Will taxing the rich to pay back borrowing work?

The coronavirus pandemic has affected every area of business and the economy, and the reverberations of the government’s reaction will be felt for months and years ahead.

One of the most debated topics in recent weeks has been around the UK’s rate of borrowing in order to cope with the pandemic – and its impact on the tax strategy going into 2021 and beyond.

The age-old response by many of ‘tax the rich’ has been discussed – but would this work? What more needs to be done to create a recovery strategy for the economy?

With further debates around the recent changes to Capital Gains Tax and parliamentary disputes around further tax levers that could be introduced – Business Leader spoke to some industry experts on what they think the future holds.

Eric Silvestre, CFA Senior Investment Research Analyst at Alpha Portfolio Management

The latest estimates suggest the government is expected to spend a whopping £280bn on measures to fight Covid-19 and its catastrophic impact on the UK economy. The latest official figures for October show public sector debt passed the £2 trillion mark for the first time in history. The Office for Budget Responsibility (OBR), estimates that borrowing will be £394bn for the current fiscal year. That is the highest figure since World War 2.

Boris has been insistent that there will be no return to austerity, so with tax revenues drying up, what options are there?

Raising taxes is the most logical option but would be politically awkward. Especially since the Conservative 2019 manifesto promised not to raise the three biggest taxes. These are income tax, national insurance and VAT.  Historically these have accounted for more than 50% of UK  tax revenues.

Recently the Wealth Tax Commission, a study group involving the LSE, controversially proposed a ‘one-off’ wealth tax of 5%. Phased over a 5-year period it could raise £260bn to recover the cost of the pandemic. The proposal could affect around 10million people or 1 in 6 or working people with £500,000 or more worth of assets. The Commission said the one-off wealth tax would be equivalent to raising VAT by 6p or the basic rate of income tax by 9p for the same period. Whilst the measure might be one of the least unappealing to the nation as a whole, to a Tory voting middle class or mass affluent, it will feel particularly painful akin to turkey voting for Christmas.

Various European countries, notably the French, have tried and subsequently withdrawn variations of wealth tax legislation. UHNW’s tend to be adept at switching domicile to avoid such measures, leading to an exodus of very high tax paying individuals and a shrinking pot of wealthier people.

Chancellor has commissioned a review of Capital Gains Tax (CGT) with a view to identifying opportunities to simplify the tax, but it was already suggested by many as a potential route to increase tax revenues and this review has done nothing to dampen such speculation.

Over the Summer, Rishi Sunak provided us with a ‘heads up’ that changes to the UK’s Capital Gains Tax (CGT) regime could be on the cards. In July, he contacted the Office for Tax Simplification (OTS). For many years CGT has been pending a wholesale review and has been deemed unnecessarily complex.

In his letter to the OTS, he stated: “This review should identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent. In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”

Hiking CGT rates and slashing the CGT allowance are obvious adjustments, but these are not the only options available.  There are a range of allowances/exemptions and reliefs that could be considered. One of the most controversial of these would be adjustments to Principal Private Residence Relief or PPRR. This currently makes the disposal of your main residence exempt from CGT. Again, the political perspective from this could jar with voters as the structural imbalances of the UK housing market could reach a much broader catchment area, impacting those deemed well off who are simply asset rich, but income poor.

What could 2021 bring us? The end of Covid? A new era of prosperity, post Brexit? But, unfortunately we also have a Father Christmas sized sack of national debt.

More comments to follow.