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How can the tax system help to reduce inequality | accountingweb
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How can the tax system help to reduce inequality?

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Looking at the UK tax system, Rebecca Cave finds that some taxpayers are more equal than others. Here she considers what could be done to treat people equally for tax.

9th Feb 2023
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I was inspired by this interview with Torsten Bell (CEO of the Resolution Foundation) to think about what changes could be made to the UK tax system to reduce inequality. 

The UK tax system treats certain taxpayers differently to others, which leads to inequality in terms of the amount of tax paid on similar levels of funds.

Capital vs income 

Capital gains are taxed at lower rates than income in every tax band, with the exception of tax due on dividends.

The tax that Zahawi allegedly paid late arose from a gain of £27m, on which he was ultimately liable to pay capital gains tax (CGT) of £3.7m, amounting to around 14% of the gain. The top rate for CGT at the time of the disposal was 20%. The discount in the effective rate was likely due to entrepreneurs’ relief, which applied a rate of 10% on gains of up to £10m in the lifetime of the taxpayer. That lifetime cap has since been reduced to £1m. 

There is no solid evidence that having a lower tax rate on gains stimulates growth or employment. A study by the CAGE group at Warwick university has found that half of all taxable gains are received by just 5,000 people in the UK, who each receive more than £1.5m in gains, mostly from the disposal of businesses or business assets. 

In 1988 Chancellor Lawson aligned the tax rates that applied to income and capital gains, while at the same time introducing indexation allowance to relieve the effect of inflation on the value of assets. A similar rate alignment could be made today, as suggested by the Office of Tax Simplification

Earnings vs dividends

Income from employment and trading suffers tax at higher tax rates than dividend income, which is also exempt from national insurance contributions (NIC). 

The favourable tax treatment of dividends, and the ease of operating through a company since the audit requirement for small companies was removed, has encouraged the growth of personal service companies (PSC). The pressure on workers to operate through a PSC also comes from engagers who seek to avoid employer’s NIC, the costs of pension contributions, holiday pay, sick pay and parental pay due for employees.

This imbalance led to the IR35 rules enacted in 2000, which did little to solve the problem, as the underlying tax advantages of the PSC structure for both the individual and the engager remain strong. Off-payroll working has tipped the scales again, but there is still an exemption for small and medium-sized engagers. 

The solution to the gordian knot of employee/self-employed tax differentials must involve tackling the issue of employer’s NIC. But this won’t be easy as HMRC statistics show the amount of employer’s class 1 NIC paid in 2021/22 was around £89.5bn. This amounted to 12.5% of all HMRC receipts and was 40% more than the total corporation tax collected in that year (£63.5bn). 

If employer’s NIC were to be abolished and the tax burden shifted to corporation tax, the main rate of corporation tax would have to rise to around 35% to make up for the loss in NIC revenue. The advantage gained by non-corporate employers by the abolition of employer’s NIC would also have to be addressed. 

Property owners vs renters

Landlords pay no NIC on their property income, unless the property is held by a corporate vehicle and the ultimate owner extracts funds as a salary. 

Where the individual landlord doesn’t pay sufficient class 1 or 2 NIC in a tax year, they won’t build up an entitlement to the state retirement pension. But that may not worry certain landlords who view their let properties as a pension fund, with a plan to sell up on retirement. 

On disposal the increase in the value of the properties will be taxed at 18% or 28%, which is significantly lower than the tax due on regular pensions at 20%, 40% or 45% (higher tax rates apply in Scotland). 

Individuals who own their own homes also benefit from the rise in property values over time, particularly for homes located in the south of England. The CGT exemption for the taxpayer’s only or main home means that this increase in value is completely free of tax, a relief worth £30.2bn per year according to HMRC statistics

Renters by comparison will never benefit from the growth in property values, and generally pay tax and NIC on their income at 32%, 42% or 47% (higher rates in Scotland), plus student loan repayments in many cases.

To equalise tax treatment between homeowners and renters the CGT exemption for main homes could be restricted or removed, and the rates of CGT could be aligned with those of income tax, as Tax Policy Associates have suggested

Older vs younger 

I discussed the advantages of the older generation in my article on boomers’ tax breaks

Charging NIC on pension income would be a step towards equalising the tax rates between the generations, but the incredible burden of student loan repayments would aslo need to be addressed. 

UK domicile vs non-domicile 

The tax advantage that Zahawi was attempting to exploit was based in the UK’s non-domicile rules, which are peculiar to this country.

Dan Neidle has argued that the non-dom regime should be removed, along with excluded property trusts that provide non-doms with an inheritance tax shelter, and I agree with him.

