the times | Monday February 21 2022 39

CommentBusiness

When taxing the rich, how about

a little carrot to go with the stick?

Y

ou can tell it has been a

topsy-turvy time in British

politics when a

Conservative politician

promising “a smaller

state” makes headlines. But there

we are: Steve Barclay, the prime

minister’s new chief of staff, has

managed it in his attempt to

relaunch his boss’s premiership.

His commitment was notable

because the Conservatives have

spent the last few years trying to

reshape themselves as a party for a

bigger state.

Net zero, levelling up, corporate

governance reform, investment

screening, increased taxes on

company profits, higher national

insurance contributions, more

public spending — all point to a

larger state, not a smaller one.

Boris Johnson spent the last Tory

conference telling companies they

were paying people too little and

advising them to either recruit from

the UK or automate the work if that

wasn’t possible. This administration

even has an opinion on whether

crustaceans have feelings or not: a

recent press release proudly

trumpets that Her Majesty’s

government now considers lobsters

and crabs as sentient beings.

Does Barclay think that all of

these issues are ones the

government should turn its back on?

I doubt it. Even Johnson, a man who

is at ease with squeezing out of tight

corners, would struggle to U-turn on

all of the commitments that I have

listed above.

Instead, I think it points to a kind

of double-think the Conservatives

have developed on the role of the

state. After 12 years in power, they

are all too comfortable vesting

themselves with the authority of

office, while delivering panegyrics to

the morality of limited government.

Consider this recent peroration,

given by a leading Conservative to a

group of business leaders:

“Government cannot fix everything

and government sometimes should

get out of your hair. And

government should make sure there

is less regulation and, indeed, less

taxation. And the true driver of

growth is not government, it is the

energy and dynamism and

originality of the private sector.”

Which up-and-coming right-

winger delivered this speech? Boris

Johnson, to the CBI, shortly before

giving Peppa Pig World his prime

ministerial approval.

What the Conservative Party

needs to learn is that UK plc does

not expect to wake up tomorrow and

discover that Johnson is as pro-

business as Margaret Thatcher, or

even Tony Blair. A smaller state is

simply not available right now.

However, as the “natural party of

government”, the Conservatives

deserve to give business a strategic

state at least: less fickle, less opaque,

less indecisive than the one we have

today, and with the ultimate aim of

reducing the demand curve for

welfare and health spending, so

lessening the need to call on

increased business taxation in

future.

There are three areas the

government could act on to

demonstrate its sincerity on this.

First, it should get a grip on the new

local health systems it is creating in

the latest Health and Care Bill and

make sure they prioritise prevention

rather than just manage hospital

admissions. Second, it should focus

less on small boats in the Channel

and think rather more about how to

link up skills training to the labour

shortages identified by the

migration advisory committee.

Third, it should set out the missing

detail of how the UK is going to

decarbonise: what the plan is for

home heating, hydrogen use and

replacing lost fuel duty revenues

with road charging.

None will be simple in either

policy or political terms. But failing

to provide business with this kind of

substance will present Labour with a

golden opportunity to make its case

instead. Rachel Reeves, the shadow

chancellor, has been embarking on

a tour of the country’s boardrooms

and discovering that the one solid

point of agreement between c-suites

and her party is frustration with the

government’s approach and

demeanour.

If the Conservatives want to

change this, they must grit their

teeth and think and act strategically

with the goal of a smaller state in

future. Anything else will be treated

as yet more lip-syncing to the old

hits, rather than anything more

serious on the part of Johnson.

Mark Littlewood

Alex Dawson

being nearly £59 million, Sir James

Dyson and his family paying more

than £100 million and Denise Coates,

the bet365 owner, contributing

£276 million. Even slight alterations in

the financial planning of the rich pose

dilemmas to those who want good

funding for schools, hospitals and

welfare.

Patriotic Millionaires’ plans for

aligning capital gains tax with income

tax could be devastating. This would

mean CGT rates as high as 62 per

cent, making it far more attractive to

simply spend rather than invest — let

alone the risk of funds leaving the

country altogether.

A preferable approach to such

counter-productive tax reforms would

be to instil a spirit of philanthropy. A

space on your tax return could be left

for you to fill in any additional

amount you wish to give. This could

even be earmarked for a specific

government department or project of

your choice.

In the voluntary sector, private

donations are often publicly

recognised if the donor wishes.

