“Tax the wealthy to atone for Osborne’s raid on the poor.” That was a headline in an article in the FT this week. Its author, Janan Ganesh, suggests that George Osborne’s attempt to change the UK’s distortionary and expensive tax credits policy looks like a “vindictive war of choice” on the poor, because he has not also “picked a conspicuous fight with people of entrenched wealth” at the same time. He should, says Ganesh. It is time for a proper wealth tax.
Hmm. There are two points to make here. First, cutting tax credits (which are not a credit, but a benefit) isn’t just about the poor. As James Ferguson pointed out last week, it’s possible to earn the pre-tax equivalent of £50,000 while inside the benefit system. That’s just not poor. And it has to end.
Second, although it’s fun for opposition politicians to take pot shots at the well-off, it simply isn’t the case that they aren’t being hard hit by new taxes and changes to old taxes. If you earn more than £150,000, you are already paying tax on your income at seven percentage points more than you were in 2007. Your income tax on anything over the additional-rate threshold is up by five percentage points and your national insurance (NI) is up by two percentage points, so you are paying tax on your income over the threshold at 47% rather than 40%. Earn £250,000? That’s £7,000 more gone. You have also lost your personal allowance – you don’t get a single penny of tax-free income. Everyone else gets £10,600.
Then there is the lifetime allowance for pensions – now on its way down to £1m. If our high earner has already hit this level, he will no longer be allowed any further pension tax relief. The current annual allowance (which has already been savagely cut) is now £40,000. So that’s another £40,000 that other people can have tax free, but the wealthy get to pay £18,800 in tax on.
Next up is stamp duty. The new regime takes the tax on a £2m house from £100,000 to £153,750. If that isn’t a tax on the rich (albeit a badly structured one), what is?
This isn’t the end of it either. Two more new charges are on the way. One involves changes to tax relief on the mortgage interest payments on buy-to-let investments. It takes away full relief at the taxpayers’ marginal rate and replaces it with a 20% tax credit. This will push thousands of people into the higher-rate income tax band and make many of their portfolios financially unviable.
The other is even tougher. It cuts the annual pension allowance for anyone earning over £150,000 from £40,000 to £10,000 by the time they are earning £210,000. For someone on £200,000, that means a £25,000 reduction in the allowance, which equates to a new tax bill of £11,750 (had they been planning to save into a pension). It also means that these people will never be able to build up the same-sized pension pots that other people have and that they will therefore never benefit from the inheritance tax (IHT) perks that less well-paid people get now that pensions can be passed on IHT-free to heirs.
I think this tells you all you need to know about the idea that there are no new taxes on the rich. It is complete nonsense.