Replies (84)

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Replying to Justin Bryant:
By Ruddles
13th Feb 2023 14:01

Yes, but, going back to my earlier point, how easy would it be - in the practical sense - for the charging authority to distinguish between a second home and a BTL?

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Replying to Justin Bryant:
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By lionofludesch
13th Feb 2023 11:34

Justin Bryant wrote:

Let's try argue about something else then! In a similar vein, second homeowners need much higher council (or call it what you like) taxes too. See: https://www.bbc.co.uk/news/uk-england-norfolk-64303486

Despite the "crash and burn" success of Liz Truss, it's surprising how some folk still think that the simplicity of taxation is add up all your costs and divide it by the number of folk paying it. Doubling council tax for folk already struggling to pay it is, I would suggest, more likely to lead to bad debts than a successful economy. We've had thirteen years of austerity and it's led us to, what the French call, "le trou de merde" that we are currently in.

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Replying to lionofludesch:
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By Justin Bryant
13th Feb 2023 11:37

"Doubling council tax for folk already struggling to pay it "

Eh? Second homeowners? Yeh, right!

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Replying to Justin Bryant:
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By lionofludesch
13th Feb 2023 11:44

Justin Bryant wrote:

"Doubling council tax for folk already struggling to pay it "

Eh? Second homeowners? Yeh, right!

I was referring more to folk on the breadline. Second home owners can always sell their second home.

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Replying to lionofludesch:
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By Justin Bryant
13th Feb 2023 11:49

I am very obviously not advocating a council tax increase for such people! Quite the opposite.

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Replying to Justin Bryant:
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By lionofludesch
13th Feb 2023 11:52

Justin Bryant wrote:

I am very obviously not advocating a council tax increase for such people!

No, I'm agreeing with you, if that's OK.

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Replying to lionofludesch:
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By Hugo Fair
13th Feb 2023 11:39

Of course certain animals on the farm are all in favour of increasing the quantity of merde ... it's grand for wallowing in!

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Replying to Hugo Fair:
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By lionofludesch
13th Feb 2023 11:52

Hugo Fair wrote:

Of course certain animals on the farm are all in favour of increasing the quantity of merde ... it's grand for wallowing in!

[chuckle]

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Replying to Justin Bryant:
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By philrob
10th Feb 2023 18:26

There is a very different and very real world difference between capital value of housing and income.

Ignoring the extreme Mayfair Mansion vs. 1 bed council flat in Liverpool and consider a pensioner couple in a big house (bought many years ago). They may not have the income to pay the super council tax and their heating and food.

If the council took a charge on the property for the tax then the couple wouldn't have the money to pay for their (inevitable) social care costs.

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Replying to philrob:
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By lionofludesch
10th Feb 2023 18:34

philrob wrote:

If the council took a charge on the property for the tax then the couple wouldn't have the money to pay for their (inevitable) social care costs.

Social care costs aren't inevitable.

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Replying to lionofludesch:
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By philrob
11th Feb 2023 12:32

Only Death & Taxes are inevitable - Contributing to social care until assets are (near) exhausted is a very real probability for most.

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Replying to philrob:
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By lionofludesch
15th Feb 2023 15:59

philrob wrote:

Only Death & Taxes are inevitable - Contributing to social care until assets are (near) exhausted is a very real probability for most.

Most? A lot - maybe.

Thinking about folk I know (or have known), maybe between 10% and 20% of them have needed significant time in social care.

It's a small sample, I know, but a long, long way from social care being inevitable.

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By Mr J Andrews
10th Feb 2023 13:51

A rather big inequality has been overlooked in this article.
I refer to the honest tradesmen - builders , carpenters , plumbers etc - compliant with their tax obligations only to be outdone by moonlighters and those offering the job for 20% less - for cash.
How many times have we heard ''...........if you pay cash , it will save you on the VAT........'' for those jobs and repairs around the house . Even ''..........it will have to be cash ; otherwise it will tip me over the threshhold.......''.
The powers that be seem hell bent on squeezing the good guys with the likes of dumb MTD rather than face up to the reality of our rife U.K. black economy. And to the point , taking measures to tackle this evasion.

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By indomitable
10th Feb 2023 13:58

Seems to me that the author wants to put all taxes up for investors and risk takers and lower those for employees

Sounds like a socialist agenda to me that would be a complete disaster for growth and inward investment into the UK

I am already think of leaving the UK, if these sorts of ideas come to pass I'm definitely out.

I already have some of my clients that have left the UK and running their businesses from overseas

And the whole premise of "How can the tax system help to reduce inequality?"

