The government could raise an additional £ 16bn per year if low tax rates on stock and property profits were raised and lowered to a level of payroll tax.
Exclusive analysis of data on the richest 540,000 people in the UK – the richest 1% – shows how decades of low taxes on capital gains, a type of income mainly available to the wealthiest in society , are creating a new breed of “super-winners”.
The results will stimulate calls for reforms that distribute the tax burden more equitably. Chancellor Rishi Sunak was criticized by members of his own party last month after raising national insurance rates to raise billions for health and social care while leaving the incomes of the wealthy largely untouched.
Under the current system, income – which covers earnings such as wages – is taxed at a maximum rate of 45%. Capital gains – the profit made when an asset such as stocks or property is sold for more than its acquisition cost – are taxed at much lower rates. Gains from stocks attract a maximum rate of 20%, while the maximum for ownership is 28%.
The Guardian’s analysis found that since the late 1990s, the proportion of income reported as capital gains by the richest 1% has exploded: only 3% of their income came from earnings in 1997, doubling to 5.4% in 2010. By the For tax year 2017/18 it had reached 13.3%.
Among the richest – the 50,000 people who make up 0.1% – the amount declared in capital gains increased by 213% between 2007 and 2017. On the other hand, the wages of this group did not increase as well. quick. Their median income increased 22% between 2007 and 2017.
The analysis was carried out for the Guardian by Arun Advani, assistant professor of economics at the CAGE Research Center at the University of Warwick and a tax researcher at the Institute for Fiscal Studies.
“We have seen that by lowering the capital gains tax rates, the main thing he has done is to encourage people to take their income in the form of capital gains, by reducing taxes without offering broader benefits. It is difficult to explain why people who are more able to restructure their income in this way should pay less than those who cannot, ”said Advani.
Much of the information on the capital gains of the richest 1% of taxpayers is not available in any public dataset. The analysis was only possible because Advani and his fellow researchers were given access to a secure room at HMRC, where they were able to view the anonymized tax returns of the super-rich.
In an article published last year, based on their HMRC research, they found that this type of income was very concentrated at the top, with the top 5,000 earning people receiving 54% of all capital gains.
Because earnings are taxed so little, the richest pay a much smaller share of their income to the tax authorities than most workers. The richest 0.001% – 400 people with incomes between £ 9 million and £ 11million – paid an effective tax rate of just 21%, Advani found. This was slightly less than someone with a median income of £ 30,000, whose effective rate was 21.4%.
Using the latest capital gains data, as recorded by HMRC, Advani estimates that if earnings were taxed at the same rates as wages, an additional £ 13.8 billion could have been collected in 2016-17, rising to £ 15.9 billion in 2019-20.
The idea of alignment is not new. Former Conservative Chancellor Nigel Lawson introduced parity between capital gains and income taxes in 1988, but this was overturned a decade later by his Labor successor, Gordon Brown.
“The Chancellor not only decides how much money to raise, he also has to choose how to do it fairly. So far, he has increased taxes on those who work for a living, to protect those who live on the income of wealth, ”Advani said.
Support for reform is increasing. Labor has said it will increase taxes on income from owning shares and investment property, although the party has yet to make detailed plans.
Adam Corlett, senior economist for the Resolution Foundation, said there were “glaring holes” around capital gains that needed to be corrected.
“Thanks to the glaring flaws in the capital gains tax system, it is quite possible for the richest to pay a tax rate of only 10%, or even zero, while low-income workers pay taxes. much higher rates. That should change, ”he said.
The argument against such a tax reform is that it could, in turn, discourage investment.
Helen Miller, deputy director and tax officer at the Institute for Fiscal Studies, said there were “good reasons to reform the capital gains tax”, but added that there was a need for further reform. “Two-pronged approach” to avoid the risk of discouraging investment.
« [The government] should reform the definition of what is taxed, in particular by removing certain reductions and adding others, which would allow it to increase rates while minimizing distortions in savings and investment incentives ”, she declared.