An Alternative BudgetHow Much Could be Raised Through Wealth and Profit Taxes?
Sam Bright considers the benefits of taxing the richest people and corporations
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New Chancellor Kwasi Kwarteng has today announced a range of economic measures ostensibly designed to boost growth and help people through the cost of living crisis.
The announcement has been labelled as a ‘mini-budget’, though the Chancellor is has unveiled measures worth up to £200 billion – including fixing the price of energy for households and businesses, reversing corporation tax and National Insurance rises, ending the cap on bankers’ bonuses, and introducing low-tax, low-regulation ‘investment zones’ across the country.
Fiscal events are usually accompanied by an analysis by the independent Office for Budget Responsibility (OBR), assessing the impact of the planned policies on public finances (particularly borrowing and debt). “These forecasts are a vital indicator of the health of the nation’s finances, and provide reassurance and confidence to international markets and investors,” Mel Stride, Conservative chair of the Treasury select committee, has said.
Kwarteng, however, has refused to let the watchdog provide an assessment.
With public spending going up and taxes going down, it’s expected that the Chancellor will be forced to announce higher Government borrowing to fund his policies – pushing up public debt.
However, there are alternatives. While the Government has introduced a 25% windfall tax on oil and gas profits in the UK, expected to raise £5 billion-a-year, Prime Minister Liz Truss has repeatedly refused to extend this scheme. Labour has claimed that backdating the tax to apply to the past profits of energy companies could raise an extra £8 billion, while between £3 billion and £4 billion could be raised from applying a windfall tax to electricity firms.
Taking into account the Government’s initial windfall plan, the overall tax rate on oil and gas profits has been raised to 65% – a high figure compared to other industries, but below the global average for oil and gas (70%) and well below the level in Norway (78%). “If the energy profits levy was raised to at least the global average, the UK would have much greater scope to help people in the short-term with energy bills and also to support the transition away from volatile fossil fuels, which have caused this crisis,” argues Joe Tetlow, a senior political advisor at the Green Alliance.
The EU expects to raise £121 billion from its windfall tax on oil and gas profits – setting the rate at 33% and backdating it to the start of the 2022 fiscal year.
Despite evidence to the contrary, Truss has maintained that cutting taxes on the rich will boost growth. While this may provide a short-term economic sugar rush, it’s not a sustainable plan for growth, experts say. “When we’ve previously had big tax cuts in tax, they haven’t been sustainable,” says Paul Johnson, director of the Institute for Fiscal Studies. “If you want a real growth strategy you need to be thinking about all sorts of things: planning, tax reform, infrastructure investment, [spending] on education.”
Johnson added that Truss’ plan may help to boost growth over the next year or two – though the Bank of England has warned that the UK may now be in recession – but “is not the sort of thing which turbo charges growth in the long run.”
Tax the Rich?
So, aside from windfall taxes, what could an alternative fiscal plan look like? With the world’s 10 richest men doubling their fortunes during the pandemic and the number of billionaires in the UK reaching record numbers while small firms struggle to stay afloat, there has naturally been an interest in whether new taxes should be applied to the super-rich.
Indeed, this policy has even been advocated by a group of millionaires – with more than 100 calling in January for the introduction of global wealth taxes on the richest individuals. This group, the Patriotic Millionaires, helped to fund research showing how introducing a progressive wealth tax could generate £43.7 billion-a-year for the UK Government. The tax would start at just 2% annually for those with more than $5 million in wealth, 3% for those with more than $50 million, and 5% annually for billionaires. If applied globally, the research estimated that such taxes could raise $2.5 trillion annually.
“Our Government cannot expect to be trusted if it would rather tax working people than wealthy people,” said Gemma McGough, British entrepreneur and founding member of Patriotic Millionaires UK. “If they do anything in the next few months, they should do this: tax the rich – tax us – instead.”
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Alternatively, if those with greater wealth were targeted, but taxed more aggressively, even more could be raised. A progressive wealth tax rate, rising from 5% on wealth above £100 million, to 10% on wealth surpassing £500 million, to 15% on all wealth above £1 billion, would raise a massive £78 billion-a-year for the UK Government from roughly 1,800 very rich people. This includes an assumption that 10% of any potential tax revenue would be lost through avoidance or evasion. Setting up these sort of taxes on the super-rich would cost some £200 million, estimates suggest.
And it seems that this sort of redistributive agenda would be supported by the general public. 58% of people in England are economically left-wing, according to the new British Social Attitudes Survey – only 31% are economically right-wing, and 11% classified as ‘neither’. 78% of respondents to an Omnisis poll for Byline Times in July also suggested that wealthy people in the UK are taxed too little.
In contrast, Chancellor Kwasi Kwarteng has today announced a major tax cut for those earning more than £150,000 a-year – cutting their additional tax rate from 45% to 40%.
The central argument against wealth taxes is that imposing a higher tax burden on the richest would cause these individuals – who have a lot of money to invest in the country – to simply pull up their roots and leave.
However, the empirical evidence for this pervasive notion is thin. In his book, ‘The Myth of Millionaire Tax Flight’, Stanford Professor Cristobal Young posits that “The corporate services complex – made up of the top firms in law, accounting, management consulting, and investment banking – is overwhelmingly concentrated in the major cities of wealthy countries.”
As a result, “globalisation has not meant that elite professionals and the executive class can now live wherever they wish. On the contrary, place is more important than ever, and top income earners are more and more concentrated in major cities.”
In other words: super wealthy individuals, although they are likely to trade over continents, are still bound to certain countries and cities due to the nature of the modern economy. “When you achieve success in a place, it becomes harder to leave,” Young adds.
The Government has justified its economic radicalism under the idea, as expressed by Levelling-Up Secretary Simon Clarke on ITV’s Peston, that “We may never get back to normal; the world is in an extraordinary state of affairs.”
Incidentally, this extraordinary state of affairs involves the rich becoming considerably richer, while most ordinary people have suffered more than a decade of wage stagnation.