AS lockdowns imposed to slow the spread of the coronavirus are eased Chancellor Rishi Sunak will have to start thinking about how to plug the hole in the public finances caused by the resulting disastrous contraction in the economy.
When he does, Mr Sunak must remember that the economic costs of the crisis have not impacted equally on different classes of people and sectors of UK plc.
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Mr Sunak has shelled out billions supporting schemes such as the furlough programme to protect jobs which he needs to try to recoup.
It is vital that he does not try to do so too quickly for fear of choking off what looks likely to be a very slow recovery, which could be derailed if infections surge again.
Spending cuts would be madness meaning the Chancellor will have to increase borrowing. While he can borrow cheaply he will need to raise revenues to service the debt concerned.
When he looks at how the tax system can be used to raise more revenue Mr Sunak must be prepared to ditch ideological baggage which could limit the Government’s freedom of manoeuvre.
This includes a commitment not to raise income tax rates, which does not take account of the fact that some people are facing much greater degrees of hardship than others.
A rise in the basic rate of income tax would weigh more heavily on people on relatively low incomes than high earners, who are more likely to have built up savings to help them cope with tough times.
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Against that backdrop the UK Government must consider increasing the rate of income tax paid by higher earners.The UK rate of 40 per cent applies to taxable income of over £50,000, with 45% payable on earnings above £150,000. The Scottish rate of 41% is payable on taxable incomes over £43,431, with 46% payable on earnings over £150,000
With fairness in mind the UK Government must also look again at Capital Gains Tax.
Gains will only be enjoyed by people who have been able to acquire assets that have value and to hold them long enough for that value to increase. The annual allowance of £12,300 means people making relatively modest gains are not taxed.The Chancellor could raise much more from CGT by increasing the rate payable by higher earners from a maximum of 28% to match the rate they pay on income.
A wealth tax might allow all people to benefit from some of the huge increases in property values in places such as London that have left so many people excluded from the housing market.The challenge would be to come up with a system that does not penalise those who own valuable assets but have little income.
The Chancellor, a veteran of the hedge fund business, may want to help ordinary people to benefit more from some of the huge profits that have been generated in the City of London.
After tanking in March as the potential scale of the coronavirus became clear, stock markets have enjoyed a strong rally thanks to governments around the world pumping billions into the financial system. Investors who made the right calls or simply got lucky will have made fortunes.
As profits made by London market players may be booked in low tax areas overseas it could be hard to ensure the UK Treasury gets a share. The kind of tax on financial transactions that reformers have long called for could help rectify the problem.
The Government must close loopholes that people exploit and employ more tax inspectors to help clamp down on the avoidance that costs the country billions.
While UK corporation tax rates are low an across the board increase would penalise firms that need support. Windfall taxes or differential rates could be used to recognise that the fortunes of sectors have varied.
The pubs and hotels sectors have been devastated by the lockdown.Telecommunications firms have seen demand for their services rocket. Internet giants such as Facebook have benefited from a huge growth in online activity.
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With high street stores closed for months, online retailers such as Amazon have won lots of business. The company’s costs have also increased but its shares have risen around 50% since early March suggesting investors like the look of its prospects. Delivery firms that have fulfilled the massive numbers of online orders placed have shared in the resulting boom.
Pharmaceutical giants that were making billions before the coronavirus crisis erupted are in line for a big boost to revenues.
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