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Think tank calls for UK tax rates to be aligned across income sources

According to a report by a leading think tank, reforming the UK tax system by equalizing tax rates for different sources of income would improve equality and generate more income for wealthy people.

Researchers at the Institute for Fiscal Studies found that the UK’s tax system was largely progressive, collecting more taxes from those with higher incomes.

However, they added that differences in the taxation of corporate income, capital gains and inheritance compared to earned income led to “horizontal injustice”. This is the case when different groups receive similar returns for their labor but are taxed at different rates.

The study found that the top 1 percent of adults paid 28 percent of income tax and Social Security contributions combined in 2018-19, up from 25 percent in 2009-10.

However, tax rates within this group varied enormously. The average tax rate for workers in the top 1 percent was 42 percent.

By comparison, those who own their own businesses paid an average of just 27 percent because they received income in the form of capital gains, which are levied at a lower rate than income taxes and NICs.

Meanwhile, under the existing system, those who kept capital gains until death paid 0 percent on the gains.

Business income, either from self-employment or from owning and operating a business, was found to be more common among the top 1 percent and 0.1 percent of earners, who account for 21 percent and 29 percent, respectively. In comparison, business revenue accounted for just 9 percent for the rest of the population.

Helen Miller, IFS Deputy Director and author of the report, said successive changes since 2010, such as the introduction of an additional £150,000 tax rate, have meant the system has become more progressive. But she added that it was “striking” that the tax people paid depended not only on how much income they had, but also on how they made it.

“Preferential business income rates are changing the way people work and earn their income, but are not well placed to encourage entrepreneurship,” she added. “There is a strong case for aligning tax rates on different forms of income while reforming the tax base so that taxes on corporate income do not discourage investment.”

Miller said the current system effectively makes employment a “tax penalty,” and this often entices people who could change the way they receive their income to make tax-motivated decisions.

Last year, the Treasury Department shelved proposals from the Tax Simplification Bureau, a public corporation, which recommended that the government consider aligning capital gains tax rates with income taxes.

At the same time, the Treasury rejected changes to inheritance tax – as proposed by the OTS in reports from 2018 and 2019. However, the Treasury said it is constantly reviewing the tax system.

The report, which analyzed tax records from HM Revenue & Customs, found that around half a million people made up the top 1 per cent of pre-tax income earners in the UK.

Over 55 per cent of the top 1 per cent of UK adults lived in London and the South East, with almost 60 per cent aged between 45 and 64. The group had an income of over £130,000 and was 80 per cent male, although the proportion of women had risen from 15 per cent in 2003-04.

The top 0.1 per cent has been found to have incomes well in excess of £500,000. This small group of 50,000 people accounted for 6 percent of all revenue, the IFS reported.

https://www.ft.com/content/beecf203-a2a5-46fc-be98-abc7a68cf74d Think tank calls for UK tax rates to be aligned across income sources

Adam Bradshaw

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