What inequality? The tax system doesn't discriminate. There are no barriers to people taking a risk and setting up in business or buying property.

The suggestion here would just discourage this

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By Mike18
10th Feb 2023 14:46

It's a good article, and I agree wth the suggestions. The tax system is neither simple nor fair and the burden of both hits the poorest the most. There are a lot of reactionary replies to this article. In justification of regressive taxes nobody uses the exact words but 'why should deserving wealthy people pay more than the feckless poor' can be heard. Another way to discredit remedial action is the familiar 'equality has been tried before in history.' Where and when? Notice how the Resolution Foundation is accused of an 'agenda' as if involved in some conspiracy when highlighting increasing inequality.
Progressive income tax rates are reasonable and the imposition of the same levels on capital gains, corporate profits and inheritances should be an objective of tax policy. Most loopholes and exemptions should go. It suits all Governments to have many complex indirect taxes, charges, duties, or rates to avoid transpacency.

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Replying to Mike18:
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By AndyC555
10th Feb 2023 16:34

"Another way to discredit remedial action is the familiar 'equality has been tried before in history.' Where and when?"

Albania - 1944-1992
Angola - 1975-1992
Bulgaria - 1946 - 1990
Cambodia - 1975 - 1991
Congo 1970- 1992
Ethiopia - 1974 - 1991
East Germany 1949 - 1990
Hungary 1949 - 1989
North Korea - 1948 - date
Somalia - 1969 - 1991
USSR 1917 - 1991
Romania - 1947 - 1989
Vietnam 1945 - date
China - 1949 - date
Eritrea 1991 - date
Czechoslovakia - 1948 - 1990
Grenada 1979-1983
Mongolia 1924 - 1992
Mozambique 1975 - 1990

To name a few. Yes, yes, I know, not PROPER socialism and next time they'll get it right.

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Replying to AndyC555:
By Mike18
13th Feb 2023 13:27

19 attempts and not one right answer. Every one an autocratic dictatorship, not in any way seeking to reduce inequality. I would say more but I'm too busy wrapping myslef in the red flag you suppose I wave around.

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By Inquisitive
10th Feb 2023 15:05

Oh dear. Someone's opened the tin ......
It is far too much to comment upon but I will make a few remarks.
The recent press articles on Scottish taxation are already highlighting some of these issues.
https://www.telegraph.co.uk/business/2023/02/09/sturgeons-tax-rises-will...
And that exodus is something that has been going on for centuries even when there was no tax difference. Pre the 1707 union, the population of England and Scotland were not that dissimilar. Now it's 10:1 in England's favour. (It's colder in Scotland and now fewer work opportunities.)
And as for CGT on residences? Surely a comment by someone who never moves home? In my career, I (and my family) have lived in 15 homes in different locations. Sometimes as an owner-occupier, sometimes as a tenant. CGT on residences and stamp duty does not enable worker mobility. Nor does the unfavourable taxation of landlords who may need to rent out their own home, or to provide a home for a short-term employee contract. Oh and of course, house prices do go down: Ever seen a derelict property in the countryside? Or properties in cities where employment has reduced? There are many areas in the UK where the rebuild cost exceeds the retail price of the property. What happened to Irish house prices a decade ago? and to Dutch house prices in 1970s?
And I remember 98% tax rates on 'unearned income' in the 1970s.
I just don't have the time to write a book on the subject.

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By creamdelacream
10th Feb 2023 15:07

Tax is the highest it has ever been in 70 years and it is only going one way, because they're not making the public sector any smaller or more efficient. I have noticed a shift in client mentality recently and a lot are starting to leave the country. Many who came here thinking it was a friendly place to setup a business are now disenchanted with the direction of the country, and I don't blame them. Where is the incentive to create something valuable if you only end up with less than half of the result whilst being demonised? Entrepreneurs will always have options.

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Replying to creamdelacream:
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By lionofludesch
10th Feb 2023 15:14

creamdelacream wrote:

Tax is the highest it has ever been in 70 years and it is only going one way, because they're not making the public sector any smaller or more efficient.

HMRC are having a really decent stab at cutting staff numbers, to be fair.

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By Ian McTernan CTA
10th Feb 2023 16:04

You've fallen for the RF's line hook line and sinker. It's a left wing think tank that thinks capitalism is the root of all evil and the solution is to remove wealth from those who make the effort to make it and give it all to those who don't, to create 'equality'.

Here's a fair tax system: everyone pays the same rate, regardless of income level. Anything else clearly isn't fair.

