In the red: Rishi Sunak has to service a £2trillion national debt
The Chancellor Rishi Sunak does not live in never-never land. As a Tory with a strong City background, he knows that the ‘magic money tree’ is a myth and that as the pandemic retreats, he will have to take an axe to annual borrowing that is heading towards £400billion this year, while tackling the terrifying national debt of more than £2trillion.
But he must also recognise that the worst possible way of filling a huge hole in the public finances would be to impose swingeing taxes on enterprise and entrepreneurship, just as the economy bursts back to life after the biggest jolt to national output in our lifetime.
A proposal under review by the Treasury to impose huge tax increases on the capital gains made by business owners and ordinary middle-income citizens is the first indication of the pain that lies ahead as the nation tries to balance its books once more. Yet the truth is that it will only stifle recovery and prosperity. Britain has a remarkable endowment in the shape of one of the most resilient economies in the Western world, with its free and open markets and flexible labour laws.
This was demonstrated in July, August and September when growth rebounded by an astonishing 15.5 per cent as Covid restrictions were lifted, before confidence was once again shattered by nonsensical restrictions on activity, such as the ‘rule of six’ and 10pm hospitality curfews.
Taxing Britain’s wealthier citizens by reforming the capital gains taxes, which fall on profits made from the selling of stocks and shares, second homes, land or booming businesses – as the Office for Tax Simplification is recommending – might appear at first blush a good way to go. But the OTS wants capital gains to be taxed at the same rates as income which, in effect, would mean swingeing increases.
Not only would the rate at which capital gains is charged soar, but tax-fee allowances would be savaged, too. The cost for ordinary, hardworking, middle-income Britons, who through their thrift have built small nest eggs in stocks and shares could be frightening.
At present, savers who opt to sell some of their investments, perhaps to fund children through university, pay for a new roof on their home or a new, greener, electric vehicle, can make a gain of £12,300 without having to pay capital gains tax. A central plank of the proposed reform is that this tax-fee allowance could be cut to £5,000, or even as low as £1,000.
At present, savers who opt to sell some of their investments, perhaps to fund children through university, pay for a new roof on their home or a new, greener, electric vehicle, can make a gain of £12,300 without having to pay capital gains tax
Millions of families that have chosen to invest in small seaside or countryside second homes for lifestyle reasons, for rental purposes or to provide a home for less well-off or ageing relatives, would be penalised. And bear in mind that the income used to finance these enterprises has already been taxed.
To tax it again would mean sacrifices made to build up savings, often over many years, would have been to no avail. Another insidious proposal involves evening up the rates of income and capital gains tax. There is a sliding scale of capital gains tax, with people in the highest income tax bracket of 45 per cent – earning over £50,000 a year – paying 28 per cent on their gains.
It is claimed that this provides an incentive for business owners to pay themselves relatively modest salaries and take advantage of the lower capital gains taxes when selling all or part of their enterprises. The reality is that salary income is earned in one year, while capital gains are usually accumulated over several years, so a lower rate of charge is fully justified because of the longer time period involved.
The Treasury advisers who have come up with tax raid proposal argue that closing the gap between income tax and capital gains could raise as much as £14 billion a year and go some way towards filling the black hole in the public finances. The reality is that the likelihood of reaping such a handsome reward would be zero.
The new measures would be a killer of smaller businesses at a time when they are barely alive after lockdown. It could also strangle at birth the hundreds of thousands of new businesses forged at kitchen tables and in garages up and down the land during the pandemic.
There is a sliding scale of capital gains tax, with people in the highest income tax bracket of 45 per cent – earning over £50,000 a year – paying 28 per cent on their gains
Of course, it should come as no surprise that the Treasury has begun to think about the national finances after Covid. The Institute of Fiscal Studies believes that tax receipts may eventually have to rise by as much as £40 billion a year if inroads are to be made into cutting the national debt.
One oft-touted solution is to soak the rich. As antithetical as it may be to aspirational Conservative values, the Chancellor could argue that such an approach has the stamp of approval of the International Monetary Fund.
The truth is that any attempt to target the wealthy is doomed to failure. Like it or not, this group is the one best able to shield itself from higher taxes, as we saw in France under President Hollande in 2012-17, when the country’s billionaires fled to Belgium and much of the financial community set up new homes and businesses in Britain.
Sunak should be focusing on how, after the shock to the economic system of Covid, he could give a shot in the arm to growth. With business investment flat on its back, the case for ramping up tax breaks for research and development, thus boosting value-creation by the UK’s life science and technology sector, could lift the nation’s output and generate new income for the exchequer.
What is absolutely certain is that increasing the burden of capital gains on enterprise, savers and second property owners can only destroy the economy’s dynamism, living standards and job creation. Any Tory Chancellor who attempted such a folly would speedily join the dole queues they conspired to create.