Should the wealthy pay more tax?

Mike Hedges – MS for Swansea East

There are two views on taxation, the progressive view is that taxation is the price we pay for public services and that wealthier people should pay more. The second is the Conservative view point that tax is a burden and the tax should be reduced, and that lots of means of reducing tax payable should be in the system.

Taxing wealth is difficult and if the intention is to tax wealth, then it is important that opportunities to reduce the tax payable should be reduced.

I intend to address four areas of tax that are paid mainly by wealthy people, which are capital gains tax, savings, dividend income, property, and land values.

We know that the proportion of tax received from income, business and profits have declined whilst the proportion from indirect taxes such as VAT have risen over recent years.

Capital gains tax

Capital gains tax is broadly a tax on the difference between an assets value when purchased and sold, excluding principal residency. With a 20% marginal top rate the UKs capital gains tax is relatively low compared to western European countries such as Germany with a 26% rate and France with a 30% rate.

Rates have significantly fluctuated over time with the Conservative Government in the 1980s aligning capital gains tax rates with income tax rate. The Labour Government between 1997 and 2010 decoupled them in order to stimulate growth but there is no evidence that this change has produced a higher level of corporate investment in the long term. I recommend that capital gains are realigned with income tax.

Dividend income

Another method of payment favoured by many self-employed people is to be paid via dividends rather than taxable income and to pay tax on those dividends. No tax is paid on any dividend income that falls within the personal dividend allowance each year.

Tax is paid only on dividend income above the dividend allowance. Dividend taxation is substantially less than income tax with a rate of 8.75% on earnings from £12,571 to £50,270, 33.75% on earnings between £50,271 and £125410 with an additional rate of 39.35% paid on earnings over £125410.

The other method of minimizing tax is to receive no or very little dividend income but to borrow from the company. If this is done a maximum of a ten-year loan with payments made each year and interest charged on the loan at bank of England base rate rule needs to be brought in.

I can see no logic for tax on dividends being different to income tax and tax, they should be treated as income and taxed at the appropriate income tax rate. If a loan is not paid back, it should be treated as income and taxed accordingly.

Property values

The best indicator of personal wealth, and a major part of many people’s wealth is the value of their principal dwelling.

Council tax is based upon the value of property. It replaced the much-disliked poll tax which replaced the rates system based upon the rateable value of a property which is still used to tax businesses. council Tax bands Value was set on 1 April 2003 so the value of all properties will have increased substantially since then in absolute terms but also there will have been relative change.

Band A is for properties up to £44,000. Band D is for properties between £91,001 to £123,00. Band H is for properties between £324,001 to £424,000.

Council tax is set on band D and all other council tax band charges are based on that. Properties in Band A pay 75% of the amount charged on band D, properties in Band H pay 18/9, or twice the amount charged on band D.

A £40,000 house will be charged two thirds of the amount of council tax paid for a £120,000 house despite being a third of the value.

A £420,000 house will be charged twice as much in council tax as a £120,000 house despite being over four times the value.

This is unfair because the payment is not proportional to the value of the property.

My recommendation is that all houses are revalued, and that Council tax is a fixed percentage of the value of the property. If we continue using bands an additional lower band, narrower bands several upper bands are needed.

Vacant land tax

Firstly, this is not a tax on gardens, sports field, or school grounds but on tracts of vacant land capable for allowing building to take place. The Welsh Government is committed to a vacant land tax, but it cannot introduce the tax until the UK Government agrees to devolve the necessary powers.

The Welsh Government says that discussions with the UK Government to devolve competence for a vacant land tax have reached an impasse. All we can is to await developments.

Savings

There is no logic for allowing those with substantial savings to protect them against tax using an ISA for £20,000 a year. With no tax on Interest on cash in an ISA, or income or capital gains from investments in an ISA. A tax does not need to include any ISA interest, income, or capital gains on it. Help to buy Isas have already been discontinued for anyone who wants to join.

Whilst savings currently in ISAs should continue to be tax free and be able to be rolled on, there is no reason to allow new ISAs to be purchased.

Proposed actions

Capital gains are realigned with income tax.

Dividends should be treated as income and taxed at the appropriate income tax rate.

If a loan is taken instead of dividends, it is not paid back it should be treated as income and taxed accordingly.

For council tax all houses are revalued, and that council tax is a fixed percentage of the value of the property. If we continue using bands an additional lower band, narrower bands and several upper bands are needed.

Vacant land tax should be actively promoted, and further effort made to get Westminster government permission.

Savings currently in ISAs should continue tax free and should be able to be rolled on, there is no reason to allow new ISAs to be purchased.