The tax system could be designed to be more progressive

The Office for National Statistics (see latest figures here) argues that overall, taxes have “a negligible effect on income inequality” because the progressivity of income taxes are offset by the regressivity of indirect taxes. This claim is disputed by the Institute for Fiscal Studies, who argue that taken together, direct and indirect taxes are progressive. Their position is that indirect taxes are broadly distributionally neutral rather than regressive, because they measure their effect as a share of expenditure, not income. They also argue that benefits do more to reduce income inequality than direct taxes, because benefits (as a share of income) are more concentrated at the bottom of the income distribution than direct taxes are at the top of it.

The tax system needs to raise more money to support better public services, and it needs to ensure that everyone pays their fair share in order to build public trust and support. To achieve these aims, substantial changes to both the design and administration of the tax system are needed. There are a range of problems with the current tax system. For example, we tax different types of income in different ways and under-tax wealth (discussion), council tax is highly regressive (statistics), there are a large number of poorly targeted and wasteful tax reliefs, inheritance tax is poorly designed, and tax avoidance and evasion remain unacceptably high (discussion), with much more money spent tackling benefits fraud than tax fraud despite the latter costing the Treasury much more (statistics). Income is the only source of wealth for low-income households, so a system focused on taxing income will inevitably undercharge richer people whose income comes at least in part from wealth. Even the national insurance system is regressive (with a marginal rate of 2% for employee contributions above the upper earnings limit of £50,270). [New research also shows that removing the ‘non-dom’ regime would raise £3.2bn per year, while tackling a loophole that benefits some of the wealthiest in society.]

Addressing the multiple crises facing the UK at the moment, including the cost-of-living crisis but also inflation more broadly and crumbling public services, will require large increases in government spending. These will have to paid for either through borrowing or tax rises, or both; cutting taxes will not generate the economic growth needed to offset the loss of revenue that they cause, let alone to provide the additional resources needed by the government. Borrowing to fund tax cuts is likely to lead to higher inflation and an economic crash. Higher taxes are linked to increased prosperity, rather than reduced levels of economic growth; most OECD countries have raised taxes in the last half-century, but the UK has not. [And the government’s recently published proposals to cut income taxes, reverse the planned rise in corporation tax, reduce taxes on dividends and so on will make the tax system still less progressive than it is at the moment, even without the abandoned removal of the top 45p rate on income tax, benefiting higher earners as much as 40 times as much as it will help those on low incomes.]

The vast majority of wealth in the UK is very lightly taxed. Because Black households have the lowest levels of wealth (and families of Bangladeshi and Black African heritage have ten times less wealth than white British families), the failure of the tax system to tax wealth appropriately makes it complicit in the maintenance of the racial wealth gap (alongside other aspects of the financial system such as insurance, banking, loans, mortgages, savings and so on).