Sunak’s choice: a botched reform of Britain’s taxes after the crisis could stifle the recovery

Is the debate over tax gearing up to be a Brexit-style bust-up?  Like with Brexit, the country’s most influential lobbying groups are fighting like ferrets to win the hearts and minds of the Treasury with their latest ideas – many of them utterly bonkers – to plug the black hole in public finances.

On one side of the divide are the tax-hikers. They want to raise personal taxes on the wealthy, increase corporation tax for companies and propose a special windfall tax on businesses that have profited from the pandemic. Included in this camp are those who want capital gains tax to be brought into line with income tax rates while there is also a flurry of support for cutting pension relief for higher earners to 25%.

On the other side, the low-taxers argue there is no need for raising taxes and that putting up taxes would only serve to choke off economic recovery. Instead, they claim that billions of pounds of taxpayers money can be saved by cutting waste out of public spending, by ending the triple lock on pensions and abandoning what they consider to be generous handouts such as the winter fuel allowance and free bus passes for the over 60s.

Let’s look at the tax hikers. Torsten Bell at the Resolution Foundation, in a paper entitled “Unhealthy Finances”, published earlier this month, argues that tax rises harm the economy less than spending cuts, and that since the performance of Britain’s public services is already low, taxes should be raised.

Resolution also wants to tax “corporate crisis windfall profits.” Yes, read that again: crisis windfall profits. What the foundation’s experts do not bother to say, however, is how they would define a “crisis windfall profit”, nor do they specify which companies they consider would be classified as one that benefitted from this extraordinary period.

Does Bell mean the UK’s fantastically efficient network of supermarket chains – Tesco, Sainsbury’s, Waitrose, Asda, Aldi or Lidl, which between them pulled out every stop to keep food and other basic essentials flowing through their supply chains throughout the lockdown and expanded home deliveries to meet the public’s need for food?

As well as keeping supplies in stock, the supermarket bosses moved swiftly to make shopping as safe as possible for staff and shoppers. Within days of the lockdown they had super-efficient queuing systems in place and plastic safety guards around their check-outs while staff spent their days cleaning our baskets and trolleys?

Supermarkets are already among the most efficient companies in Britain – the nature of the industry forces them to be fiercely competitive on prices and the profit margins are wafer-thin. Should they be penalised for doing their job well?

Or should the taxman penalise the hundreds of local farm shops that suddenly found themselves in demand and doubled-up on stock to meet the that surge in demand be taxed more heavily? They are small and often family-run businesses, but you could argue they have also “profited” from the crisis.

Another target of such a windfall tax could be the manufacturers that did such a booming trade in selling plastic green houses and other garden DIY materials as people decided to grow their own veg and do up their homes. Or the makers of masks or hand gels? Should they be taxed extra too?

Sorry, but this is one idea that goes straight into the 101 bin. So is putting up corporation tax – which raises only 8% of total tax take – and would whack companies as they recover from the shutdown.

It’s true that companies such as Amazon have benefitted enormously from the lockdown, but they also did an amazing job, hiring new drivers and expanding their services. So rather than a windfall profits tax, the government would do far better to ensure Amazon pays its fair share of normal corporation tax rather than finding loopholes. Jacking up the so-called “wealth taxes” by bringing capital gains tax in line with income tax would also be detrimental to recovery at such a fragile time.

You could argue that this is the right moment to boost incentives to help the self-employed, invest in start-ups and small businesses – all of which have been so devastated by trading restrictions. However, there are two specific areas where relief should be removed – that is on “carried interest”, whereby 20% of the profit on the sale of a stake is taken as the investor’s reward and is taxed at the lower CGT level rather than at the person’s income tax rate. This is ripe for reform. Profits on the sale of second homes should also be removed. Profits should be treated as income, not a capital gain.

Quite a different approach has been taken by The TaxPayers’ Alliance, the low-tax think tank, which recommends savings to maintain current spending commitments. It recently published a 15-point Save to Spend plan, which, if taken together, could save the taxpayer £43 billion next year and £73 billion by 2025-26.

As the TPA points out, recent tax increases have taken the tax burden to the highest level that it has been in more than 50 years. Under such circumstances, any more hikes would be disastrous because “the private sector has been decimated, so imposing taxpayer austerity on entrepreneurs and innovators would kill off the recovery.” Spot on.

Instead, the TPA takes a more difficult, radical approach, but one which is fairer because savings would be spread across the population. Proposals include the ending of national pay bargaining, defunding the Arts Council, raising the state pension over the next decade, scrapping the Christmas bonus, as well as ending winter fuel payments and free bus passes for the old. It also proposes reforming the triple lock, student loans, the Barnett formula for Scotland, capping holidays for public sector workers in line with the private sector and an end to funding for trade union activity.

Overall, such a package would be harsh a dose of medicine, but several of the proposals – such as the ending of the triple lock and reforming pensions relief – are worth proper scrutiny.

While the Chancellor, Rishi Sunak is not expected to make any detailed pledges about fiscal policy in tomorrow’s Spending Review –  that’s for next year’s Budget – he is likely to give a flavour of tax rises to come over the following years.

Thank goodness for that; the last thing we need right now is a Grinch for Christmas. He has already pledged that there will be no return to austerity, but there is a greater danger that implementing the wrong types of tax rises would introduce tax austerity, particularly for small businesses. The Chancellor should bide his time and take a long-term view to reform the tax system from top to bottom: a bad deal is worse than no deal.