Published:

209 comments

Sam Robinson is a researcher at Bright Blue.

Economists say there’s no such thing as a free lunch, and the same is true of lockdown.

The Coronavirus crisis is expected to cost the Government £300 billion, as we are set for the deepest and sharpest recession in 300 years.

The Treasury has reminded Rishi Sunak of this fact in no uncertain terms.

A leaked document puts this year’s deficit in the ‘base case’ scenario at £337 billion, and points out that tax rises and spending cuts of between £25 billion and £30 billion a year will eventually be needed to right the ship.

Significant spending cuts are not a plausible option in these circumstances. With every Whitehall department save Health, the Home Office and DFID seeing its budget slashed over the last ten years – some by more than 50 per cent – there is little financial room for further substantial cuts.

The sacrifices of key workers throughout this pandemic has made demands for higher pay for public sector workers and more money for the NHS all but impossible to resist.

Public support for austerity is no longer there; a clear majority of voters, including Conservative supporters, want to see spending on public services increased.

As the Treasury briefing makes clear, it is likely that the Government will instead have to break its manifesto pledge not to raise taxes.

At present, the Government is desperate for revenue and therefore likely to raise one or more of the broad-based taxes: income tax, National Insurance or VAT.

But if higher taxes are now inevitable, the Government needs to think about how revenue can be raised fairly and effectively.

It needs to stop putting off the difficult questions a major tax-reform programme requires.

Bright Blue has launched a new major project on tax reform in the 2020s to explore the options.

The UK has a narrow VAT base compared to many other countries, making the system complex, inefficient and costly.

Indeed, HMRC estimates that (assuming no behavioural changes) the Government could have raised an additional £53 billion in 2018/19 if goods and services that currently benefit from a zero or reduced rate of VAT were charged at the standard rate.

But it would be a waste if Government were to just take the money and run without thinking more deeply about how indirect taxes can support wider objectives.

Taxes on consumption are much maligned, but there is evidence that ‘sin taxes’ on unhealthy food and drinks work – not just in mathematical models, but also where they have been tried.

Indeed, the plastic bag tax and sugary drinks levy have both had the intended effects.

Environmental taxes in particular are ripe for reform.

Britain has an uneven approach to taxing different forms of polluting activity.

But where environmental taxes are higher, emissions have been falling faster.

There is evidence that carbon taxes more broadly are an effective way of moving towards net zero: the IMF concluded in a report late last year that a $35 per ton carbon tax would be very nearly sufficient for the UK to meet its Paris summit pledge on emissions.

There is a strong economic case to be made for looking again at consumption and environmental taxes.

In any case, what could be more conservative than asking consumers to take responsibility for the social cost of their consumption and using the tax system to protect our natural heritage?

In the longer term, wealth taxes are arguably the most promising way of obtaining revenue on a large scale.

In the UK, private wealth as a proportion of GDP has more than doubled since the 1970s, yet revenues from taxes on wealth have remained at two per cent of GDP.

But reforming wealth taxes needn’t just be about plundering the rich.

There is a way of reforming wealth taxes that improves both efficiency and equity.

Income from work is taxed more heavily than income from wealth, and this is already distorting the economy: whereas an employee earning £100,000 pays £40,000 of that in tax, an owner-manager taking most of their income as capital gains and taking advantage of Entrepreneurs’ Relief could pay as little as £22,000.

Such large tax differences may go some way to explaining the large rise in incorporations over recent years.

These differences also have a bearing on whether companies decide to employ someone directly or as a self-employed contractor.

Shortly after his election victory, Boris Johnson proclaimed: “We believe that talent is evenly distributed throughout our country but opportunity is unfairly distributed”.

Any conservative who cares about social mobility should recognise the role wealth has to play in this, particularly inheritances.

The value of inheritances – which are very unequally distributed – has doubled in the past 20 years and will double again over the next 20.

A litany of exemptions and reliefs in inheritance tax means that it is the richest estates who benefit most.

Around 20 per cent of the value of the smallest estates is subject to a tax relief, while this is over 70 per cent for the richest estates.

Agricultural and business property reliefs disproportionately benefit the largest estates, such that the effective average tax rate on estates with net value over £10 million is less than 10 per cent – compared with double that for most estates.

In the wake of Coronavirus the overriding objective for Government is to generate revenue, and quickly.

But it would be a terrible waste if taxpayers are squeezed without any thought going into how taxes could be reformed to deliver more social mobility, more efficiency, and better environmental outcomes.

Yes, there is political risk for the Conservatives in breaking their manifesto pledge.

But there is also an opportunity to use taxes to shape a One Nation conservatism that will bring the country together after this crisis passes.

209 comments for: Sam Robinson: How can the UK pay off its Coronavirus bill? A carbon tax and reformed wealth taxes would help.

Leave a Reply

You must be logged in to post a comment.