The UK tax system is supposed to be progressive. In reality, wealthy people can pay a smaller proportion of their income in tax than millions of people who work for a living.
That is not an accident. Wealth is taxed differently from work.
Workers pay income tax and National Insurance. They then pay VAT when they spend. Wealthy people can instead turn income into capital gains, retain profits inside private companies, use offshore structures, transfer assets between generations, and they also spend a smaller proportion of their income on items subject to VAT.
The result is a tax system that helps create and preserve wealth while imposing a disproportionate burden on ordinary households.
In this video, I explain seven ways in which the UK tax system favours wealth. I also explain why I do not think that an annual wealth tax is the best immediate answer to that problem.
Instead, I explain that we could raise well over £50 billion a year by reforming existing taxes. Capital gains could be taxed at income tax rates. Higher investment income could be subject to a charge equivalent to national insurance. Private companies could be prevented from accumulating untaxed personal wealth. Inheritance tax loopholes could be closed, while council tax could be made genuinely progressive.
This is not technically difficult. The necessary information already exists. What is missing is political will.
Fair taxation means taxing wealth like work.
Please share your opinion in the comments and take part in the poll below.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
The UK has a wealth problem. The problem is that too few people have too much of our wealth, and most of the rest of us don’t have enough. That’s a definition of inequality, and that inequality is causing massive stress, social injustice, and political grievance. And you will have noticed that grievance. All of it is justified by the fact that this is a system that has been chosen by the government. Our tax system lets this wealth inequality happen.
As a straightforward matter of fact, the wealthy often pay a lower share of their income in tax than do people on very much lower incomes. That should be impossible, but it is true. We don’t have a progressive tax system overall in the UK, especially when it comes to the wealthy, and my research has shown that. We’ll provide a link down below to the Taxing Wealth Report, where the data is. We have a tax system that taxes the wealthy less than it should. So, why is that? And what can we do about it? That’s what this video is all about.
The explanation lies in how our taxes are designed. Wealth is taxed differently from work in the UK. It always has been, ever since we introduced income taxes in the UK in 1805. And the system favours those who already have money. That is why inequality in this country keeps increasing. And when Margaret Thatcher made changes to our tax system in the 1980s, in particular, wealth increased rapidly, and nothing that has been done since has reversed that trend. And that’s why we need to change our tax system now.
And let’s be clear, in this context, wealth means having money left over at the end of the week. That is a particularly important idea that you have to keep in mind when we’re talking about tax. In the case of those with wealth, their income in a period exceeds their spending, so they save, and therefore they grow their wealth. Most people spend almost everything they earn, in contrast to those with wealth. But the wealthy and the wealthiest can save large amounts every year. And saving creates tax opportunities that earning wages never can. And those opportunities reduce the tax liabilities of the wealthy. Our tax system rewards those who have or can accumulate wealth.
So, the question is, how does that happen? Let’s talk through the steps.
Step one is that wealth is turned into investment instead of income. When you’ve got money left over at the end of the week, and you know you’re not going to need it to meet some rainy day demand sometime in the near future, you can invest it in a way that turns that investment into what is called a capital gain rather than an income stream. Most people put their savings into a bank account, an ISA, or something like that, and get a steady flow of interest.
The wealthy buy capital assets. They buy shares, they buy land, they buy businesses, they buy farms. They do it to try to realise what is called a capital gain, a profit on eventual sale. And the fact is, capital gains are taxed at much lower rates than income, even though both income and capital gains just put pounds of equal value into a person’s pocket. It’s totally unfair that gains are taxed less than income. And at the same time, it’s totally unfair that there is no such thing as a National Insurance charge on a capital gain, but workers do, of course, pay National Insurance as well as income tax. So, not only do they pay higher income tax rates, in most cases, they also pay National Insurance as well. And the wealthy therefore avoid taxes paid by workers, and the same overall monetary gain receives a very different tax treatment as a result. And that is deeply unjust.
Step two in this process is that the wealthy hold their money through private companies. Now, private companies were never intended for this purpose, but they have become used for it. Company profits face much lower rates of tax than personal income on the same equivalent sums, especially if the company is owned by a person who would otherwise be a higher rate taxpayer. And what is more, National Insurance is not charged on company profits, either in the company or, if the profit is withdrawn by way of dividend.
