Capital Pains?

Does Rishi Sunak's tax return matter? And is there promise for Labour in raising capital gains tax?

We are one week from the launch of Why Politics Fails, coming out in the UK on March 30th. You can see the book - and of course, PRE-ORDER it - here. Or if you’re in North America, head here. Pre-orders make authors and publishers happy - if you’re a subscriber too, or just casual reader, of this Substack, please do put in a pre-order. And if you don’t believe me about the book’s merits - please trust my wonderful blurbers! Or read Nick Pearce’s excellent review in the FT, which connects the book to current ongoings in the Conservative Party. Speaking of which…

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Today’s Substack is a brief but hopefully relevant one. Yesterday was a big day for Rishi Sunak in a variety of ways - the Windsor Accord, Boris Johnson’s obfuscation-fest, and a few more polls showing him closing the gap on Labour. But Sunak also used the day to make public his tax returns and they show not only an enormous income but rather more meagre (proportionally) tax payments thanks to the lower level at which capital gains are taxed. Is that political poison for Sunak? Is it electoral manna for Labour? Does anyone really care about marginal tax rates on different streams of income? Read on…

Last week I had the pleasure of presenting statistical work on taxation to an audience in Parliament. The wild lives of academics. I had been invited by Liam Byrne MP and the Patriotic Millionaires organisation to an APPG on wealth taxation. In the audience were a number of Labour MPs, keen to figure out how and whether wealth taxation might end up on Keir Starmer’s manifesto, or if not perhaps in an early Budget. And there were also a number of Tory Lords who recalled wistfully the time when Nigel Lawson raised capital gains tax rates… You see, Parliament still has the capacity to surprise.

Regular readers of this Substack will recall I wrote a lengthy post about attitudes to wealth inequality in the UK. I don’t think any of us has the stomach to go through anything that lengthy again. But the basic message, which I reiterated at Parliament, is that most actually existing wealth taxes are very unpopular. This obviously comes at some dismay for many people associated with Labour, for whom otherwise wealth taxation might provide a convenient way of figuring out how to pay for Britain’s ever-growing welfare state needs, without raising an already unprecedentedly high income tax burden.

But the problem with that strategy is on the whole people don’t like taxing wealth. Indeed, Why Politics Fail, has a whole chapter devoted to the ‘equality trap’, where I explore why taxing wealth is so unpopular, even when wealth inequality is much higher than income inequality. Find out more here, here or here!

In my earlier post I showed that more people in the UK prefer taxing income to taxing wealth. And, looking at the graph above, they find most forms of existing wealth taxation ‘unfair’, especially inheritance taxation, stamp duty, and tax on interest. Even those forms of ‘wealth taxation’ that are less loathed - taxing income from dividends or capital gains - are still thought of as ‘fair’ by fewer than fifty percent of people.

You’ll notice the scare quotes in the last sentence. Dividend income and capital gains are in a funny halfway house. They are income received as a return on wealth - so the wealth is not directly taxed, rather its yield is. The American tax code refers to this as ‘unearned income’. This phrase seems to make some people angry, partly because they view investments as having been made using money that was previously taxed as earned income (true in some but not all cases) and partly because they view investments as risking one’s wealth, and hence deserving of being taxed less than income. I don’t really follow this last point because people also experience lots of risk in the labour market when they earn their income (e.g., of unemployment, precarity, in any education or training they acquire). But we won’t resolve that here.

Why am I bringing up this arcania. Well, capital gains and dividends turn out to be rather important to Rishi Sunak’s tax return. And figuring out how to tax them was a big focus of my meeting in Parliament.

Let’s start with Sunak. Anoosh Chakelian (who as also at that Parliamentary meeting) has a nice New Statesman piece where she sets out what Sunak earned and what he paid. She gives the example of the 2021-22 tax year, where Sunak’s earned income of around £330,000 was taxed at an average rate of 36.6%, whereas his capital gains earnings of over £1.6 million (!) were taxed at just over 20%. Ben Walker noted that Sunak’s total average tax rate was 22.7%, whereas he, including his graduate tax, paid 25.6%. In the interest of openness, my own rate was substantially above thirty percent. Harrumph…

The reason Sunak’s overall average tax was so low was of course because capital gains are taxed at a much lower rate than income: at twenty percent (or twenty-eight on residential property excluding the main residence) rather than forty or forty-five, the usual rats paid on income for higher earners. And it’s this discrepancy that means of the new monies entering Rishi Sunak’s accounts each year, he pays less proportionally than Ben Walker, or me, or probably you.

