Forget levelling up: Rishi Sunak is deliberately increasing tax injustice

Forget levelling up: Rishi Sunak is deliberately increasing tax injustice
© Provided by The Guardian Photograph: Stefan Rousseau/PA

A wise tax plan silently vanished last week. The chancellor was due to narrow a notorious tax loophole for the wealthy by raising capital gains tax. Now, in a quiet reverse ferret, he won’t. You might think any chancellor in these harsh times would collect what they could, and that this policy would be voter friendly, raising large sums from a few of the richest. But it would no doubt displease Tory donors and the influencers who will choose their next leader.

Besieged by urgent spending pleas, Rishi Sunak can’t pretend he doesn’t see the arid social landscape after a decade of depredation. One fragile sector after another teeters towards public scandal. Will a report on the murder of six-year-old Arthur Labinjo-Hughes expose the brutal cuts in child protection? An ambitious man eager to move next door to No 10 must surely fear the NHS buckling under current strains. But no, it seems not. Other political calculations come first.

The chancellor is abandoning the chance to raise as much as £14bn a year by reforming capital gains tax, according to his own Office for Tax Simplification, the outfit set up by George Osborne to iron out anomalies and inefficiencies. Sunak asked the OTS to report on raising the tax from its current 20% to 25%. That would catch some of the sleight of hand that allows high earners with personal service companies or private equity magnates to disguise their annual income as a capital gain to avoid far steeper income tax rates. They usually do that by taking pay in company stock, not cash, which cuts their tax rate from 45% to 20%. That’s how a hedge fund manager once notoriously boasted in 2007 that he paid less tax than his cleaner.

The OTS duly reported the facts, and its top estimate found the Treasury would gain a significant £14bn from raising capital gains tax. But last month the chancellor slipped out a response that stamped on the whole idea. Undertaxed, unearned wealth is soaring, but Sunak’s preferred choice is to raise National Insurance from everyone else. Capital gains trebled to £63bn in the eight years before the pandemic: Arun Advani of Warwick University reports the rise of “super gainers” who declare more than £1m a year of their income as a capital gain. Now consider this: last week the ONS reported the assets of the rich skyrocketed even faster during the pandemic. The Resolution Foundation warns that the pandemic has widened wealth gaps “with profound consequences for social mobility and future income inequality”. Those already on high salaries saw the value of their property, pensions and bank deposits soar.

Forget levelling up: Rishi Sunak is deliberately increasing tax injustice
© Photograph: Stefan Rousseau/PA ‘Rishi Sunak should be copying the one good reform Nigel Lawson enforced, when he equalised tax rates on all types of income.’

Sunak should be copying the one good reform that Nigel Lawson enforced as chancellor in 1988, when he equalised tax rates on all types of income, rightly declaring in the Commons: “There is little economic difference between income and capital gains.” Taxing all income at the same rate removed any incentive to disguise earnings as profits.

Forget levelling up under a chancellor who is deliberately increasing tax injustice. Last week Sunak let the Times know he would be cutting taxes, not raising them. His “retail” offer ahead of the next election will be a 2p cut to income tax, but as ever, those in higher bands benefit most. The cut would cost the Treasury an estimated £12bn. Meanwhile he is piling on extra bonanzas, with plans to scrap the top 45% rate altogether and cut inheritance tax. Not surprisingly, the Institute for Fiscal Studies has responded brusquely: the income tax cut would be “indefensible”, said its director, Paul Johnson, as it “discriminates in favour of the wealthy”.

These are monstrous sums for the state to forgo while failing to keep basic services afloat in the NHS, social care, schools, skills and transport, let alone progressing to net zero emissions. Will he say where his axe will fall to pay for these tax cuts? Michael Gove’s white paper on levelling up has been postponed until the new year, amid a reported dispute over the chancellor’s decision to allocate only a paltry £4.8bn over three years for all levelling-up projects. Many have compared that with the £2tn it cost to level up East and West Germany – which only took them 85% of the way.

Labour’s shadow chancellor, Rachel Reeves, did say she would tax wealth more fairly, but without revealing a plan or responding to Sunak’s capital gains retreat. She mentioned a windfall on Covid profiteers, so she could adopt the proposals in Tax Justice UK’s report about the six companies that made £16bn in excess pandemic profits. Some easy wins might include scrapping business asset disposal relief and reforming council tax and inheritance tax, according to Helen Miller, the deputy director of the IFS. Another move could be removing the VAT zero rate on food, which is an additional bonus for high spenders. This may sound regressive, but Miller says it would yield so much that it would be easy to compensate all lower earners and make them better off. A small fortune could be saved from the gigantic hidden welfare state that the well-off benefit from, such as pension tax relief, ISAs, charitable relief for private health and education and a host of other perks. These are waiting to be stripped away by any Labour chancellor brave enough to do so.

Sunak may have only one thought: how to prove himself a small-state anti-taxer to win the backing of the hardline Tory party selectorate. Maybe he’s right that cash in the pocket buys most votes. But he risks a pyrrhic victory if the price of seducing a small and unrepresentative rightwing clique is to lose the next election due to public repugnance at levelling down everything, everywhere.

  • Polly Toynbee is a Guardian columnist

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