And, business costs reduce taxable profits in a way that income earned by a person from work cannot do. And undistributed profits from a company avoid personal income tax altogether. Companies provide long-term tax-planning vehicles, then letting savings grow in a low-tax way. The company is then a gift to the wealthy who want to avoid their tax liabilities.
Step three in this game is moving offshore. I know that offshore tax planning is much harder now than it was before I began tackling it in the early part of this century. We have made going offshore harder. I’m delighted about that because I worked very hard to achieve that outcome. But the fact is, offshore tax planning has not completely disappeared. And low-tax jurisdictions or secrecy jurisdictions, as I call them, still attract wealth.
Complex structures can still reduce UK tax bills, and international wealth remains easier to shelter in tax havens than it should be. The richest still have choices that others do not. We need to close down offshore.
Step four involves VAT. This is a complex area, but one worth paying attention to because this mundane tax is heavily biased against ordinary people. Remember, VAT is a tax on your spending, and by definition, those who are wealthy or those who are saving spend less than all their income. Now, most of us spend all our income or almost all our income every week or month. But the fact is that means that we pay VAT on a great deal of our income.
So, after we’ve paid income tax and National Insurance, then we pay VAT on quite a lot of the rest of what we spend. But the wealthy do not spend all of their income. They spend a much smaller share of their income and therefore do not pay VAT on it. By definition, therefore, the wealthy pay less VAT than do ordinary households. This is what is called a regressive tax. The lower your income, the higher your likely tax rate is going to be. And that is a problem built into the VAT system in itself.
The VAT system, and this is step five, is designed to favour the wealthy, and our politicians are not doing much about this. Much of what the wealthy spend attracts no VAT.
There’s no VAT on buying a second home.
There’s no VAT on financial services.
There’s no VAT on private healthcare.
There wasn’t VAT on education until recently. And didn’t you just notice the furore when Labour tried to do that successfully? One of the few things they’ve got right.
And investment management is also normally not subject to VAT, and only the wealthy buy that, of course.
The pattern of spending of the wealthy does then reduce the amount of VAT they spend. This is a further injustice around VAT.
So, let’s talk about step six in this process. That’s around inheritance tax. Inheritance tax is the most hated tax in the UK, supposedly, although that’s mainly because the Daily Express always talk about it as a death tax, which it isn’t, and they always talk about it as though it’s a curse on everybody when only about 5% or 6% of households in the UK ever come to pay this tax.
But having said that, most families that do pay tax have little chance of avoiding much of it. Why is that? Because a lot of their wealth is inside the family home, and that can’t be got rid of until either late in life or on death. And that means it’s very difficult to avoid inheritance tax charges.
For the wealthy, although their houses might be worth a great deal, that is not true. They’ll have multiple houses, so they can get rid of a lot of them to the next generation way before they die.
And they can hide their assets away in trusts or just give them away to their families during their lifetimes. And if you give your assets away more than seven years before death, in most cases, that will mean you won’t pay inheritance tax.
And they can afford to do this because they’ve got so much they can go without the income and the capital gains that that wealth gives rise to. They can afford to avoid tax. As a result, the wealthy tend to do so and very often pay lower rates of inheritance tax on the value of their estates than do those who are people who think themselves middle class. The tax system helps preserve big family fortunes.
And then there’s step seven. The council tax system in England and in other parts of the UK, favours the rich. Higher value properties are taxed at lower overall rates than lower-value properties in a way that is deeply unfair and discriminatory. And multiple property ownership rarely results in sufficient additional charge, while some forms of land, like sporting estates, aren’t taxed because they’re supposedly agricultural property. They should be. They are just sporting venues for the wealthy. We have a land tax system that is biased to wealth in this country, and that is deeply unfair.
In summary, workers pay income tax and National Insurance. Workers also pay VAT on most of what they buy. Wealth often avoids all three of these taxes whilst paying too little council tax as well.
The wealthy do pay corporation tax and capital gains tax, but these are at much lower rates than the income tax rates that they should be paying, and there is no National Insurance charge in most cases.
