An independent think-tank focused on improving the living standards of those on low-to-middle incomes, has proposed in a new report, that the UK government should introduce a new Health and Social Care Levy, alongside a Pandemic Profits Levy. The author of the report, Resolution Foundation, suggests that it is proposing the biggest reform of wealth taxation in a generation, as part of a £40 billion plan to repair the public finances post-Covid.
The report, Unhealthy finances – has been published in partnership with the Standard Life Foundation. The authors include George Bangham, Adam Corlett, Jack Leslie, Cara Pacitti and James Smith.
“The Government is rightly focused on fighting Covid-19, and will then need to turn to securing the recovery for several years to come. But the daunting task of repairing the public finances lies ahead, with tax rises of £40 billion likely to be required,” said James Smith, Research Director at the Resolution Foundation and one of the report authors.
The Foundation is proposing two temporary measures that draw on the “principles of solidarity and fair burden-sharing”.
First, it recommends a Pandemic Profit Levy of 10 per cent on windfall profits made by firms during the pandemic, reflecting the fact that such profits in many cases “reflect the luck of some firms being presented opportunities by the crisis or not being adversely affected by social distancing restrictions”. This, in the author’s estimations, would raise approximately £130 million and be time-limited to 2020-21.
Second, the self-employed who have seen their incomes actually rise this year while claiming the poorly-targeted Self-Employment Income Support Scheme (SEISS) grants should have their grants partially clawed back. This would narrow the enormous gap in treatment with the self-employed who have seen income falls but been excluded from support, and would raise at least £3 billion.
A newly proposed Health and Social Care Levy would be set at a simple flat rate of 4 per cent, paid above a threshold of £12,500. This would be combined with the abolition of Class 2 NI for the self-employed and a 3p cut in the basic NI rate for employees. The Levy, the report suggests, would apply equally across different generations and across different forms of income, including taxable capital gains.
“This approach is designed to deliver the bulk of the necessary consolidation in a way that protects those on lower incomes and supports broader national priorities that have been put into stark relief by the pandemic,” said the report.
The report’s rationalisations include:
• Be highly progressive. Employees earning below £19,500 would be better off.
• Raise significant revenue for social care. Such a tax would raise £17 billion, with £6 billion of that set aside for social care.
• Reduce the tax gaps that heavily incentivise self-employment, with the greater insecurity that can bring. It achieves this by levelling down NI rates for employees to those paid by the self-employed.
• In the longer-run, it would be desirable to go further and completely replace personal NI with the new Health and Social Care Levy.
Specifically, the Foundation recommends that recipients of SEISS grants in 2020-21 should be required to repay two-thirds of any portion of their grant that made their income exceed their average income from fiscal years 2017-18 to 2019-20 (or fiscal year 2019-20 alone, if this is higher than the three-year average).
This would mean that if a self-employed person’s income is down on previous years, they would pay Income Tax and National Insurance on their SEISS grant as usual. If their income including the SEISS was higher than previous years, then two-thirds of the increase in income would be clawed back, with the claw-back capped at two-thirds of the size of the original SEISS grant.
“Considering the first round of the SEISS alone, we estimate that 435,000 people claimed grants and then did not experience any fall in their earnings, implying that around £1.3 billion in unnecessary grants was claimed in this way. Clawing-back two-thirds of these payments, for example, could raise £840 million.”
The report said it is aiming to freeze various tax thresholds that could collectively raise £7 billion. Alongside freezing the Inheritance Tax and VAT thresholds, this includes keeping the Personal Allowance at £12,500 and Higher Rate Threshold at £50,000 for the next four years – raising £5 billion and £1 billion respectively. Even after this freeze, the Personal Allowance would remain 50 per cent above its 2010 level in real terms.
The authors also suggest that the government should also raise Corporation Tax from 19 to 22 per cent – raising £10 billion while maintaining a Corporation Tax rate below the OECD average.
Turning to wealth taxation, the report sets out around £9 billion of measures, which rationalise various tax allowances and restrict widespread exemptions. Measures include restricting capital gains and inheritance tax reliefs (together raising several billion) and adding a Council Tax Supplement of 1 per cent on properties worth over £2 million (raising over £1 billion).
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