To argue with a Guardian headline
This is of course an isometric exercise, lots of effort to get nowhere. But when such an excessively silly claim is made needs must:
Sunak's reforms are long overdue – income shouldn't be taxed more than wealth
Carsten Jung
Yes, yes it should Carsten. Currently the top rate of income tax in the UK is 45%. We think that’s a bit high. We also think that taxing wealth at 45% would be insane - and so do you. Having disposed of what is being said let us now turn to what is meant.
Which is that income from wealth should be taxed at the same rate as income from labour. This is also incorrect.
A slight detour, in that there is much confusion - some deliberately planted - in this field. We must look at the total tax rate upon a flow of income. Not just whatever portion is charged to a specific person in the flow. So, the taxation of dividends, for example, must include both the income tax charged to the recipient and also the corporation tax charged at the level of the company. We should also adjust with capital gains and so on, for inflation over the period of the gain. Once we do that the gap between those capital and labour income taxation rates narrows. In fact pretty much disappears for dividends, never was there for interest and significantly narrows for capital gains.
The actual science of the subject is over in optimal taxation theory. Mirrlees being a part of it, his Review another. The really big result though being Atkinson and Stiglitz which says that the optimal taxation rate for capital income might well be zero. Most of the more modern scholarship on the point, since 1976, is a bit of smoke blowing attempting to obscure this inconvenient result.
It is certainly economically efficient that the taxation of incomes derived from capital should be lower than those from labour. Dependent upon the definition of fairness being used it can also be argued that it is fair.
Standard economics states that capital incomes definitely should be taxed less than labour incomes. Not that we expect The Guardian to accept that but all those seriously discussing the shape of the tax system should grasp the point, no?