys in Whitehall to scupper well intentioned reforms).
We can expect that on Wednesday, 08 March Mr Hammond will announce measures to neutralise the impact of the revaluation of business rates on businesses which are most affected – which includes most of those in the high street. (This comes at a time when bricks-and-mortar businesses are competing with their nimbler online counterparts). And we shall learn how Mr Hammond’s strategy for deficit reduction differs from that of his predecessor, Mr Osborne.
We shall also get some insights into how the British economy is doing and the latest borrowing data. I wrote last month that the UK government’s debt pit just gets deeper; but according to a paper released last week by the Resolution Foundation, tax revenues are robust and the Chancellor will have £29 billion more than forecast to spend.
I’ll be mulling over the spreadsheets on Friday; but for today I’d like to focus on a deep structural problem in government finances which will in time require a fundamentally different approach to taxation.
And it affects you…
The problem
The problem is that in the UK, as elsewhere, most tax revenues come from income taxes levied on the wages and salaries of Jo Citizen. In the current fiscal year income and capital taxes are expected to garner £237 billion out of the total expected tax take of £716 billion[i]. But the tax base is narrowing because Jo is spending more time in the gig economy and is more often self-employed. That means that he can offset all legitimate business expenses against tax, which an employee cannot.
Moreover, Jo is aware of rising inequality and so is getting more resentful of income taxes. We know that wage differentials have widened dramatically in the last thirty years or so; but there is also a rapidly widening gulf between the net worth of the middle class baby boomers who own their own homes and the many who have given up any hope of ever owning their own home. (Not to mention that the home-owning middle classes can see the super-rich accelerating away from them into the stratosphere…)
In the current fiscal year income and capital taxes are expected to garner £237 billion out of the total expected tax take of £716 billion.
And then there is the effect of increasing life expectancy. As the population grows older so more elderly folk will require long-term care – either at home or in care homes. This is a major issue right now because a lot of elderly people in England are languishing in hospitals (paid for by the NHS) when they should rightfully be cared for in care homes or nursing homes which, for those who are not self-funding, is the responsibility of cash-strapped local government.
Who pays for social care (the current euphemism for the long-term care of the elderly) is a hot topic. The Scottish Government, in its largesse, subs care home fees for all. But then it has an estimated budget deficit of nearly ten percent of GDP. (Not that it cares because in the current constitutional La La Land of Scottish devolution it doesn’t have to worry).
Income tax is not progressive
Progressive taxation means that poor people pay less in tax, proportionately, than rich people.
A British citizen earning the Minimum Wage of £7.50 per hour who is in full-time work in fiscal 2017-18 will have to pay £625 in income tax and another £775 in National Insurance Contributions (NICs). That works out at nearly ten percent of income for people at the bottom. (Of course they may well qualify for in-work benefits including Working Tax Credit and Child Benefit – plus possibly Housing Benefit).
A hedge fund manager in Mayfair earning a cool £1 million next tax year according to my calculations will pay £433,500 in income tax and another £23,520 in NICs. That works out at an effective tax rate of 45.7 percent. That’s much more than in the USA – or indeed Russia, where the national flat tax is just 13 percent.
But if that minimum wage earner is in the bottom ten percent of UK households who have a net worth of £12,600 or less, then they are paying HMRC in the current tax year over eleven percent of their total worldly goods[ii].
While the hedge fund geezer, assuming he (or she) is in the top one percent of UK households who have net assets of £2.8 million or more is actually paying the HMRC in the current year about 15 percent of his or her worldly assets – a smidgeon higher than the worker at the bottom.
And you don’t have to be a left-wing economist to work out that people at the bottom have much lower savings ratios than people at the top. So the hedge fund guy is likely to grow richer over time, while the minimum wage guy will very probably flat line – even though supported by state welfare.
Piketty, it’s all so Piketty…r > g
I have here on my desk a tome that weighs in at about three kilos. Capital in the Twenty-First Century by Thomas Piketty, the now world famous French economist. The book was first published (in French, of course) in 2013 and in the Arthur Goldhammer English translation in 2014. It is probably the most influential work of economics of the 21st century – so far at least. Why is it so important?
Thomas Piketty set out to model the dynamic forces that determine the accumulation and distribution of capital – as indeed did Karl Marx about 130 years earlier. Piketty is as much an economic historian as a theoretical economist (no tedious algebra here). He plundered the economic archives of at least twenty countries to synthesise economic data from the early 18th century to the present to determine fundamental socio-economic patterns.
