Funding public services has been central to the UK general election debate. The political parties have set out plans in their manifestos, but questions about affordability remain, not least given the general reluctance to announce any increases in taxation.
Prior to the election being called, the government had plans for increased public spending on health and defence. These sat alongside further cuts to so-called ‘unprotected departments’, including justice and local government.
At a time when prisons are already full and some local authorities are having to sell assets – including land and buildings – to pay their bills, this would certainly not be easy to deliver. The obvious alternative – often seen as unpopular, but now widely anticipated – is to raise taxes to pay for public services.
But even with that in mind, the manifestos of the two largest parties largely duck the question.
Labour pledges a number of specific tax rises. These include reforming the taxation of private equity managers and the ‘non-dom’ regime (the taxes paid by residents who are not legally domiciled in the UK), as well as charging value added tax (VAT) on private school fees and putting a windfall tax on large energy companies.
But collectively these taxes would raise less than half of 1% of GDP. Keir Starmer has stated that his party would not raise income tax, national insurance contributions or VAT, which collectively raise around two-thirds of UK tax revenue. Ruling out change in the rates of these taxes would therefore constrain some of the easiest ways a government has of raising revenue.
This usefully means that raising revenue from these taxes would in practice require broadening the base of the taxes. Labour is already doing this by extending VAT to private schools. It is possible to widen the scope of these taxes further – for example, by extending national insurance contributions to investment income or closing the gap between the taxation of wealth and work (which the Conservatives have also highlighted as problematic, though with the rather different solution of cutting national insurance contributions ).
Some of the money raised by Labour’s proposed changes would go to unprotected departments, reducing by around 10% (but not reversing) the cuts they currently face.
The Conservatives’ manifesto instead promises further tax cuts, the largest of which would be a further reduction in national insurance contributions: a tax on income from work. The manifesto rightly points out that national insurance contributions mean that income from work is more heavily taxed than income from wealth, making them a good place for reform.
Nevertheless, cutting them faster for the self-employed than the employed, as proposed, would continue much of the unfairness. The political choice that would need to be made is to pay for this by reductions in social security, rather than alternative tax rises. No answer is provided as to how the existing cuts would be delivered.
The smaller parties take quite a different approach to taxation. Both the Liberal Democrats and the Greens propose equalising the rate of capital gains tax with income tax, returning us to the system we had between 1988 and 1998.
This reform is widely supported among economists, since it would remove any incentive to ‘shift’ income into gains to benefit from a lower rate. It would also be a very progressive reform, since more than half of all gains go to just 5,000 people.
The Greens propose additional reforms, including a tax on wealth above £10 million, largely following the design recommended by the Wealth Tax Commission. They have also announced plans to increase taxes on carbon emissions substantially.
Wealth taxes
Internationally, there has been increasing interest in taxes on wealth, including recent discussions in the G20. Domestically, only the Greens mention introducing a tax of this sort. Its design largely follows the recommendations of the Wealth Tax Commission, with the tax applying only to individuals with wealth above £10 million.
While such taxes cannot pay for everything, when designed well, they can raise serious revenue: even after accounting for the ways in which people respond, revenues of £12-14 billion are quite plausible. For a sense of scale, this is similar to the revenue from increasing the basic rate of income tax from 20% to 22%.
Just over three years ago, the Economics Observatory summarised the central conclusion of the Wealth Tax Commission’s final report: that a well-designed one-off wealth tax would raise significant revenue in a fair and efficient way; it would be very difficult to avoid; and it would work in practice without excessive administrative costs.
Summaries of some of the evidence that the Commission pulled together are available on this site. My colleagues and I outline our estimates of how much revenue such a tax might raise (including a tax simulator where you can plug in your chosen tax rates and thresholds), and where and on whom the main burden might fall.
Nick O’Donovan at the Future Economies research centre explores the varying degrees of success of other countries’ efforts to introduce one-off wealth taxes or capital levies in the aftermath of major crises. And economic historian Martin Chick at Edinburgh asks whether the UK’s past experiences suggest that wealth taxes can help to improve the public finances.
Where can I find out more?
- Should the UK have a wealth tax? Report from the Wealth Tax Commission.
- Election 2024 coverage: Institute for Fiscal Studies.
- How is evidence used in tax policy making? Institute for Government report by Thomas Pope, Gemma Tetlow and Arun Advani.
- The government’s record on tax 2010-24: Report by Stuart Adam, Helen Miller and Bobbie Upton.
Who are experts on this question?
- Arun Advani
- Paul Johnson
- Helen Miller
Author: Arun Advani
Image: PaulMaguire for iStock
