How to tax the rich?

Dan Neidle

Whenever I write about tax say in the newspaper columns, there'll be comments underneath saying, yes, people just put money into offshore trusts, people can open a bank account in the Isle of Man, these things don't work anymore. Trusts for British people are generally a tax disaster. If I open an Isle of Man account tomorrow and put some money in it, then that bank's going to report on the account to HMRC at the end of the year. So the days of the British super rich being able to avoid tax through tricks are, I think, largely gone.

Paul Johnson

Hello, and welcome to this edition of The IFS Zooms In, I'm Paul Johnson, I'm director of the Institute for Fiscal Studies, and today, we're going to talk about the ever-popular subject of how to tax rich people. To do that, I'm joined by Helen Miller, who is deputy director here at the IFS and head of our tax work, and Dan Neidle, founder of Tax Policy Associates, and a former very senior tax lawyer. So, we have the right people to talk about this, the economists and the lawyers, both of which we need, I think, when we come to talk about taxing rich people. An issue of permanent interest, how much do other people pay? How much don't they pay? How much do we get from them? And how do they actually or apparently manage to minimise their tax bills? So, lots and lots to talk about in the next half hour or so.

Let's start, shall we, by just sort of getting our heads around who are these rich people we often hear about the top 1%, the top 1%, broadly speaking, people with pre-tax incomes of above about 150,000 a year, I think I'd be right in saying that, and the top 0.1% we're talking about people in the £6-£700,000 a year range, so give us a sense of who these who these rich people are. I mean, I'll start with Helen, and then Dan probably knows more rich people than we do, so, he can give us a bit more colour.

Helen Miller

Yeah, great. So, using the data rather than any personal acquaintances, if you look at the top 1% and you want to do big, you know paint with a broad brush, there are kind of two groups of people up there. About two thirds of people in the top 1% are employees, urm so people who have ordinary jobs, and many of those work in the finance sector, so lots of people up in the top who work in banks and get effectively paid wages. The other big group at the top are people who work for their own businesses, and again, roughly half of those are people who work in professional services partnerships, so think accountants and lawyers, and about 10% of people up there are people who work for their own companies, so, company owner managers. If you want to think about how much tax these people pay, then taken as a group as a whole, the top 1% of adults get around 15% of fiscal incomes, that's income that you can see on a tax form effective, and they pay around 30% of income tax and National Insurance contributions combined. So, you know, big picture, that group get a lot of the money, but they also pay a very large share of those two income taxes.

And of course, people will have different views on whether that's enough or too much, but I think what's really striking is not how much the group pay overall, about how much different people pay within the top 1%. So how much you pay is not really a function, so much of how much you earn overall, but how you get your income. So, think of those bankers, a lot of them actually pay fairly high tax rates, and there’s not a great deal they can really do to avoid paying high tax rates, but for people running their own businesses, they get taxed at lower rates, and in particular if you're a company and a manager, a very easy thing you can do to pay less tax, and we know that most of them do this, is to pay themselves in dividends rather than in salaries, and that gets you a lower tax rate. You can also pay a lot less tax if you get paid in the form of capital gains. And again, if you're a company and a manager, you can often take money out of your company in the form of capital gains. But also, some other groups can get paid in this way, and in particular if you're a partner in a private equity firm, or you're a hedge fund manager, you can often get paid in the form of what's called carried interest, which is effectively you get paid in a way that lets you get tax as under capital gains rather than as ordinary income.

So, I think again, big picture, lots of people at the top pay lots of tax, but there are some groups at the top who really pay a lot lower rates. So, thinking about how much tax the rich pay we should get more accustomed to talking about different types of rich people, as opposed to all grouping them together, I think.

Paul Johnson

And you're talking sort of broadly about that top 1%, is it fair to say that the top 0.1% are the ones who are really different?  

Helen Miller

Yes, so, the broad picture I've painted kind of still holds at the top, in the sense that you still have bankers at the very top, but the trends are more accentuated. So, there are even more business owners at the top, so people who are running their own companies in particular. And there are even more capital gains at the top, so, business income, capital gains gets more and more important the further you go up the distribution. And of course, in terms of the income distribution, the people at the very top are also just much richer, so just give you a sense of scale, the top 0.1%, so that's about 50,000 people, get about 6% of the income, so quite a small group getting really quite a lot of income overall.

