A think tank has urged the government to hike the rate of capital gains tax to match income tax levels in a bid to make the UK’s tax system fairer and increase government revenue.
Just Tax, a report from The Institute for Public Policy Research published today (September 9), estimated the government could raise an extra £90bn over the next five years by taxing capital gains at the same rate as income.
Capital gains tax is subject to different thresholds than income tax and is generally lower for higher earners.
The think tank also thought an additional £15bn could be raised over the same period by removing the exemption of capital gains upon death, which currently means a deceased’s estate is not liable for capital gains tax.
On top of the potential benefits of reform, the current capital gains causes economic inequality and is unfair, according to the IPPR.
The report claimed two people who earned the same amount of money but from different sources could make very different contributions in tax, and those on larger incomes from a mixture of sources could have a lower average tax rate than those on lower incomes who received their income solely through employment.
The IPPR stated this was “fundamentally unfair”, claiming it distorted economic behaviour and created opportunities for tax avoidance.
Alan Chan, director at IFA Wealth & Pensions, said the IPPR’s proposals would be a “poor move” which “sent out the wrong message”.
He said: “We want to encourage more people to save and invest. By increasing the tax rates, it would reduce the incentive for savers.
“Significantly hiking up capital gains or dividends taxes to the same rates as income tax rates would be disproportionate to the level of risk taken for the investor.”
Mr Chan added capital gains were not guaranteed, highlighting that investors took risks to get such returns and changes to the tax would make investing outside of any tax wrappers unattractive.
He also thought such proposals could hurt those heavily reliant on savings and investments, such as retirees.
The IPPR backed the taxing of all sources of income together and equally under a single tax schedule:
| Gross income | Net income post tax: current system | Net income post tax: IPPR system | Difference |
| £18,500 | £16,080 | £17,110 | +£1,030 |
| £26,200 | £21,316 | £22,378 | +£1,062 |
| £39,500 | £30,360 | £30,810 | +£450 |
| £59,200 | £42,826 | £42,106 | -£720 |
| £188,000 | £110,625 | £107,585 | -£3,040 |
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the report underlined how tax allowances and rates could change overnight and she stressed the importance of wrapping savings and investments in Isa wrappers to protect money from tax regardless of policy change.
She added: “The think tank says its proposals are fairer than the current system. It underplays the fact that in reality, the vast majority of savers and investors pay tax on their income from work, they save and invest diligently for their future, and may pay a second round of tax on their investment income or gains.”
The think tank also proposed a fundamental reform of the income tax system, stating the current system of tax bands dated from the “pre-computer age” and was “no longer fit for purpose”.
Therefore the IPPR backed the taxing of all sources of income — earnings, dividends and savings — together and equally under a single tax schedule, with a gradually rising marginal tax rate as income rises.
According to the report, such a system would be more transparent and avoid ‘tax cliffs’ which exist in the current banded tax system.
This wouldn’t change the total amount of tax received by the government, but the richest 20 per cent would pay a larger share, stated the IPPR.
“Taken together, we believe these proposals amount to a transformation of the taxation of income which would move us towards a more economically just system and warrant serious consideration for any government interested in raising revenue in a progressive manner.”Just Tax reportTax reform is likely to be a hot topic in any upcoming election, with new Prime Minister Boris Johnson already believed to have set its sights on reform.
Before he was elected, Mr Johnson appeared open to changing the current stamp duty system and had previously promised to make changes to pension tax in order to deal with issues stemming from the tapered annual allowance.
Neither Mr Johnson or Sajid Javid, the new chancellor of the exchequer, have come out in favour of any form of income tax increases, however. In fact, both have opted for tax breaks.
In the election race, Mr Javid backed a cutting of the basic rate to help lower-paid workers but told The Telegraph he could also slash the rates for high earners in a no-deal Brexit scenario to inject “dynamism” into the economy.
Early in his leadership campaign, Mr Johnson promised to raise the 40 per cent income tax threshold from £50,000 to £80,000 which would benefit the top 10 per cent of earners to the tune of almost £2,500 a year.
imogen.tew@ft.com
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