In practice, we tax those who generate more income/gains/whatever at higher rates in order to pay for the ever expanding public sector and the huge and growing economically inactive.

It's a bit like hearing 'give more money to the NHS' as a solution to all it's many problems. It's already getting more money, but still has many problems- it needs real reform but no party will do the necessary as the NHS is a sacred cow.

Or 'public sector workers haven't had a pay rise in X years' which conveniently ignores spine point increases for those in the first years in the job (private sector companies gives pay rises based on performance, public sector get one for being in the job a year).

RF never tell us how huge public sector pay rises should be funded: how about a special tax on those receiving the most benefit, ie those getting the pay rise. 140% tax rate would cover the additional pay, NIC and pension contributions ....

As for their constant attacks on private landlords (note: most rentals are now in the control of housing associations etc, where the recent mold death occurred), it was already a marginal business with low interest rates and with the rise in rates and the awful Section 24 creating tax bills on non-existent profits, expect to see a further contraction in the available properties.

If RF had its way, no landlord would ever be able to get their property back from a non-paying tenant!

I could write a book in response to the many loony left ideas in the article but the summary should be:
remove all incentive for anyone to do anything to improve themselves, someone else can make the effort then give me their money.

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Replying to Ian McTernan CTA:
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By creamdelacream
10th Feb 2023 16:35

This is very succinct. The only value that exists was created by companies and entrepreneurs and the ones who really pay for our society are the top 10%. Is demonising them and taxing them into oblivion to pay for astonishing waste really sensible, or is it short sighted? There are plenty of examples of countries around the world who are failing due to their high taxes. Capitalism isn't perfect but it's orders of magnitude better than socialism.

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Replying to creamdelacream:
By Mike18
15th Feb 2023 12:03

Would Scandinavia offer examples of high tax states that are....failing? I think not. Should I explain a 'mixed economy' to people who see any state intervention as a step towards North Korea?

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By philrob
11th Feb 2023 13:32

It appears the consensus is not in support of the article's conclusion or the 'hoodwinking' of Rebecca by the Resolution Foundation - though I suspect an aim of the article was to stir up this debate.

So, how could you simplify the system? - I am not an expert on tax (hopefully I get my own right) so there will be holes in what follows but (deep breath) here goes...

Society/Taxation needs the following:
1. Agreement on the 'job of the state' - What is expected to be funded from our taxes and what should taxpayers expect to pay themselves. I believe we need a smaller state with less complexity and more individual responsibility but it is a debate that society as a whole needs to have - Our National Health Service is not viable in its current state and that is probably the first debate that is needed.

2. Agreement on how much incentivisation of wealth creation is reasonable (by this I mean actually taking the risk to start and grow a business rather than being employed by taxpayers - Entrepreneurs relief is one way of doing this, business property relief another.)

3. Agreement on basic principles of what to tax and what proportion should come from each element.

4. The timescale for balancing the budget - we need to live within our means.

So, basic principles - Still needs work but here are some suggestions....

Employers National Insurance - I don't like it but I accept it is necessary in a global economy until a global tax agreement apportions global profit to where the sales are. So it should stay for the time being - Like property, employees tend to stay in the country and so are easy to tax.

Employee National Insurance - Get rid of it and incorporate into Income Tax - High income pensioners will then pay the same as the 30 year old bringing up kids on the same income. NI is a Ponzi scheme so there is no real reason why high income pensioners shouldn't be paying it despite historic promises). Lower income earners and pensioners would be un-affected (see later). It also means that the Self employed National Insurance on profits can be the same rate. Still have to deal with fewer benefits for self-employed (sick pay etc.) so perhaps a small discount to reflect the risk for genuine self-employed.

Dividends - Paid out of profits after (25%) corporation tax has been taken. It could be argued that the rate should be lower than income tax because of that. But, if dividends were treated as equal to earned income then the service companies and IR35 would vanish - Much better to pay ER NI than 25% corporation tax and, bluntly. Income is income unless you are an owner/manager taking all the risk so perhaps a discount for dividends from private businesses compared to quoted companies (to reflect the significantly greater risk of private businesses).

With a withholding tax for any dividends ‘exported’ from the country you could potentially reduce the corporation tax to match the ER rate of NI. Though capital allowances etc would also need to be considered.

Capital Gains - There are several broad types of gain:
a) Entrepreneurial (start or grow a business),
b) Incidental/Accidental (e.g. buy a house and value increases over inflation but the intention was to have a home)
c) Investing Taxed income in the (mostly safe) stock market.
d) Investing Taxed income in high risk 'baby' businesses.