Therefore, their overall tax burden is much lighter than that of ordinary people. This is why we have a regressive tax system in the UK. The tax system we have is designed to help both create and preserve wealth, and is designed to impose tax injustice on ordinary people.
So, do we need a wealth tax then? My answer remains no. Why? Because all of these issues need to be addressed first. If we put a wealth tax onto a system which doesn’t work, we leave a system that doesn’t work and all the sense of inequality and injustice that surrounds it. A wealth tax might sound attractive, but they’re very difficult to implement. They affect relatively few people. Valuation creates massive practical problems and lots of disputes. And the revenue would take time to arrive because getting this tax into place would take a long time, and then imposing it would take longer still. It’s better to reform what we’ve already got when that is a source of major injustice.
We should start where change is easiest, in other words. We need to fix what can be done with ease. What is that? Well, we can do these things.
We could equalise income tax and capital gains tax rates. That would raise at least £10 billion a year.
We could apply a National Insurance equivalent to higher investment incomes. I suggest sums over £5,000 a year, but it could be fixed higher than that. We had a charge like this until the mid 1980s. It worked. My estimate is that that could raise £18 billion a year in the UK.
We could increase the corporation tax rate in this country. It is quite straightforwardly far too low as it stands because people are not paying for the privilege of limited liability that incorporation provides.
But we could do something else as well. We could require that all private companies in the UK distribute their excess profits to their members or be deemed to have done so. This would mean that those profits would become income subject to income tax in the hands of the shareholders in those companies via something called an investment income surcharge, something that we had until the mid-1980s, when Margaret Thatcher got rid of that.
We should also make offshore avoidance much harder, and we should extend VAT or equivalent taxes to financial services and trading. We might need a financial transactions tax, for example.
We should also be looking at closing inheritance tax loopholes used by the wealthy. We should be restricting lifetime gifts that escape tax. There should be an absolute value on these that can be made, and above that sum, everything should be subject to inheritance tax. And we should therefore tax wealth more consistently across generations.
At the same time, council tax on higher value properties should become a proportion of the total value of the property so that we collect a fair amount of tax on those higher-value properties. And we should be charging tax on things like sporting estates. And second properties, or third or fourth or fifth properties, should be subject to higher rates of council tax; indeed, much higher rates of council tax.
Do all of these, and we would have a better tax system. They’re practical. They’re easy to do. They could be done now. No new tax is required, and, critically, all the information to put these charges in place already exists. It’s on current tax returns, current council tax valuations, inheritance tax declarations and so on. The data is there. All that is required is the political will.
Evidence that these reforms would work is also already available. Some of the things I’ve suggested existed in the past. The legislation has been proven. The changes are technically straightforward. The revenue gains would be substantial. Add up all the things I’ve just talked about, and we’re talking about well over £50 billion a year. If the goal of a wealth tax is to simply reduce inequality, these taxes would work better than a wealth tax, the maximum revenue for which is assumed to be around £20 billion a year.
These changes would be capable of being implemented in stages, which would make it easier politically to do, and politicians would not have to face the same fear of upsetting the wealthy in the way that a wealth tax will do.
But they also challenge the deeply unfair tax system we have and will send out a vital message to people, which is that we would have a government that cares.
Our tax system, as it stands, subsidises the accumulation of wealth. That is one reason why the wealthy stay wealthy. Ordinary taxpayers are helping finance that privilege by paying too much tax. Tax is being paid by the wrong people in the UK, and fair taxation means taxing wealth like work.
Tax reform is a political choice. It’s not a technical problem. All of these changes are deliverable. I could write the legislation tomorrow. I have written legislation before. I know this is deliverable. There’s no umming and ahhhing required. We can get on with it. The question is, do our politicians have the courage to act? They should, but do they? That’s the question. I wish they would.
That’s my opinion. What’s yours? There’s a poll down below. Let us have your comments. Let us know what you think. Please like this video if that’s what you do. And please do share it, because that helps. And if you’d like to make a donation to the work of this channel, that would be great. There’s a link to our Ko-fi donation button down below.
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