Dan Neidle

So, I very much agree with what Helen said, that if we asked the question, are the rich paying enough tax? We're asking the wrong question. I would crudely divide the rich into three, there's people with very high earnings, be them bankers, lawyers, accountants, management, consultants, now those guys, it's not that they're Saints, it's just that if you are earning essentially wages, it's these days almost impossible to avoid tax on it. The tricks that people did in the seventies, eighties, even the nineties, don't work anymore, their likely to get you into a lot of trouble and people know this. So, sure, you can argue for the top rate should be 45 or 50%, but fundamentally those people in that first category are paying quite a lot of tax already.

Then there's a second category, which is people who are truly self-employed, very successful businessmen say, and as Helen says, they have the ability to take dividends, to time the dividends, which is important, to take capital gains taxed at a much lower rate, and then this is the icing on the cake, if you've just created a billion pound business and you're going to sell it, you have the ability to skedaddle off to Monaco, then sell it, and pay no capital gains. And whenever you see people, successful businesspeople who’ve moved to Monaco, that's normally what they're doing. So that second category pay tax on a completely different basis than the first category, and we shouldn't confuse the two.

And then there's the third category which is non-doms who live in another world entirely, and we should probably talk about them more later. But so, I would try, if you let us Paul to spend as little time as we can on that first category, because I think they’re taxed and they're pretty easily understood in a more or less sensible way already. It's the other two categories where the problems lie.

Paul Johnson

Okay, so I think the I think the broad message so far is that we should actually love the bankers perhaps a little bit more than we, than we do because they pay the tax, not because they're lovely people, but because they've got absolutely, they've got very little choice about it, and we should get rather more upset about these other categories of people, who have got much clearer ways of not paying tax on what might look like income but isn't treated like income in the same way that earnings are. So perhaps, Dan, you could just say a little bit more about that issue around, I mean you mentioned dividends and taking them as income and you mentioned capital gains, so, before we get on to the skedaddling to Monaco and the non-doms and all of that, could you just say a little bit more about what is it about the way that we tax dividends and capital gains which allows lower taxes to be paid?

Dan Neidle

So, if you're an employee, a highly paid employee, you are paying tax at a marginal rate of 45%, in other words, every additional pound you're getting of income, you're paying 45% of income tax. And you have 2% of employee National Insurance, and something you never see but is still important, your employer is paying 13.8% of employer National Insurance. And all the evidence is in the long term, that's coming off your pay packet because if they didn't have to do that, they'd use the money to pay employees more. So, pull all that together and you've got an effective tax rate in in the mid 50%s for employees, people receiving salary.

If you're getting dividends, things are different. The rate is lower, the marginal rate is 39.35% very catchy. That's less important than the fact there's no National Insurance, so that's a potentially huge saving, all those 13.8%s, and 2%s add up. That, however, pales into insignificance when you get into capital gains, so capital gains, the main rate is 20%. So, if you have the ability to take something that is really your income, and make it into a capital gain, which if it's your business is pretty easy, then you are halving your rate of tax.

Paul Johnson

And it's easy because you can, as it were, set up a company, keep the money in there, and at the end in some way sell the company, take the money out having only pay capital gains, is that in in very Noddy terms, is that broadly how it works?

Dan Neidle

Yes, there's sometimes things you can do which don't involve selling the company, but at its simplest, yes, it involves selling company.

Paul Johnson

So, Helen, are there any economic excuses for this? I mean, I mean start with the lower rate of tax on dividends. I mean, why on Earth do we charge 39.35% and not the standard 45%? I mean ignore it, let’s ignore the whole sort of capital gains and National Insurance point at the moment, what, what's the, what's the rationale?

Helen Miller

You know, big picture, it's very hard to justify at the margin why different source of income get taxed differently. But I think there is something genuinely different about capital income. So, if you think about someone who's got, is running a genuine business, so ignore anything that's really artificial, just you know, you really did set up a new business and you really did, you know, you bought some machines, you had a new idea, you did something that was real. Then some of the returns you're getting, are the returns to that investment, and it could be that, you know, you borrowed for the bank, you made this investment, you had to pay the bank some interest, some of the returns might reflect inflation as well, as well as big profits, and that does mean that returns to capital investment are different to just returns to wages, to labour. You know, there's a kind of a trade-off there, if you have higher tax rates, you can discourage some investment.