Debate is needed on how the different types of capital gain should be taxed - but indexation should be re-introduced, (esp with inflation at 10%) - EIS should be retained and Entrepreneurial Relief re-introduced so that the reward for putting capital at risk incentivises businesses to start and grow. The tax 'saved' by the taxpayer on on private business would be recovered via Wealth Tax if the gain isn’t spent. If it is spent you get the VAT and employment benefits.

Wealth Tax - otherwise known as Inheritance Tax. The change I would make here is that the carried forward cost for business property relief (inc agriculture) is the indexed purchase price (rather than being revalued on death and then exempt). At some point the company will be sold (or die) - if sold the gain is taxed appropriately at the gain over the indexed rate. I would remove the exemption from IHT of AIM shares unless they were 'subscriber' shares at the IPO that have been held throughout.

Stamp Duty:
a) Shares, leave it where it is at the moment for quoted/aim shares as it has the side effect of reducing volatility - introduce it on any 'borrowed' shares. Eliminate it for Private Businesses (probably costs as much to administer (company and HMRC) as it raises).
b) Property - get rid of it (or make it much smaller - the current rates are stopping people downsizing and stoping mobility) - You will get the value in the Wealth Tax eventually and probably an element through spending on home improvements etc.

Council Tax - Make it an income tax levy (with upper limits) - This would also mean that 3 working people in a property would pay 3 lots of tax (they are using three lots of services) and thus contribute more fairly to the community. Single person occupancy also is easy. There would be a personal ‘allowance’ but it should be much lower than the one for National income tax (see later) so that there is a genuine interest in the efficiency of local democracy and value for money for everyone. Second homes = second lot of local income tax. Anti avoidance rules to deal with ‘non earner in couple owning 2nd home’ - and local income tax paid at the highest rate of the areas in which properties owned if you wanted to punish second home owners.)

VAT - Drop the registration threshold to the level of the (new) personal allowance for income tax + (say) 50% (for materials) - There are huge distortions preventing businesses from employing people and growing as they are typically 18 to 20% more expensive than 1 (wo)man bands (depending on the material cost element). Software packages make the accounting relatively easy. A much lower threshold would level the playing field as would penalties on both parties for 'cash in hand' transactions - both parties pay the vat that should have been paid if they try to 'dodge' it.

Income tax - Raise the personal allowance to (say) £25,000 (ideally more) and tax at an appropriate flat rate above that. The wealth tax will get a chunk of the high earners income eventually. But more money would probably circulate in the economy if people have more income left to spend. Consider making unused personal allowances transferrable between spouses/civil partners where children are involved. Ensure that local income tax and national income tax are less than 50% of all income - this incentivises earning more rather than finding avoidance mechanisms.

Remove the Devolved Powers to change the rates of income tax in Scotland and Wales until such time as they are separate nations (hopefully never) - no-one needs the complexity, division, distraction and distortion different tax rate in the same nation creates.

High Income Child Benefit Charge - scrap it (and possibly child benefit itself- incorporating CB into other benefits). As it stands the HICBC is patently unfair - a couple with 1 earner on 80k pays '000 more tax than a couple on 40k each - yet there is increasing evidence of the benefits of having a 'stay at home' parent on child mental health.

Pensions - Include the ‘pot’ in the Wealth Tax if it can be transferred after death. Remove the limits on total value of funds - with NI Included in Income tax you will get it back if pension income is high and the current fund value limits are arguably a)not high enough to provide for a long retirement and b) disincentivising people to stay in work. If you want to put limits on pensions then have these (as now) on contributions (company and private) not fund value.

Business rates: Don’t have an easy answer for this one. Once there is a global agreement to allocate profit in proportion to sales by country it can probably be moved to corporation tax. Until then Business Rates is about the only way to get Amazon to pay any tax in the UK at all.

Keep de minimus allowances on savings income and capital gains to reduce the admin burden on taxpayers and HMRC.

Lots of number crunching needed to get the thresholds right - but if the system is simpler we should need less HMRC staff to administer it (apparently there aren't enough HMRC Staff at the moment)

What do you think...

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Replying to philrob:
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By lionofludesch
11th Feb 2023 13:55

philrob wrote:

What do you think...

I think it's a very big Finance Bill.

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By agknight
13th Feb 2023 14:33

This would seem to be quite a political article and one I'm not happy to read on AW. It seems to be advocating one choice over another, rather than just pointing out situations and possible effects.

I'm not saying accountants can't have a personal view, but that should be with a personal hat on.

It seems to me that socialism is creeping across any entrepeneurial initiative in this country and the given thinking is to tax more, for the state to spend. Level tax upwards.