Linacre College in Oxford is set to be

renamed Thao College after a huge

donation from Vietnam’s richest

woman. Tate Modern’s extension

received a £50 million donation from

the businessman Sir Len Blavatnik

and bears his name. These are

obviously at the extreme end of

philanthropy, but maybe more modest

donations to the state could lead to a

donor being named on a plaque on

the wall of a school or hospital?

The rich have an obligation to pay

their due taxes. But that doesn’t mean

we should fail to recognise their

enormous contribution. Rather than

designing tax policies aimed at raising

still more funds from them (but

unlikely to do so), we could deploy

the carrot alongside the stick. For

those making major contributions to

propping up the state sector, or happy

to add further funds on top, a public

way of acknowledging our thanks

could work wonders.

We could even have an official

“Most Tax Paid” list to sit alongside

The Sunday Times

Tax and Rich lists

for those willing to

divulge their tax

returns.

Although the

argument is as old

as the hills, recent

times have seen a

sharper focus on the

question of how much tax the rich

should pay. A globalised economy has

led to a sharp rise in the number of

billionaires. This, combined with the

perennial crisis in public finances,

leads many to argue that if the state

clipped just a little more money from

the bank balances of the ultra-

wealthy then a happier, healthier and

more harmonious society would be

the result. According to this line of

reasoning, the super-rich are so awash

with cash that they would barely

notice the additional burden.

Into this heated debate enter an

intriguing group of affluent

individuals, Patriotic Millionaires,

who were founded in the US in 2010.

They believe that the state should

confiscate a higher proportion of their

substantial resources. Membership of

the American branch requires one to

show either an annual income in

excess of $1 million or an asset base of

more than $5 million. It is not clear

whether a long-term goal would be to

wind up the organisation due to the

huge scale of philanthropy being

practised by its members, causing

them to fall below these thresholds.

Patriotic Millionaires in the UK

have taken to writing to national

newspapers to urge the chancellor to

raise capital gains tax or introduce

a 2 per cent levy on wealth,

which, they claim, would raise

much greater revenues than

those likely to come from the

uplift in national insurance

contributions.

Of course, the first

oddity about the case

they put forward is why

they are spending their

time writing to the

newspapers rather

than writing cheques.

It seems that they

have the means, in the

words of Mahatma

Gandhi, to “be the

change that you wish to

see in the world”.

HM Revenue &

Customs gladly accepts

the receipt of funds in

excess of your basic legal tax liability.

Historically, these donations have

been derisory, but there’s no obvious

reason why Patriotic Millionaires

couldn’t choose to meaningfully swell

the government’s coffers.

One imagines that their retort

might be that they face a collective

action problem. In America, for

example, somewhere in the region of

300,000 people earn more than

$1 million per annum; about 800 have

accumulated more than $1 billion in

wealth. Yet there are only about 200

members of Patriotic Millionaires in

the US. Perhaps their argument is

that while they stand ready to pay

higher taxes, they will only do so if

the same burden is placed on the

shoulders of rich citizens who are less

enlightened and philanthropic than

they are. This would require radical

changes to the tax code.

It is here that the tax ideas put

forward by the UK branch of Patriotic

Millionaires run into trouble. It may

just be feasible to believe that they

would not alter their financial

behaviour if they were obliged to

hand over 2 per cent of their total

wealth to the state every year.

However, recent economic evidence

suggests that such taxes are bad for

wealth generation and injurious to

jacking up the government’s income.

The French Socialist president

François Mitterand introduced a

wealth tax in 1982. It is estimated that

the losses in tax flight from the

country were twice the revenue it

brought in. In the first 16 years of

the new millennium, more than

60,000 millionaires left France.

When François Hollande sought

to introduce a supertax, 12,000

millionaires departed in 2016

alone.

The well-heeled are so vital

to our own tax revenues that

even rather modest changes

in their behaviour could

have serious implications for

the public sector. Thirty per

cent of all income taxes in the

UK are paid by only 300,000

people. That amounts to more

than the next 20 million highest

income taxpayers combined. In

London, more than half of the

total income tax bill rests on the

shoulders of 87,000 people. Some

individuals make almost

ludicrously large tax

contributions. In a single year, we

have seen Lord Sugar’s annual bill

“

’’

Mark Littlewood is director-general

of the Institute of Economic Affairs.

Twitter: @MarkJLittlewood

Alex Dawson is the practice lead, UK

politics and policy, at Global Counsel

6 Graham Ruddick is away

The Tories need to tell

business what they’ll do

to create a smaller state

Denise Coates, owner of

bet365, paid £276 million

tax in a single year