After the chancellor has spent a record amount supporting individuals and businesses through the coronavirus pandemic, he is now looking to fill the hole in the public finances, through increased taxation.
Due to the high wealth gap in the UK, we have an extreme situation where the top 10% of individuals own over 45% of the wealth. The chancellor is going to have to look at taxing the wealthy in the UK. The wealth gap has been growing in the UK and the US for decades with the middle class being squeezed and a small group becoming ultra rich. The US is even more extreme with the top 10% owning 77% of the wealth in the US.
For many years the wealthiest in the UK and the US have been able to take advantage of a two tier taxation system and paid a lower rate of tax than PAYE salaried employees. Taking income in the form of capital gains or dividends has long been a loop hole to avoid the higher rate of tax.
The tax rate for capital gains has been at 28% in the UK, against a top rate of income tax of 45%.
Many private equity executives take vast sums worth multiples of their annual income as ‘carried interest’ or ‘capital gains’. This allows them to pay the lower rate of taxation at 28%. The chancellor is now arguing that taxing ‘carried interest’ at the same rate as income will level the playing field in taxation.
It is not fair for the wealthy to pay a lower tax rate on their income than lower paid employees. This unfairness has been in place for many years in both the UK and the US and has led to the widening of the wealth gap in these countries.
Warren Buffett the US investor and fourth richest individual in the world has long highlighted the unfairness in the taxation rules in the US. In 2013 he said he was ‘still paying a lower tax rate than his secretary’, despite reforms in the tax rate. Buffett has advocated a minimum tax on the top wage earners who benefit from the fact that capital gains are taxed at a lower rate than regular earnings. The proposal was known as the ‘Buffett rule’, and was strongly opposed by American republicans.
The UK government is currently being lobbied by the trade body ‘BVCA’ which stands for British Private Equity and Venture Capital Association. They say that the capital gains tax shake up would result in a flight abroad by those individuals affected. It becomes a moral question for the government. Should the government be blackmailed by the few very wealthy to pay a lower rate of tax than the rest of the UK ?
In the US there is a very different mentality among the super rich. As they are US nationals this means that they would pay tax to the US government even if they relocate to a different country. If the individual decides to give up their US nationality, then they must also give up 50% of their wealth to the US government.
This has resulted in less US tax exiles, and instead there is a culture of the super rich doing charitable works. An example of this is the Bill and Melinda Gates Foundation, which is named after Microsoft founder Bill Gates.
The UK government should be able to tax the super rich, and the top 10% by wealth, at the same rate that the middle class pay taxes. The UK government can follow the US example of dealing with tax exiles, and does not need to be influenced by lobbyists. It is time for the UK government to do what is right and reform the UK tax system to a fairer system.
Rebel Economics 