An alternative proposal is to scrap Corporation Tax altogether, and let the (more) money flow to individuals, who would by definition be taxed more, but at least they are voters.

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By twohaporth
13th Feb 2023 16:27

We are all looking at this from the wrong viewpoint.

The problem isn't the tax system which may not be perfect but what is?

The problem is that the civil servants are incompetent and spend or waste too much money - too many civil servants paid too much, too many incompetencies PFI, MTD,PPE (6.2 million I think) BBL (about £40 million) and look at Scotland - want to buy a ferry? Then we have HS2, the NHS, in fact anything that civil servants are attached to is ridiculously expensive and bafdly managed.

Get rid of the waste in Government and taxes could actually fall.

Fat chance of that though is there? The politicians couldn't run a party in a brewery. As f0r Starmers crew - paid for by the unions who are probably in Putin's pocket judging by their actions so what hope do we have? Perhaps the real workers - those who fight for themselves without goverment help - should take a long holiday and leave the politicians to it.

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Replying to twohaporth:
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By lionofludesch
13th Feb 2023 16:36

twohaporth wrote:
As f0r Starmers crew - paid for by the unions who are probably in Putin's pocket judging by their actions so what hope do we have?

Wow.

Here's me thinking that it was the Tories who had close connections with the Ruskies these days.

How times change ......

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By cfield
13th Feb 2023 18:58

I think it ought to be pointed out that Rebecca is or was the Chair of the Milton Keynes Lib Dems, as well as their candidate for a local ward, and this probably explains some of the blatantly left-wing tax policies advocated in her article.

I read AWeb for news/advice on tax and accounting issues, not to be bombarded with propaganda from a website in danger of being seen as the tax edition of the Guardian newspaper. Rebecca is unashamedly using AWeb as a free soapbox for her political views and she is using her position as tax editor to varnish them with a veneer of authority they ill-deserve.

Rarely have I read an article so flawed in both logical analysis and basic interpretation of the facts, but that's what happens when politics gets in the way. Objectivity and common sense fly out of the window to be replaced with ideology and dogma. Let's examine the points she makes in more detail.

Firstly, dividends are not taxed lower than earned income, quite the opposite. They come out of profits that have already been subjected to corporation tax. If dividends were tax deductible for the company, they would be higher. The effective tax rates on dividends from April onwards, assuming the company makes profits between £50k and £250k, are almost 33% for basic rate taxpayers and over 58.5% for higher rate taxpayers. This is based on the marginal CT rate of 26.5%. That was the very good reason we used to have notional tax credits on dividends, to avoid this sort of double taxation.

Secondly, the reason there is no NI on dividends is because they are not earned income. NI is the tax that dares not speak its name. It used to be what it said on the tin; a social insurance scheme that paid for pensions and sickness benefit, and that's why it is only levied on earnings. It is also why the rate goes down above the Upper Earnings Level, for the very good reason that this was the cap on SERPS. Indeed, there never used to be employee NI above the UEL at all once. Those days are long gone. There is hardly any linkage now between NI contributions and state benefits, apart from a few peanuts under New Style JSA and old accrued pension rights under SERPS and S2P that are now in run-off. In short, you no longer get what you pay for with National Insurance, not higher earners anyway.

If you want to put NI on dividends, or pensions for that matter, then stop calling it NI and start calling it the tax it really is, but in that case, make dividends tax deductible for the company so they are not double-taxed. Also, bring back the age allowance so the poorest pensioners are not so badly hit by ramping up tax in lieu of NI.

Thirdly, capital gains are not the same as income. Investors take a risk, workers don't. If they make a loss, the Government doesn't come running to reimburse them, nor indeed should it. It doesn't even allow losses to be offset against income in most cases, but it is very happy to tax the gains.

However, the UK economy needs investment, so it is only sensible to tax them less heavily. Rebecca says there is no "solid evidence" that lower tax stimulates growth, but that would be difficult to measure anyway. How can we know which investments would or wouldn't have been made without the tax breaks? There is plenty of anecdotal evidence, however, not to mention plain common sense. Otherwise, there wouldn't be so much money being ploughed into VCT and EIS schemes. What is the point of the Department of Science, Innovation and Technology doing its utmost to stimulate investment from all over the world if the investors are going to be taxed up to the eyeballs? You can argue the reliefs might be poorly targeted in some cases, but the principle of taxing gains at lower rates is surely beyond dispute.

Also, most capital gains accrue over several years. There is such a thing as inflation, you know, even when it is very low. Since the abolition of indexation/taper reliefs, a big part of a capital gain is due to a simple rise in prices, especially on property (real estate doesn't have the same opportunity to out-perform the market as shares, etc). Hence, the effective tax rate on capital gains is actually a fair bit higher than the taxman says.

