Inheritance tax rise fears as ex-adviser to Tony Blair weighs in on General Election | Personal Finance | Finance
A former Labour Party adviser has argued the party will need to impose a new generation of “wealth taxes” to fund public services.
Professor Patrick Diamond, who advised Tony Blair and Gordon Brown, insists there is an “overwhelming economic and ethical case” to ensure the wealthy pay more tax.
Top of the hit list would be to increase Capital Gains Tax to the same rate of income tax, which could bring in more than £10 billion a year.
Just this tactic was deployed by Margaret Thatcher’s tax-reforming Chancellor Nigel Lawson in 1988.
Also in the firing line will be Inheritance Tax and pensions. This could involve ending the current system that allows some pension pots to be passed on to relatives free of tax.
The Institute for Fiscal Studies (IFS) has pointed out there is a gaping black hole in the finance plans of both Labour and the Conservatives in terms of how they will fund public services after the election.
As things stand, the IFS says this can only be met with either savage cuts to services or tax rises.
Labour’s Shadow Chancellor Rachel Reeves has ruled any increases in tax on working people. However, this, potentially, leaves open the door to increases related to a minority whose wealth is based on property and investments.
Writing in the Observer Professor Diamond, professor of public policy at Queen Mary University of London, and his colleague Colm Murphy, a lecturer in British politics, said a Labour government will need to look at radical ways to raise money.
They argue that the shadow chancellor is right to put “fiscal constraint” at the heart of Labour’s economic policy and to avoid costly promises “in the heat of an unforgiving election campaign”.
But they insist Labour will need “an agenda in government that confronts the urgent imperative of raising resources through major UK tax reform” in order to “address at least a decade of sustained underinvestment”.
They say this can be done in line with the party’s values by shifting the burden of taxation from income and employment to unearned wealth and capital, thereby allowing greater investment while addressing “soaring levels of wealth inequality in Britain”.
For the 2024/25 tax year, CGT is charged at the rate of either 10 percent or 18 percent for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20 percent or 24 percent.
Raising CGT to the same level as income tax – 25 percent for basic rate taxpayers and 40 per cent for those on higher incomes – is estimated to bring in more than £10 billion a year.
To date, Labour has made clear that it has no plans for a wealth tax, however economist argue the nation’s finances suggest this is an unsustainable position.
The intervention by Diamond, who was on the Blairite right of the party before leaving for academia, is intended to bring some degree of economic realism to the somewhat narrow general election debate on the economy.
Diamond and Murphy write: “Voters, of course, don’t like tax rises. As a result, Labour avoids tax pledges like the plague.
“But while the tax burden on working people is at a historic high, taxes on wealth and capital remain comparatively low.
“And taxes can become, if not popular, then less unpopular if framed as ‘necessary’ to fulfil progressive ambitions such as a ‘citizen’s endowment’ for every young person to invest in education or a future home, alongside funding services that give children a fair start in life.”
They add: “A newly elected Labour government should launch a commission on UK tax reform.
“There is an overwhelming economic and ethical case for higher taxes on wealth and for taxing capital gains at the same rate as income, not least the soaring levels of wealth inequality in Britain.”
They cite research indicating that such a reform would be relatively popular with voters.
“The tax commission would engage directly with citizens to work through key choices on tax prior to any final decision by ministers. In addition, reform of council tax through a revaluation of tax bands based on current property prices should be linked to a new devolved funding settlement for local authorities, boosting investment in local services.
“There is a radical course open to Labour in power that neither entails risky borrowing nor mindless cuts and kneecapped investment. The momentous challenges of our era should encourage Labour to reclaim the half-forgotten but deeply compelling tradition of economic prudence from the left.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said talk of new wealth taxes “could sound the alarm bell for investors”.
She said: “It doesn’t just raise concerns for the super-rich, but for people with defined contribution pensions, or those who are putting money away to help protect them later in life.”
She added: “So far, voters are divided on whether Labour or the Conservatives would be better for their investments. Some 31 percent think a Conservative government would be better for their investments, while 27 percent think Labour would, and 23 percent don’t know.”