By the way, this is not some weird British thing. Americans also pay lower rates on capital gains than income. Canadians only pay CGT on fifty percent of their capital gains. And so forth. Some countries, such as Belgium, don’t even have capital gains tax. So my first piece of advice to those seeking to manifest their fury at Sunak is… hold on. There are presumably good reasons why most every country has different rates on CGT to income (unless you are an old-school Marxist, in which case I guess you can simply blame the structural power of capital). Only the Scandinavian and Baltic states tend to subject capital gains to personal income tax rates (as in Denmark, Estonia, Lithuania, and Norway).

A look at the graph above shows basically no negative relationship between income per capita in Europe and top marginal CGT rates. So no reason to think you can only get rich by lowering CGT. If anything, if you took Switzerland and Luxembourg out, it might look positive. Wouldn’t read too much into that TBH - the Scandinavians are rich for a lot of reasons. But also worth noting is that CGT top rates are pretty low across Europe, substantially less than top marginal income tax rates. And the UK is slap bang in the middle.

Still, very apparent in the Parliamentary meeting I was at, was a call to consider equalising CGT and income tax rates. And as I mentioned, at least one Tory peer noted that Nigel Lawson himself had done just that in the 1980s. So it’s not only Labour Party members who are attracted to CGT rate equalisation. Sunak’s tax returns might have created an opportunity but there’s clearly existing demand.

Let’s look a little bit at that demand. As I’ve mentioned in earlier posts, with my WEALTHPOL team I ran a bunch of YouGov surveys in the UK and a Kantar survey in seven European countries. And across all surveys I asked people how they felt about equalising CGT rates with income tax. I won’t subject you to the ins and outs of European demographics and CGT support but I can show you something that might surprise you. The UK actually had the highest level of average support for equalising CGT and income tax at just over sixty percent! One thing that might make you slightly cautious is that the Danes (who have equal CGT and personal income tax) and the Swedes, who have high CGT rates, both were least supportive, suggesting that actually doing this might be less popular than considering it!

Still, that looks like some quite high support for increasing Sunak’s taxes. And if we look at support for equalising CGT and income tax by party vote, we also see a lot of consensus. Even fifty percent of Conservative voters in the General Election of 2019 are CGT-equalization-curious. Labour voters, SNP voters, Green voters are all three quarters or more supportive.

But there are some slight risks here. Do people really actually have opinions on this somewhat opaque topic? My colleagues and I have found that ‘don’t know’ is a very common opinion on inheritance tax levels and one that is associated with people you might expect to actually support increased inheritance taxation (the young, the poor, renters). Are people actually able to formulate a coherent response? Here is a bar plot of the spread of answers we got to our question on CGT equalisation in the UK.

You can see lots of people are in ‘agree’ or ‘strongly agree’. But the second most common response is dunno. And the electoral success for Labour in going to war on the favourable rate of CGT taxation depends on how the voters they need to win feel. In my last post, I looked at five core groups of voters for the General Election of 2024: loyal Conservatives, Conservative waverers, Conservative switchers to Labour, loyal Labourites, and previous non-voters heading to Labour. Here’s how they feel about equalising rates.

You can see Starmer’s problem here. People who voted Conservative in 2019 but are currently undecided aren’t massive supporters of equalising CGT rates - indeed they look just like Loyal Conservatives. Even switchers aren’t fully sold. New voters on the other hand (NA-Lab) look very supportive. But…

If we look at how many of each group say ‘Don’t Know’ about CGT equalisation - the two groups Labour needs to win over now (Conservative waverers and previous non-voters) have much the highest chances of having no opinion on CGT equalisation. Hammering on about it, without making a broader case in language people understand about, say, fairness, is going to be pretty meaningless to these people. CGT-equalisation is not some kind of turnout fuel. It’s complex and off-putting. So if Labour wants to use it effectively electorally, it may have to go into Sunak’s tax returns pretty hard and tie it to a narrative about work versus wealth. Even then, I wouldn't want to be the door-knocking MP who has to try to explain how marginal tax rates work and what capital gains really are to skeptical voters.

As the equality trap I set out in Why Politics Fails makes clear - people are often torn between valuing equality of outcomes and equal treatment and rights. Treating CGT equally to income feels like it gets at the latter while helping push towards the former. But people are suspicious of government and suspicious of having equal freedoms transgressed. Just because it seems obvious to social scientists does not mean it will be obvious to voters, or indeed to politicians on the election trail. A maxim for our times.

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If you’ve made it to the end of this Substack, remember that in one week Why Politics Fails, comes out in the UK. Please do PRE-ORDER it - here. I’d be enormously grateful.