I think the problem we've got into in the UK and actually in most countries, is that policymakers are trying to use the tax rate to do two things. So, on the one hand, you want a higher rate so that you don't encourage people to do these funny shifting things and to, you know, to get lower tax rate. But on the other hand, you want a lower rate to not discourage savings and investment. The sort of the basic way around that is to design the tax base, so things like, you know, giving allowance for inflationary gains, for example, to ensure that you don't discourage investments, and then you can have higher rates. So, I think the question, if you don't have a tax base that's sensible, then one reason to have a slightly lower rate is to try to stop the tax being so damaging to investment. If you sorted out the tax base, however, I think that that that rationale disappears, and I think there's a very good case to having rates that are all the same across, you know, however way you earned your money, you've got the same overall tax rate. So, I think you know there's, the best you can rationale for it currently is that our tax base doesn't work very well.

Paul Johnson

And Dan, in your experience, to what extent are there lots of people for whom this is appropriate? Because in Helens words, you know, these are, really are people who have been putting lots of investment in, they've had cost, you know, they have to take account of inflation, and to what extent is this really, you know, it's called self-employment income, but it's basically the same stuff as you and I, or at least me and Helen are getting?

Dan Neidle

There are absolutely people in that position, and I think they'd be in a satisfactory position if the rate was higher, but we, we, we had an indexation allowance, so this is some ridiculous Utopian dream, this is something we had in the UK. Nigel Lawson consciously raised the capital gains rate to the same with the income tax rate because he understood this point, and there was an indexation allowance, then a series of well-intentioned but badly thought through - seems a bit harsh - but well-intentioned but it didn't end well changes by the Labour government.

Paul Johnson

I think badly thought through is rather generous there.

Dan Neidle

They, they, they flip-flopped the CGT system so many times that if I put ten types of people in the room and ask them to write down all the changes, they would miss at least three, and that ended up where we are now. So, I would just turn back time and go back to when Nigel Lawson had it, he, he knew what he was doing, it was sensible. The difficulty we have is that if we have a CGT rate which is justified by sense of economics, then that will be messed up by the lawyers and the accountants because they, the benefit won't just go to the people we wanted it to go to, it will go to everyone. Can I confess some tax avoidance, can I, can I confess personal tax avoidance here? So, a while ago I was looking at you in investing some of my retirement nest egg in a fund, and I was deciding between two funds, and one of those funds was an income fund where it pays out dividends, and the other, which would likely have a very similar return, was a growth fund, would pay out very, very few dividends, and you'd get a capital gain. When I was deciding between those two, what drove my decision? Well, I would be weird, possibly even inhuman if I wasn't driven by the fact that the tax would be twice on one than on the other. And that's a distortion that is created by having a lower capital gains tax rate, there's no economic justification for it at all. You can't in practise just give a low rate to the good guys and not give it to the bad people like me who are responding to the same incentives.

Helen Miller

And that’s exactly, it's a great way of highlighting exactly the problem when governments wants to incentivise some things, entrepreneurship, risk taking, investment, but they do it in this very clumsy way of using tax rates, everyone gets the lower tax rates, everyone responds to it, not just by doing more investment, but by paying themselves dividends rather than a salary, or taking capital gains, naturally, it's not, it's not even a particularly exotic thing to do, or it's very obvious thing to do. And the way to get around that is if you want to have things like investment, you target that very specifically through investment allowances or things that are targeted at the activity that you want, rather these very broad-brush policies of you know, lower capital gains tax rates for everyone that has capital gains. I think it's a mistake to use tax rates in that way.

Paul Johnson

So, the, and Dan, I completely agree with your conclusion, I mean the simplest thing to do at the moment on capital gains, is to go back to where we were in 1997, which is to tax capital gains at the same rate as you tax income, but only capital gains which are real, in other words, not just inflationary capital gains. And that would, do we have any sense of scale here? I mean, how much - would this raise lots of money? Or, perhaps more pertinently, how much behaviour do we think this would change? Or is this, is this, is this in the kind of area where we know it's a good thing, but it's very difficult to put any kind of scale on it.

Dan Neidle

So, I've done a calculation on this, looking at the different types of property that are subject to gain, and now because the systems a mess, there's about five different ways capital gains can apply. But I put all that together, shook it around, and came out with an estimate of eight billion of additional revenues on a static analysis, i.e. assuming behaviour doesn't change. Good behaviour change, well, fortunately, we've got a brilliant natural experiment of this because all the changes that have been made in the last thirty years, you can look at what they did to the volumes of gains. What did they do to people's decisions whether to sell or not? And what you see each time is a big bump because people immediately react and either accelerate or hold back their business decisions, but then not much changes. So, I conclude from this that actually the dynamic result would not be very different from that eight billion static result.

