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Time for a bigger tax debate

US Democratic Congresswoman and activist Alexandria Ocasio-Cortez had an unmissable message for politicians and taxpayers as she attended a charity fundraising ball in New York at the weekend: “Tax the rich”. The slogan was printed on her gown and she backed it up with a statement: “The time is now for childcare, healthcare, and climate action for all. Tax the Rich.”

The words may have been intended for a local audience, but the language and issues are global and while the reality of implementing such a policy is nowhere near as simple as the motto suggests, AOC is right that “the time is now” for the world to start facing up to its most intractable issues and economic problems.

Ahead of the elections In Germany next week, the environment is ranked as one of the key electoral issues and the party now thought most likely to end up leading the country’s next coalition government (SDP) has a wish list that includes a wealth tax (despite a weight of evidence that such taxes are not worth the cost, and tend to drive the target group into exile), higher dividend and capital gains taxes; hefty carbon taxes and a clampdown on buy-to-let investors.

Our own government has introduced pre-Budget tax raising measures with a 2.5 per cent rise in National Insurance contributions split between employers and employees, and dividend tax rises. The increases are designed to fill the giant hole that has been blown in the NHS books by the pandemic and to address a waiting list with potentially 13 million people on it. The hikes are also intended to help fund social care in the longer term.

But long before Covid, the health service was in a mess. The expected annual revenues of £12bn from the levy are unlikely to be enough to treat this patient. A better long-term solution might have been to follow the lead of medics who nowadays focus on wholistic solutions for patients (diet and exercise rather than pills) and begin a national debate on a healthier, lasting way forward. And if we are willing to accept a special health levy – and it will eventually be identified on payslips as such – then why not go the whole hog and combine state support for the NHS with a form of insurance paid for by the working population, or at the very least instigate an informed discussion about it? 

The NIC increase leaves Britain with its highest tax burden for many decades, and much closer to levels in the EU, but the burden could become heavier still. Rob Pullen, partner at Blick Rothenberg, says the scope of the health and social care levy could be extended in due course beyond NICs. “It could be applied to investment profits and also in conjunction with capital gains tax rate rises.” Tax rises targeting wealthy investors would be a winner politically he says, and in a changed environment where the urgency of tax increases becomes ever more apparent, previously unpopular reforms such as removing the CGT uplift on inherited assets could be back on the table along with proposals to axe higher-rate pension tax relief. 

Taxes have to rise but which ones? Some taxpayers pay tax at a marginal rate of 60 per cent; while some young graduates repaying student loans and on not very high salaries are approaching a marginal tax rate of 50 per cent. In light of this, the gradual whittling away of dividend tax advantages in recent years seems less unfair given that a large chunk of top earners’ income typically comes from partnership and dividend income.

Now is indeed the time to have a national debate on the tax way forward. It’s getting harder to justify different rates of tax on different types of income, or charging NICs on some but not all income streams. Plenty of people think property and pension taxes should be given a major overhaul too. Are they right? Should protected pensioners, and investment profits be targeted? I’d love to hear your views. Email me at rosie.carr@ft.com