In a nutshell (this is a rich and complex work with many implications for different aspects of economic thought) Piketty demonstrates that for most of the history of capitalism – with a hiatus in the inter-war years – but especially in the modern world (post-1945), the rate of return on invested capital – r – has exceeded the rate of economic growth – g.
…unless corrected by government intervention, the rich will always continue to get richer while the poor will continue, at best, to flat line…
So what? It means that, unless corrected by government intervention, the rich will always continue to get richer while the poor will continue, at best, to flat line (as we intuited above). Piketty concludes that the future focus of taxation policy in advanced countries will have to be on assets rather than income. That means wealth taxes.
Interestingly, we might have thought that r would fall below g in the era of negative and zero interest rate policy. But – as I have discussed at length before – the priestly caste of central bankers (who are not controlled by elected governments) initiated a globally orchestrated wave of monetary manipulation (“QE”) precisely so as to stimulate asset values for the most wealthy. Since the Credit Crunch, r has been artificially held high while g has fallen well below its long-term trend rate.
Now, of course, this is ammunition for the left; but in my view it is also a wake-up call for the right (including the pro-market, pro-enterprise luminaries who write on these very pages).
Step forward Madam May – a Tory Pikketist
Mrs May has made some very progressive noises since becoming PM – not all of them tuneful. After the Copeland by-election victory she said she wanted to lead a party of the workers. Her idea about workers’ representatives in board rooms was not well articulated – though some businesses have responded to this call.
According to The Times[iii], the Tories are now exploring how the assets of the elderly might be reclaimed by the state after their death in order to pay, ex post facto, for their social care. The rumour is that Wednesday’s budget will provide extra funding for local councils coping with rising demand. But there needs to be a compensating tax initiative.
The argument goes like this. Why should people with assets – especially expensive houses – receive generous state-funded social care in their old age, only to leave those expensive houses to their children? So actually, if the ultimate issue is wealth a tax, the proximate issue is inheritance tax.
Inheritance Tax (IHT) is as much of an ideological minefield for the Tories as the NHS is for Labour. Tories believe that “hard working people” should be free to accumulate capital and then to pass it on to their progeny. The whole idea of perpetuating wealth runs very deep in the British (or at least English) psyche. (Why was Downton Abbey such a hit? The novels of Charles Dickens are full of disputed legacies.)
In 2007 George Osborne outfoxed Gordon Brown, who was considering calling an early general election, by promising to raise the IHT threshold to £1 million. It was clear that many “ordinary” Londoners whose parents bought houses for a song in London 40 or so years ago would have to pay substantial IHT. For many that seemed obnoxious. In the event, Mr Brown bottled out – the election was never called.
Now, it seems that the IHT tax cut pre-figured by Mr Osborne, which is due to come into force on 06 April, could be reviewed. Moreover, there could be a compulsory social care levy on estates of above a certain value. No doubt this will be styled not as a tax but as retrospective social insurance.
The funding gap will only get worse
By the late 2030s over a quarter of the UK population will be aged over 65. It is not going to be politically reasonable to expect young people who cannot afford to buy houses and who will have no access to defined benefit pension schemes to pay for the increased social care budget for the well-off out of their income tax.
Already the baby boomers (born between 1946 and 1965) have two and a half times the median wealth of Generation X households (born between 1966 and 1980). And they have nine times the average household wealth of millennials (born between 1981 and 2000). There is no way that the millennials should be forced to pay for the baby boomers’ twilight years.
Property: the easy target
The main problem with general wealth taxes – France experimented with them under President Mitterrand in the 1980s – is that they require a lot of intrusive information and it is easy for the rich to hide financial assets. Pension pots are sacrosanct. What is not so easy to hide is residential property. As soon as I know your post code, I can find out the market value of your home from Zoopla.
In the 2015 general election it was Ed Milliband who favoured a mansion tax – a Council Tax on steroids for the “rich”. In 2020 it will probably be Mrs May. Plus they’ll want to clobber your estate after you die.
Death and taxes? Yes, and at the same time.
[i] See: http://www.ukpublicrevenue.co.uk/breakdown
[ii] See: http://idealfinancialmanagement.co.uk/blog/34-personal-financial/149-how-do-you-measure-up-on-the-uk-net-worth-chart
[iii] See, for example, article by Rachel Sylvester, Tories raise spectre of death tax for care, The Times, 28 February 2017.