Helen Miller

I think it's worth saying as well, I think it would really depend on exactly what policymakers did. So, I think if you just do small tweaks to capital gains rates, you're talking small numbers, and the problem is that people can just shift again how they get their income. So, a nice simple example, if the government put up capital gains tax rates on business owners by twenty percentage points, but left capital gains at death like you were talking about earlier, Paul, people would just delay a lot of those gains and pass them on in inheritance, so, that that would be a problem. I think the the the more radical the reform you do, so if you change the treatment of all capital gains and dividends and you stop people being able to shift across different tax bases to avoid taxes, then you can get more money, and we could, you know, debate whether it's going to be how many billions, in my sense also is that it would be billions, we're not talking about many tens of billions, it’s not going to pay for the NHS, but it's, it's not, it's, you know, it's non-trivial sums. But I think it really will depend on - I think the government needs something really quite large to get significant sums, not just fiddle around the edges with a, with a, with a few rate changes.

Dan Neidle

The other thing you need to do is credibly make the changes long term. If people think the government's going to fall next week, people think there's going to be another seventeen changes in the next two finance acts, then people are going to be deferring their, their gains and expectation of that. I would, I'd like this rule tax policy, whichever new government comes in after the next election, should make it’s big, make its big changes in the first budget and say, “we are not going to fiddle with this again during the life of this Parliament,” is that deluded of me to hope that could happen, Paul?

Paul Johnson

Well, it's optimistic of you, Dan.

Dan Neidle

I like being optimistic.

Paul Johnson

Absolutely optimism is, is, is important in this game. Dan, is there anything special about private equity? Is there something we, we, it's worth speaking about there?

Dan Neidle

Yes. So, if you are a hedge fund manager, or you manage investments in a bank, what you're receiving is income, and your taxed on your little bit of the management fees, and I think at that 47% marginal rate, with probably National Insurance to boot. Private equity is structured in a unique way. The management executives take a share in the fund, they buy that share for essentially nothing, and if the fund is successful, they then get a very, very large return. But because that return is a gain on their interest in the fund, it's historically been taxed as a capital gain. Meaning that their quote unquote “income”, isn't taxed at 47% at all, it's taxed at a special rate of 28%, which I think a lot of people would regard as unfair. I guess there's two reasons to see it as unfair, one is that it's a lot lower rate than most employed people pay on their earnings, and these aren't really entrepreneurs, they're fund managers, so why are we doing that? Second, there's a horizontal equity problem, why are some types of fund managers paying lower tax than other types of fund managers?

Paul Johnson

Is there any simple way of getting around this other than aligning the rates? Is there a regulatory answer or is it the answer we often come up with which is if you've got a daft tax system which taxes similar things differently, people are always going to find ways of doing this sort of thing?

Dan Neidle

Align the rates, it's not complicated. There is actually an alternative which will be discussed in a British tax review paper, which I wrote which is coming out in a couple of weeks time, which I think will surprise people. But I'm not going to talk about it more now.

Paul Johnson

My goodness me, well, all listeners please subscribe to the British Tax Review immediately to find out what surprises Dan is going to spring on us. So, we, we've gone through, as it were, what most of us are still actually feel slightly esoteric things, you know those of us who you know just get a pay check every month, but there are much more esoteric things that one can do, or there are strange phrases like “carried interest,” which sometimes get used, and you've mentioned skedaddling to Monaco, Dan. Can you just take us through two or three of the, the sort of the more esoteric ways in which the super-rich managed to pay less than what you might think of as their fair share?

Dan Neidle

So, skedaddling to Monaco is so simple, I don't think it gets to be described as esoteric. I, I set up a company, the company is very successful, it's worth a billion pounds, well done me, I get a sale agreed with a private equity firm, the sale is going to complete in, say, 7th of April 2023, on the 4th or 5th of April, I move to Monaco and I'm going to stay there for a few years, or at least not be in the UK for a few years, ta-da, that billion pounds of gain, even though I made it while I was in the UK, completely in the UK for all of that, the UK gets to tax none of it. And the reason is, that we in the UK don't have an exit tax, if you leave the UK owning property which is sitting at a large gain, the UK gives up any hope of taxing it, and that is a policy choice, and I think a bad one.

Paul Johnson

You say we don't have an exit tax, do other countries have an exit tax?

