Monday 27 July 2020 5:21 am

Want a recovery that works for everyone? Fix the injustices in the tax system

John Penrose is Conservative MP for Weston Super Mare.

The lockdown shone a spotlight onto a two-speed, two-nation Britain, where better-paid white-collar professionals worked from home, while less well-off key workers had to keep travelling to work, often on crowded public transport, to do riskier jobs.

Even worse, it turned out that those less well-off key workers were paying much higher tax rates than the safer, white-collar professionals. Why? Because tax rates on unearned income from things like dividends on investments or rents from property portfolios are much lower than income tax, and because benefits withdrawal rates only apply to low-income households. 

The combined effect means that low-income key workers often pay a total tax rate of 75 pence in the pound, while a protected managerial class pay about half that.

Think about that for a second. In modern Britain, the “haves” are being subsidised by the “have-nots:. That can’t be fair — or right. How can we “clap for carers” without fixing a tax system that’s rigged in favour of a rich elite? Who on earth thinks it’s okay to give a better deal to the rich at the expense of the poor? 

High earners should not pay lower tax rates than the people who clean their offices or drive the trucks that deliver their goods. And if we believe that tax rates above about 40 per cent or 45 per cent undermine work incentives for rich people, why not for low earners too?

The last time Britain taxed earned and investment income equally was under a Conservative government, when Nigel Lawson was chancellor. Lawson argued that taxing different types of income at different rates was nothing more than political favouritism; a taxpayer-funded subsidy for whichever side has the best Westminster lobbyists.

If we were to return to his approach, by taxing all income the same whether it comes from benefits, work or wealth, the effects would be huge. Britain’s post-Covid, post-Brexit economy would grow faster and become massively more efficient and productive, because investment would flow to wherever it could be used best, without distortions from the tax system.

Taxes would be simpler and harder to dodge, because there would be no need or reason for all those complicated schemes to reclassify income as capital gains or dividends to avoid higher tax rates. And we would cut in-work poverty at a stroke, because less well-off families would keep more of any extra money they earnt as well.  

Crucially, we would hand low earners the same life chances and opportunities as all those well-off white-collar professionals I mentioned before. At the moment, poorer families have weaker reasons to apply for a promotion or work a few more hours of overtime, because they keep less of the extra money that they would earn if they did. Just think of the energy and drive that we’d unleash if everyone in the country had the same strong, clear incentives to work hard and do well, no matter who they are or where they’re from.

Today, the One Nation Caucus, a group of Conservative MPs, is launching the first in a series of “One Nation Recovery Papers”, to set out the way forward for a recovery that works for all parts of our economy and society. I have contributed a chapter, and this is one of my key ideas. 

It’s a thoroughly Tory idea too — not just because we would be following in the footsteps of Margaret Thatcher’s chancellor, but because we’d be rewarding hard work and strivers. Making the system fairer for the “have-nots” would prove to all those Red Wall voters who supported the Conservatives for the first time in December’s General Election that we’re on their side. That we’ve got their backs. That a one-nation Conservative government will stick up for them, so they don’t get the short end of the stick each time. 

In short, it would prove to the nation that we really, genuinely, are “all in this together”.

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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