Light my fire: the election and taxes

Introduction

 

Depending on who you listen to or how you get your news, the UK’s next General Election may be only months away.

 

It doesn’t take a campaign strategist to work out that taxes will, as always, be one of the most keenly contested issues.

 

Nevertheless, attention is even more likely to be focused on the part that taxes will play in rebuilding the economy once the polls have closed.

 

That is due in part to a quite fiery assessment from Shadow Chancellor Rachel Reeves about the scenario which Labour may be confronted with if it forms the next government.

 

The Conservatives, she said, had pledged to “fix the roof, but what they’ve done is smashed the windows, broken the doors down and are now burning the whole house down”.

Out of the frying pan?

 

Whilst the image of Rishi Sunak and Jeremy Hunt as fiscal arsonists might be amusing to some, it makes you wonder whether things are as bad as Ms Reeves claims and what might be around the corner.

 

Figures issued by HMRC a couple of weeks ago showed that provisional tax receipts between April last 2023 and February this year amounted to £761.1 billion – up £36.3 billion on the same period last year.

 

The actual numbers may be even higher by the time that the Revenue publishes its annual report in July.

 

To put that data in some context, we need only turn to the UK’s leading economics research think tank, the Institute for Fiscal Studies (IFS).

 

It calculated that the “sharp increase” in tax receipts was set to represent the highest share of national income since the end of the Second World War.

 

Whilst some of that was arguably a necessary response to meeting the extraordinary costs of the Covid-19 pandemic, the IFS has identified that a great chunk of the extra tax income is due to “discretionary policy measures”, such as a change in the main rate of corporation tax announced in 2021.

The art of discretion

 

The element of discretion, of course, gives rise to intense debate about how those tax pressures may be relieved in order to entice voters.

 

Jeremy Hunt has so far resisted calls to reform or even abolish Inheritance Tax (IHT) and, peering more closely at HMRC’s own figures, it’s possible to see why.

 

Although it gets many people in a lather, it is relatively marginal in terms of the sums which it generates: £6.8 billion between last April and this February – a rise of £0.4 billion (5.8 per cent) – and affecting only five per cent of estates.

 

Receipts of Air Passenger Duty (APD), by comparison, increased by 16 per cent in the same period.

 

Apart from those two levies and Alcohol Duty, the only real growth in tax income in the last year came from Income Tax, Capital Gains Tax (CGT) and National Insurance (NICs), which were collectively up by £23.2 billion to £430.3 billion.

 

Of that total, 85 per cent was derived from Income tax and National Insurance alone.

 

Weighed against that, we can see that CGT, IHT, Stamp Taxes and Annual Tax Enveloped Dwellings (ATED) came to £37.8 billion during the period in question (VAT, which can be thought of as a tax on business or personal consumption, generated £160.1 billion).

Where there’s muck, there’s tax

 

Those numbers underline the degree to which HMRC and the Government are considerably more reliant on workers than wealth.

 

It was none other than Winston Churchill who once remarked that “you can tax wealth or you can tax wages—that is the whole choice”.

 

Any politician grasping for a solution – whether that is the “dire economic inheritance” which Rachel Reeves has predicted she might face or not – could be forgiven for finding a hike in taxes borne by the well-off quite tempting.

 

If the election results are as upbeat for Labour as forecast, Ms Reeves may even think herself able to cope with as little blowback.

 

After all, where else can she or anyone else turn? Income from environmental taxes, for instance, should decrease as our behaviour becomes more climate-friendly.

 

The idea of stiffer wealth taxes is somewhat a la mode.

 

A number of other countries, including Norway, Spain, Switzerland, France and Italy already have wealth taxes of varying sorts.

 

However, as I have commented, these don’t seem to have been a resounding success.

 

Further, one might say that the UK has capital gains tax, IHT, stamp duty and ATED. Each badly stitched together like a kind of Dr Frankenstein’s wealth tax.

Pluck off

 

People in the UK have also become used to the pain of taxation in the last decade as a result of what the IFS has described as “the biggest tax-raising parliament in modern history”.

 

As Colbert famously said, the art of taxation is plucking the goose with the minimum of hissing. I think the goose is starting to complain.

 

But the money must come from somewhere.

Conclusion

 

Challenging circumstances require bold initiatives and are more likely to receive broad support if they can be presented as fair to a large number of people, irrespective of how much they have in their bank accounts.

 

However, what is clear, is that tax, and the debate it promotes, is a light that will never go out.

 

If you have any queries or comments about this article, then please get in touch.