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Why tax pay packets more and not property?

The initial response to the pandemic recession was a significant temporary tax cut to property transactions, even though demand to move houses remained buoyant.

The permanent response to the pandemic recession is to raise taxes on pay packets, working hours, and jobs permanently.

This pattern is not an accident. It is the consistent cross-party political consensus that reflects the perceived political reality of where tax coffers can be squeezed.

The tax base has shifted from capital and wealth to labour and wages over decades.

It seems that property, capital and wealth, particularly in the form of housing is an untouchable asset, and should typically be able to be left free of tax even beyond the grave.

It is difficult not to notice the reflections of the Resolution Foundation, that carers will be paying the hike in National Insurance, but not those they care for. Tenants will pay, but not landlords on their income from tenants.

That think tank’s chairman, a former Conservative minister Lord Willetts points to an issue – that household wealth is now worth seven times the annual value of the UK economy.

Forty years ago it was below three times GDP. So household wealth has more than doubled in relation to the size of the economy, reflecting the housing market.

What has happened to the taxation of that wealth during that time? It has stayed at just over 2% of GDP consistently.

Increasing tensions

While there is no inherent need for taxes on wealth to rise by the same proportion, it is striking that they have not risen at all, specifically when the taxes are earmarked for use both to to help fund the costs of an ageing society and to keep people’s housing wealth intact.

Productive work is taxed more. Unproductive wealth is largely left alone. While PAYE makes it relatively easy for HMRC to get hold of taxes on work, it is arguably easier to tax a property, which can not move abroad , for example.

The tensions here are about to increase as the demand for public spending and the taxes required to fund it increases.

There is a powerful demographic factor underpinning the changes we see in politics. As Mr Willetts put it today: “The Thatcherite shrinking of the state was demographically driven by fewer people who were going to be heavy users of public services”.

That is now reversing, as the baby boomers retire, and require the NHS, care and other services.

So the emergence of a couple of measures – the extension of NICs to over 66 year old workers and the increase in dividend tax is a small indication that the Treasury recognises this structural issue.

These sums are modest though. Only one in six pensioner households have private earnings that could be hit by the new NI levy. The dividend tax raises about £600m.

It shows though, that the government is sensitive to the argument. The political incentives have for decades stacked up on one side here. The voters that seem to matter most own homes that they do not want to be taxed, even beyond their lives.

That is why successive governments reach for taxes on pay packets instead. While the “death tax” remains unthinkable, all that is left is the “jobs tax”.

Source: https://www.bbc.com/

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