Politics in the UK and the US has been beached for a decade. After the financial crisis, it was caught on debt and austerity. Come 2016, it was on immigration and the fate of the nation. Alongside, there emerged the politics of identity. This year, a new battleground is taking shape: tax.
Governments need money. Our ageing societies are redefining their states. The UK and US are turning into heavily armed pension funds. Both countries are on track to increase spending on healthcare and pensions by about 4 per cent of output over the next 20 years. For the US, that is roughly the same as doubling defence spending; for the UK, it is equivalent to tripling it.
This is before you get to investment in US infrastructure or UK local government, where spending is unsustainably low. It is before you get to rising debt service costs. And it is before governments have done anything new in defence, education, science or housing.
But the politics of tax has congealed. A conventional wisdom has set in on rates: income tax rates in the US and UK fell sharply in the 1980s, but have hardly been revisited since. The political classes have shied away from taxing wealth.
Inequality is eroding that consensus.
In the UK, Labour is looking at top rates of tax well above 50 per cent. In the US, the Democratic Party’s star of the moment, Alexandria Ocasio-Cortez, has suggested a 70 per cent top bracket for the very richest. And the academic consensus that has underpinned the case for our current income taxes structure is fraying.
Hiking income tax is not an easy fix: taking more from younger wage-earners to pay for pills and pensions hardly seems fair.
Ann Coulter, the American conservative, has supported another idea that was, until recently, a heresy: wealth taxes.
Treasuries have preferred to tax you on what you earn (income) and what you spend (VAT or sales tax), rather than what you have (home, savings, inheritance). But senior officials at the UK Treasury are thinking about how to shift the balance away from the reliance on income tax towards greater taxation of wealth.
Funding dignified retirement without clobbering the young will require a proper argument – not just about whether to raise taxes, but which taxes to go for. It won’t lower the political temperature, but at least – unlike a lot of our recent fights – it might do us some good.
- The Resolution Foundation has suggested ways in which the UK could start to raise wealth taxes
- Paul Krugman has defended the Ocasio-Cortez proposals and set out the case for the changing economics of soaking the rich
- The paper at the root of the reappraisal of tax rates by Diamond and Saez
- John Cochrane’s rebuttal of the new case for higher rates
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