Rebecca mentions the OTS as justification for taxing gains the same as income. Reminds me a bit of the "level playing fields" mantra trotted out by some politicians as a good excuse for everything. The OTS wants to simplify the tax code as that is its reason to exist, and usually that's a good idea, but not at the expense of fairness or precision. Sometimes the law, including tax law, is complex for a good reason, usually to stop the baby being thrown out with the bathwater or to forestall evasion. Far too often, politicians use simplification as a smokescreen for putting taxes up.

Half of all gains made by just 5,000 people? By value maybe, not by the number of people. Reducing the lifetime limit to £1 million should have been enough to improve the targeting of ER/BADR and stop private equity managers paying less tax than their cleaners (what a huge wind-up that was, it certainly got Alistair Darling going). So what does Rebecca want to do? Tax the self-employed on their retirement nest-eggs, that they spent their whole lives working for? Well I suppose it is a bit unfair, as ordinary people don't get big pay-outs when they retire, do they. Only company pensions and tax-free redundancy packages!

As for the rise of personal service companies, yes the abolition of statutory audits was a driver for this, and a long overdue one too, as they were a complete waste of time for all concerned. So was the end of the hostile tax regime (e.g. ACT, close company apportionments) and the trend in paying contract staff off-payroll (itself driven by over-burdensome employment law and rocketing ERNI rates) but there were many other factors, technological, societal and regulatory. Mobile phones, the internet and new software all made running your own business much easier than ever before, and changes to the Companies Act made it simpler to do this via your own company. There was also the recession of the early 90s and the end of the jobs-for-life culture which forced many people into contracting or made it an attractive alternative. Personal service companies were not invented to dodge tax, although the rules certainly made this easier. It was Gordon Brown who ended the £2 entry fee and thus made it possible to clock up qualifying years without paying NI, not Moss from the IT Crowd (although there are certain similarities).

Comparing CGT with tax on pensions is a bit disingenuous. For starters, money going into pensions has enjoyed tax relief, sometimes at higher rates. Not so other investments. True, BTL investors enjoyed tax relief on their mortgages until recently, but it wasn't as though the Government was topping them up, and it was after all a genuine business expense. Also, as pointed out earlier, the real CGT rates are much higher as the gains are inflationary.

What did she say next? Ah yes, main residence relief. She really is on another planet here with the idea that people should pay CGT when they move home. How on earth are they supposed to pay for the new home? Re-investment relief? Well that should stop people down-sizing when the kids fly the nest, shouldn't it. As if the sky-high SDLT rates we have now, which are grossly unfair on people living in the South-East, are not sufficient deterrent to moving house, she wants to make them pay CGT too. It will make the supply of housing even lower than it is now, and thus force prices up even higher, making them ever more unaffordable to younger would-be buyers. It is also, by the way, a big restraint on labour mobility. Renting does have some advantages. They don't seem to mind it in Europe. For one thing, it makes moving easier. No SDLT! No mortgage hanging round their necks. They also save on insurance, maintenance and sometimes furniture and kitchen appliances.

The only way to fix the housing market is to build more houses and flats, which means relaxing the planning laws. Kwarteng wanted to do that in his Budget speech last year. Lets hope it didn't go the same way as the rest of his Budget. The other thing we should do is stop people buying property just as an investment by imposing local quotas. For instance, 90% of homes in Cornwall must be lived in all or most of the time by the buyers, or rented out, not just left empty for summer breaks. Also, we should not be letting foreigners buy up UK property, not unless they want to live here permanently.

That brings us on smoothly to the non-doms. I see Rebecca is jumping on the latest bandwagon and blaming them for tax shortfalls. It's become a bit of a political football this, hasn't it. The Left are just loving it. They can't stop banging on about it. The truth is that the tax rules have been tightened up unrecognisably for non-doms since Labour's day. It's a rich man's game now. They have to pay £30,000 a year after 7 years to exempt foreign income. There is also double tax relief if they do opt to use the arising basis, unless they come from a tax haven. I doubt very much it would yield that much extra tax if we abolished the remittance basis. There is also the small fact we would lose all the tax they pay on their UK income if they left these shores. Theresa May said in 2018 that the top 1% pay 28% of total income tax. What are we going to do if that 1% say "Shod that for a game of soldiers", ups sticks and leaves, and the next 1% after that? All for the sake of party political point-scoring.

