Tighten up wealth taxes to fund services, says Resolution Foundation

3 Jan 19

Reforms to wealth taxes could help fund the rising cost of public service provision, a think-tank has said.

Almost £7bn a year could be raised by 2022-23 by “tightening up” existing wealth taxes such as entrepreneurs’ relief and council tax, according to analysis by the Resolution Foundation published today.

The foundation estimated that demographic changes and rising health cost pressures are set to increase the cost of the current welfare state by £36bn a year by 2030, and by £83bn by 2040.

To meet this cost, the think-tank suggested tightening existing taxes by: limiting entrepreneurs’ relief; replicating Scottish reforms to council tax; clamping down on inheritance tax loopholes; and making pension taxation more progressive.

In its briefing note, the think-tank said Britain has £13trn of wealth undertaxed relative to the size of its economy and this emphasises the need for a wider debate about the role of wealth taxes.

Torsten Bell, director of the Resolution Foundation, said: “Britain has unfortunately got used to weak income growth but soaring wealth, which is now worth seven times the size of our economy. It’s time the tax system caught up with that fact.

“Maintaining our valued public services in the face of the big cost pressures of an ageing population, requires better wealth taxation to help fund this gap.

“Yes this is politically difficult, but the good news is that relatively large sums can be raised simply by tightening up our existing wealth taxes and subsidies.”

The think-tank said entrepreneurs’ relief has cost £22bn over its first 10 years and the Office for Budget Responsibility expects its annual cost to rise from £2.6bn in 2018-19 to £3.9bn in 2023-24.

It added that the relief should be under “serious scrutiny” in the forthcoming Spending Review.

The Resolution Foundation also took aim at council tax and suggested England has “the most regressive system in Britain”.

The group advocated following in Scotland’s footsteps by increasing taxes paid by those in the top band. This could raise £1.4bn a year by 2020 and be used to cut tax on the lower bands, the group said.

Alternatively, the group said that councils could be given their own flexibility to increase the relative taxation of more expensive properties in their area.

Adam Corlett, senior economic analyst at the Resolution Foundation, said: “Britain’s wealth is undertaxed, and the wealth taxes we do have are in serious need of reform.

“There is a strong case for scrapping council tax and inheritance tax altogether, and replacing them with proper wealth taxes that are more progressive and harder to avoid.

“The chancellor can make small steps in the right direction by tightening up five of our existing wealth taxes and subsidies – raising almost £7bn in the process.”

Other suggestions included clamping down on inheritance tax by freezing the threshold after 2020, raising £200m a year.

Another was to cap the tax-free lump sum from pensions at £40,000, raising £2bn a year.

The foundation also proposed scrapping “poorly targeted and expensive” ISAs and help to buy ISAs, whcih would save £0.9bn a year.

A Treasury spokesperson said: “We’ve taken significant steps to ensure those with the broadest shoulders bear the greatest tax burden, including permanent non-dom status, reducing tax breaks for those with the largest pension pots, and reforming dividend taxes so that those with very large shareholdings pay more.”

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