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    What tax rises will Rishi Sunak introduce?

    2 September 2020

    Rishi Sunak has acquired a political reputation of which potential rivals in a future leadership election can only dream. Almost alone, as ministers around him have been damned for their bumbling, he has had a good pandemic. But is it really all that surprising when all he has really done to far is to hand out money? Doling out billions – over £30 billion in the case of the furlough scheme alone – does tend to make you rather popular with the client groups who are receiving the cash.

    But now comes the more difficult bit: when the Chancellor Sunak attempts to bring the public finances a little more into balance before investors in UK government debt lose confidence and the country goes bust. Over the weekend we began to hear the first reports of how he will approach the nasty side of his job: increasing revenue, cutting spending or both. Faced with a similar black hole in 2010, George Osborne let it be known that he was going to err on the side of spending cuts. Sunak, it seems, will do the opposite, with tax rises predominating – possibility to the tune of £30 billion a year. To put that into context, in 2018 income tax raised £175 billion, VAT £125 billion and fuel duties £27.5 billion.

    The main possibilities for tax rises dangled before us have been equalising capital gains tax with income tax, so that high earners would face a marginal rate of 45 per cent rather than 28 per cent, cutting pension tax relief so that everyone received relief at 20 or 30 per cent rather than their marginal rate of income tax, raising fuel duties and increasing corporation tax from 19 per cent to 24 per cent. The last suggestion is especially eye-catching, given how the Conservatives reacted to Jeremy Corbyn’s manifesto, which suggested raising the tax to 26 per cent. We seem to be in a weird looking-glass world where the manifesto of the party which was trounced in the general election is the one which ends up being adopted.

    From experience, Sunak will not be seriously considering all these tax rises. His purpose behind floating these suggestions – I am assuming that the reporting is informed by him or his staff – is to prepare the way for tax rises and to ascertain which inspire the most anger. Then, come the Budget, the measures he actually delivers will seem relatively mild.

    To judge by the reaction so far, any corporation tax rise is going to go down extremely badly at a time when company profits have been shattered by lockdown, and goes against everything the government has signalled about the need to attract businesses to Britain in the wake of Brexit. Less than a year ago the Prime Minister was proposing to cut corporation tax to 17 percent.

    If you are going to raise taxes at all there is some merit in aligning capital gains tax with income tax – providing, that is, that both are as low as possible. It would move us closer to a flat tax, where every form of gain is taxed the same – and which therefore lessens the possibilities for clever tax avoidance.

    It is possible that the Chancellor might soften the blow by reintroducing indexation, so that he would only be taxing real-terms gains. Restricting tax relief on pensions ought to be a relatively painless way of raising revenue – while saving is generally something to be encouraged, it is easy to wonder why government needs to skew the tax system in order to help the well-off amass pension funds way in excess of that required to keep them off the breadline during retirement. Limiting relief to 20 per cent seems a reasonable compromise. It also has the advantage that plans for this had already been floated prior to the Covid 19 epidemic.

    Raising fuel duty will bring with it accusations of hitting ordinary people, especially in rural areas, who need a car to get to work. That argument is all the stronger during the Covid epidemic when people are trying to avoid public transport. The long shadow of the fuel revolt of 20 years ago hangs over any government attempt to raise fuel duty. But then again it is far from clear why the government has frozen fuel duty for years on end, even when the price of oil is low and at a time when government is trying to shift us to battery-powered cars.

    Over all these tax rises, though, will hang the charge that the Conservatives won an election last December on a false prospectus of low taxes. It will ignite, too, criticisms of some of the schemes designed to bail out the economy over the past six months. The furlough scheme has been popular with many, not least the 9 million people who have benefited from it. Eat Out to Help Out, which ended this week, has won plaudits. But will it seem so wise when the bill comes in and we find that we will, after all, have to pay for our gammon steak via the tax system? Rishi Sunak is going to have his work cut out to remain the most popular member of the cabinet.