The battle of essays between Labour Party grandees has given British politics a distinctly retro feel over the last week, as Tony Blair, Keir Starmer, Wes Streeting and Andy Burnham behaved like competing 18th-century pamphleteers explaining in earnest detail why things will only get better if they’re in charge.
The ideas these once-and-would-be-future Labour prime ministers have been suggesting are depressingly old-school too. Full of coded nods and winks to the internal factions and power-brokers who will decide their party’s next leadership election, and blaming 20 years of slow economic growth on inequality which has hardly budged for 40.
The only, tiny concession to economic reality came from Andy Burnham, who tried to divert Labour’s enthusiasm for investment-destroying wealth taxes into a less damaging channel, by suggesting equalised capital gains and income taxes instead. He meant it as code for higher taxes on savings, pensioners and investors of course, so it would still push us into the economic slow lane. But we’d stagnate more slowly than the full-fat left-wing lunacy of extra taxes for anyone with a nest egg.
But hang on a second: could Burnham’s idea contain a tiny, glowing ember of good sense buried under Labour’s jealousy-driven, benefits-loving, profit-distrusting instincts after all? In principle, it can’t be right that people pay different tax rates depending on how much of their income is earned from work or unearned from investments. Or that we charge lower rates for wealthy people on their unearned investment incomes than on less well-off workers for their wages. That’s clearly unfair because the ‘haves’ are being subsidised by the ‘have nots’.
Could Burnham’s idea contain a tiny, glowing ember of good sense buried under Labour’s jealousy-driven, benefits-loving, profit-distrusting instincts after all?
Even worse, the taxes we levy on assets and wealth like stamp duty, inheritance tax or capital gains tax, are a complicated and growth-destroying mess. They divert investment away from wherever it will drive growth fastest, and need a plump, highly-paid priesthood of expensive lawyers and expert advisers to grease the machinery’s wheels as well.
The Conservatives have already announced plans to scrap the most damaging tax of all, stamp duty on homes, but there’s a bigger and broader opportunity to go further and create radically simpler, flatter, lower taxes that will drive faster economic growth while giving the Chancellor the same amount of revenue as before.
The change would start by turning capital gains into the economic equivalent of getting several years of wages in a single lump, by excluding the effects of inflation. It’s an easy calculation with modern tax apps, and would mean capital gains could and should rightly be taxed like normal income, along with investment income from dividends and interest too.
The next step would be to abolish inheritance tax completely, and replace it with this newly-reformed version of capital gains tax instead, so grieving relatives wouldn’t have to pay taxes unless and until they decided to sell whatever they’d inherited. At that stage they would still pay taxes on what they’d received, after allowing for inflation, at the same rate as if they’d earned the income themselves, but only when they had cash from the sale to afford it.
These changes would mean the Chancellor could treat earned and unearned income and capital gains equally, with a single, unified income tax threshold and set of percentage rates. Stamp Duty would be gone. Inheritance Tax would be gone. All the different tax rates and schemes for income from dividends, interest or anything else would be gone.
The new system would be fairer because the ‘haves’ wouldn’t be subsidised by the ‘have-nots’, the left-wing lunacy of wealth taxes would have been avoided, and most people’s income tax rates would be lower than today. Britain’s economy would grow faster, because investors would suddenly be free to invest in growth on a completely level playing field, without dozens of complicated, expensive tax-incentivised schemes to divert capital into politically-fashionable but economically less-dynamic sectors instead. The priesthood of highly-paid tax lawyers and advisors will be a bit poorer, and it definitely isn’t what Andy Burnham meant in his pamphleteer essay about ‘Manchesterism’ either. But it will give us simpler, lower, flatter taxes, and it will work.
his article is the latest in the fortnightly ‘Small State Conservative’ series of policy proposals for CapX from John Penrose and the Centre for Small State Conservatives.
If you like this idea, you’ll find more details, soundbites and rebuttals about it under Simpler, Lower Taxes in the Policy Thumbnail section of our website
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