Generational inequality was her other main point. Apparently all us baby-boomers have had it too good and now we should share our ill-gotten gains with the younger generation. Listen, they will get their share when we turn up our toes. Until then, they will just have to wait, same as we did. Without sounding like CJ, It took us years of hard work, self-sacrifice and thrift to get where we are today. Yes, property was cheap in todays terms, but we still had mortgages hanging round our necks for 20-30 years. They will inherit the fruit of our labours eventually. They have many advantages we didn't, like full employment, the internet, better education, more opportunity to start up a business and travel.

I do agree about the student loans though. It's a huge ask, expecting a school leaver to take on that level of debt, in the certain knowledge their job prospects will be compromised if they opt out. We should pay off their loans, but only if they graduate, not if they flunk or drop out. Also, we should only be offering full credit on certain courses, such as science and engineering, that will benefit the country and we should be targeting the most help at students from poorer backgrounds, whatever course they do. In general, we are too focused on the number of people going to university. 50% is far too high. Half of them should be in other forms of education or training, like apprenticeships. A degree should be a mark of excellence, not the norm. Otherwise, it's hardly worth having.

Anyway, if I carry on much longer, I'm going to need a whole page on this thread to myself, so that's my contribution to the debate. Bound to tread on a few toes I'm sure.

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Replying to cfield:
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By Hugo Fair
14th Feb 2023 12:32

It's a shame that this appears near the end of page 2 of an already lengthy thread - as it may not get the readership it deserves.
I don't agree with every single point (who does when the topic turns to political beliefs?), but at least it is well written and cogently argued - with more than a smattering of common sense.
And, unlike the original article, it has caused me to think more deeply about some of the aspects ... and set off on some further research ... so, thanks.

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Replying to cfield:
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By Moo
14th Feb 2023 17:03

'Apparently all us baby-boomers have had it too good and now we should share our ill-gotten gains with the younger generation. Listen, they will get their share when we turn up our toes. Until then, they will just have to wait, same as we did.'
When baby boomers turn up their toes there will presumably be a substantial increase in the IHT take together with a gradual reduction in demand on the NHS and Care sector. I wonder if any of the powers that be have budgeted forwards for this? It would be interesting to see any actuarial modelling, there must surely be a big turnaround in the Boomer effect coming in the next 10 years or so.

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Replying to Moo:
RLI
By lionofludesch
14th Feb 2023 17:15

Moo wrote:

'Apparently all us baby-boomers have had it too good and now we should share our ill-gotten gains with the younger generation. Listen, they will get their share when we turn up our toes. Until then, they will just have to wait, same as we did.'
When baby boomers turn up their toes there will presumably be a substantial increase in the IHT take together with a gradual reduction in demand on the NHS and Care sector. I wonder if any of the powers that be have budgeted forwards for this? It would be interesting to see any actuarial modelling, there must surely be a big turnaround in the Boomer effect coming in the next 10 years or so.

I doubt it. They're not as wealthy as some folk would have you believe.

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By coops456
15th Feb 2023 13:35

Nobody, least of all Rebecca, is proposing a communist/socialist solution here!

She's simply offering suggestions on how the tax system might be used to tackle UK income inequality, which is among the highest in the developed world. We can and should debate how this can be achieved, but some of the responses here seem opposed to the goal of equality or levelling-up. I genuinely don't understand why AWebers wouldn't want a more equal UK.

People in more equal societies live longer and have better mental + physical health. Addiction rates are lower. Community life is stronger where the income gap is narrower, children do better at school and are more likely to reach their potential. People trust each other more, there is less violence and rates of imprisonment are lower.

Inequality is a political choice, not an inevitability.

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Replying to coops456:
By cfield
15th Feb 2023 14:29

Depends on whether you want equality of opportunity or equality of outcome. Most of us want the former. The latter tends to be advocated by those who see something wrong in some people having more money than others, even if they've earned it.

It also depends on how you define equality. Is it just a matter of money? People are unequal in all sorts of ways - brains, beauty, strength, health, personality, natural ability, family background. Perhaps in the future they could find some way of ironing out all those inequalities too. Turn us into a hive of bees!

Take away the ability to rise above the common herd and do well in life financially and society will become sclerotic. What would be the point in working or studying hard, inventing things, setting up businesses? We're halfway there already. One of the reasons our growth rates are so low.

The societal problems you mention will not be solved by re-distributing incomes. Even the poorest people are much better off now than they would have been 40 or 50 years ago, yet those problems have got worse for all sorts of reasons, chiefly the volume of drugs flooding into this country. Education and early intervention is the key to curing those ills. Money only works as a way of enabling that to happen.

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