Spotting drivel in The Guardian from Tom Kibasi

Well, spotting innumeracy in The Guardian is not that unusual and full blown drivel has been known to appear. But when people propose a change to the tax system it really is incumbent upon them to understand the tax system we’ve already got, the one they’re desiring to change. This not being something apparent from Tom Kibasi here:

That’s why it’s time for a simple but radical and fair reform to tax: tax all income in the same way, whether it comes from wealth or from work. It goes against basic fairness that tax rates on income from share dividends or capital gains are much lower than those from employment.

A large share of the costs of coronavirus could be covered: abolishing capital gains and share dividend tax and instead putting all income on the income tax schedule would net around £90bn for the exchequer in five years. It would greatly simplify the tax system and it is almost impossible to argue that those who work hard for their income should be taxed more highly than those who do not.

Given that standard tax theory insists that capital income should be more lightly taxed than labour income that impossibility would seem to be most possible.

The background is that we like investment - it’s what makes the future richer. So, those who delay consumption now in order to make our children richer, why would we want to tax them for doing so? We can also argue about what is the revenue maximising rate of any one specific tax - the Laffer Curve peak is different for each tax of course. Empirical research seems to show that around the UK’s current CGT rate is that curve peak. We can even point out that there’s no inflation adjustment on capital gains (OK, there are some vestiges of past attempts still left but not in general) and we do need either that or a lower rate.

But put aside these logical points and consider dividend taxation. Tax rates are already at around income tax rates. By design too, that’s why we have the system we do have.

If we want to tax profits (see above, we might not want to) then conceptually we can do so at two points. It can be at the level of the company, the place where the profits are made. It can be in the hands of the recipients, the income or dividends received. Some places do it one way, others the other. We do it at both points but adjust the second tax rate to account for this. This is why dividend tax rates appear lower than income tax ones even as they aren’t.

Take £100 in profits that have been made. These pay 18% at the corporate level this year. There is now £82 to be paid out as dividends. You can receive up to £2,000 without paying further tax - this is for administrative convenience. After this if you’re a basic rate taxpayer there is 7.5% to be collected. That is, a total tax take of (0.075x82 plus 18) £24.15. If a higher rate payer then the rate is 32.5% so £44.65. If additional rate 38.1%, so £49.24. And those tax sums translate over into rates, of course, giving total tax rates of 24%, 44% and 49%*. Which are not, the numerate will note, lower than income tax rates.

We can check this too. Imagine the business is organised as a partnership of some kind (LLP say). There is no corporation tax and profits pay simply normal income tax. Which gives, for that same distribution of £100 in profits, total rates - dependent upon the other income of the recipients - of 20%, 40% and 45%.

To insist that dividends should pay the same rates of tax as labour income isn’t, in fact, desirable for those logical and theoretic reasons. But to demand that change without knowing that they already do, and more, is, well, what should we call it? Is drivel too harsh?

*We’re willing to be corrected on the details here but not the general principle.