Britain is at its most dangerous economic juncture for decades. We are living far beyond our means, disconnected from reality. GDP remained flat in April, and our best-case scenario for 2024 is growth of around 1 percent, exactly two years after the end of the pandemic. Total government revenues from taxes and other sources are scheduled to reach 41 percent this year, compared to 37 percent in 2019-20 and 32 percent in the 1990s.
But politicians still deny it.
How else can we explain the insistence that the problems facing the country can be solved by the old method of “taxing the rich”? They’re all in: the Greens with a wealth tax and the Liberal Democrats with plans to impose a 500 per cent council tax surcharge on second homes. The Conservatives failed to mention “success” even once in their 80-page manifesto, apart from self-congratulatory references to their own questionable past.
An extra three million workers will be dragged into 40 percent income tax over the next five years because of the fiscal drag, and another 400,000 workers will pay 45 percent income tax. Jeremy Hunt abolished the “no-dom” regime in March, rehearsing the tired line that those with the “broadest shoulders” should pay more. The IFS now calculates that just 1 per cent of taxpayers pay 29 per cent of all income tax.
But Labor looks ready to double down. Hostility towards wealth, trade and landlords will intensify. The party is promising an “appropriate” windfall tax on North Sea oil and gas companies, which currently face a headline rate of 75 per cent. They will impose VAT on private school fees and replace the Conservatives’ “semi-skimmed” non-dom measure with a “full-fat” measure.
So why wouldn’t they? Raising taxes has never been easier politically. The current consensus is that, with high levels of debt and no ability to cut public spending, Treasury coffers should swell after the election, regardless of who is in power. We think that our aging population requires higher government revenues and that in any case people would prefer to spend the fiscal share on public services rather than reduce taxes.
Against this backdrop, reports have emerged that Labor may soon introduce a capital gains tax (CGT) in parallel with income tax, levied at rates ranging from 10 percent to 28 percent depending on the asset class and the taxpayer’s income. Shadow ministers have issued undeniable denials, but the first salvo in class warfare is almost always an increase in taxes on capital gains. Like windfall and wealth taxes, it has a superficial appeal. Why should people pay less tax on asset sales than others pay on income?
But there’s a reason Larry Summers said in the 1980s that eliminating it in the US could increase both steady-state production and consumption. This reason became clear in 1990, when the federal government received 10 percent less revenue at 28 percent than it did at 20 percent five years earlier.
Increasing CGT reduces the incentive to save, leading to lower long-term growth and ultimately lower living standards. Since the tax is levied at the point of sale, a “lock-in” effect is created as people stop selling to defer the tax. The problem is clear when these assets include small businesses that could benefit from new management.
During Hunt’s chancellorship the annual allowance was reduced from £12,300 to £3,000. It has not been indexed since 2008, so it is not just real earnings that are taxed, but also inflation. None of this mentions that these assets are often purchased using income that has already been taxed.
As Art Laffer warns, raising the CGT rate reduces total profits, reduces total investment and reduces wages and total employment. As a result, it reduces income tax receipts, payroll taxes, profit taxes, sales taxes, and property taxes. This also means fewer job opportunities and higher welfare payments. How will Labor balance this with its promise to “stand by” workers?
But the question that should make Starmer break out in a cold sweat is what happens if the small portion of the population funding the government’s largesse decides to walk away?
In a globalized economy, money is mobile. Last year it was reported that the UK led the world in the number of high net worth individuals leaving the country. Every person who leaves drains our tax revenues and spending power. And the more super-rich individuals leave, the more middle-income earners will be dragged into paying higher taxes.
Perhaps the Left will reassure themselves that immigration is difficult for Middle England. Costs can be prohibitive. Those with young families will not rush to pick up their children from school. Those approaching retirement may want to see their grandchildren grow up.
But there is an alternative for hard-working Brits worried they have become the country’s rhetorical punching bag; They watch powerlessly as politicians smother them with higher taxes and berate them for refusing to pay their “fair share.”
They may give up.
Around 54 per cent of UK households (36 million people) currently receive more benefits than they pay in tax, including the estimated value of health and education. Why don’t you join their ranks?
The mood in Britain is clear: higher taxes on the “rich” and a greater burden on businesses to pay for an unreformed public sector and a rising welfare bill. When you let people keep more of what they earn, they work harder. When you increase taxes, you take less risk and create less wealth.
No matter how bad the situation has been over the last 14 years, Labor will make it much worse.