IGP Stories

Why IGP’s work on National Contributions holds the answer to Labour’s calls for a fairer tax system

Social Prosperity Work Europe

Professor Henrietta L. Moore

28 July 2022

On 26 July 2022, the leader of the Labour Party, Sir Keir Starmer spoke on the BBC Today programme about the issues of taxation and tackling the cost-of-living crisis. He outlined three key principles of a taxation system:

  1. A fair tax system with a lower tax burden
  2. An efficient tax system which closes tax loopholes
  3. Reducing the burden on businesses

It is on the first principle that he outlined where the IGP’s report on National Contributions struck a cord. He stated how the Labour party would look at taxing all forms of incomes whether earned or unearned including taxes on stocks and shares as well as property portfolios.

Our proposals would treat active (earned e.g wages) and passive incomes (unearned e.g. dividends) equally using a flat rate definition of incomes known as a ‘Progressive Rates on Flat Incomes’ (PRoFI). In other words, this would combine income tax, national insurance contributions, capital gains tax and inheritance tax into one called ‘National Contributions’, thus significantly simplifying and reforming the tax system.

Currently, tax rates are much lower for those with unearned incomes. Therefore, in order to promote fairness and foster social solidarity and reciprocity while protecting the poorest in society, we need fundamental reform of the UK taxation system like the one we have proposed. The overall effect of National Contributions is to reduce taxes on wages and increase taxes on passive (unearned) incomes.

The report outlines three key models or stages. The first model or stage known as ‘Modernise’ is revenue neutral in the sense that it generates the exact same revenues as the current tax system, also accounting for the change in national insurance this year. For hard working families without any passive (unearned) incomes, this would represent a 100% tax cut while 88% of all taxpayers would be better off.

The second stage ‘Build’ implements a programme of Universal Basic Services which reduces the cost of living and establishes reciprocity. Under this stage, we can generate £33bn for levelling-up the UK. 86% of all taxpayers would be better off and for those without unearned incomes, 98% would be better off.

The final stage ‘Transform’ sets out the path to financing net-zero. This stage generates £11bn a year for net-zero and makes 82% of all taxpayers better off, with 98% better off for those without unearned incomes.

It is clear that proper tax reform creates a combined package of £44bn to achieve levelling-up and net-zero. Tinkering at the edges with tax may only help in the short-term but will not help us achieve our long-term objectives and tackle societies most pressing challenges. With the final two contenders in the Conservative leadership contest stating it is time to move forwards under a new clean slate, is it time for our taxation system to move forward?

Photo by Josh Appel on Unsplash

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