Dan Neidle

The US has an exit tax, that they'll keep taxing you while you have your citizenship, if you give up your citizenship, you get an exit tax. In Europe, things are complicated because EU law makes it very hard, perhaps impossible, to have effective exit taxes, quite a few countries try, it's difficult for them and they run the risk of legal challenge, but here we've got the sunny out plans of Brexit means that the UK has-

Paul Johnson

I was going to say this sounds like a Brexit opportunity to me.

Dan Neidle

It, it is a Brexit opportunity to have an exit tax the European courts cannot challenge. And you make it fair, you say if you're moving not to Monaco, but to France, you're going be taxed on the gain anyway, well, then you know good luck. But if you're moving somewhere which is going to tax the gain less than the UK, it's only fair the UK gets some tax, because this is, this is Money that you realistically earned while in the UK.

Paul Johnson

Okay, excellent, well, that's one answer. Anymore tax advice for the super-rich?

Dan Neidle

Right, I think the main things are are the capital gains rate, and the exit tax, I think most normal British super rich, the days of easy tax avoidance are gone. Lots of people were, whenever I read about tax say in the newspaper column, there’d be comments underneath that say yes, people just put money into offshore trusts, people can open a bank account in the Isle of Man, these things don't work anymore, trusts for British people are generally a tax disaster. If I open an Isle of Man account tomorrow and put some money in it, then that bank's going to report on the account to HMRC at the end of the year. So, the days of the British super rich being able to avoid tax through tricks are, I think, largely gone.

Paul Johnson

Ah, so some good news.

Dan Neidle

Yeah, the tax avoidance schemes that we see reported, recent ones, tend not to be the super rich, they tend to be people on pretty modest income, even nurses, agency workers who are essentially hoodwinked by tax boutiques who sell them tax schemes that would never work, and would never be brought by anyone with serious money and serious advisers. And that's where the tax avoidance world really is now. And it's more fraud than avoidance. That's not, I think, going on with the British super rich, and there, there's really a small number of issues which we should be able to fix.

Paul Johnson

Okay, well, that's that's good to hear. So, so, so, so the issues are the big ones, they're the sort of, you know treatment of capital gains, it's a bit of National Insurance here, there's the, there's the need for an exit tax if you're leaving with a whole pile of money. I mentioned the words carried interest, I honestly don't understand what that means, is that something we ought to be talking about?

Dan Neidle

Well, we have, we, we already have. That that, that's the private, private equity, the private equity thing that the private equity managers hold in their fund, that gives them the big return, and is taxed at only 28%, that's often called carried interest. Why it's called that when nothing is carried, and it's not interest, I don't know, but that's the term.

Paul Johnson

Okay, that that explains my confusion, that's, that's very good to hear. Before we move to to non-doms, I mean I, I just want to very briefly and Helen, you mentioned this at the beginning, that some of these very high income people not paying National Insurance, are these curious people that Dan used to be, who are partners in professional services firms, could you just very briefly, Helen explain what that's all about?

Helen Miller

And I think Dan set this out earlier, I mean, it's really a lot about employer National Insurance. So, if work happens through an employment contract, then as Dan said earlier you pay income tax and employee National Insurance, which is the bit that you and I are see on our pay checks. But then the employer pays employer's National Insurance contributions, and the difference is that the self-employed, and that includes these big partnerships of accountants and lawyers and the like, they get the income tax treatment as the same, and they get some self-employed national insurance contributions at a slightly lower rate, but there's no equivalent of employer's National Insurance contributions. Now we can have some discussion about the incidence of that, I think as Dan said, in the long run, you should think about that as I think probably as coming off of people's wages. But actually, regardless of who's really paying there, it gives a big incentive for people to structure themselves in a way that avoids that employer National Insurance contribution. So, you know, I guess people who are lawyers could come together and set up a company and pay themselves salaries and paying national insurance contributions as if they were employees, that would be, come with a big tax bill, they don't need to do that, and they don't. But it it's, as I say its employer national insurance, for that particular group that's making a big difference.

Dan Neidle

Yeah, and the difference ends up that the bankers effective rate of tax, if we take the employer National Insurance into account, is about 52%, the lawyers effective rate is 47%.

Paul Johnson

Poor old bankers. Non doms, Dan, this is something that gets bandied about quite a lot. We hear occasionally people in the news, who are, turn out to be non-doms. What is a non-dom, and how many are there and how much tax are they not paying?

Dan Neidle

So, I am a UK resident, UK domiciled individual, that means that I am subject to UK tax on my worldwide income and gains. If I put money in a Barclays account on the High Street, I pay tax on the interest, if I put money in a Cayman Islands account, I am taxed on the interest, easy. But, if I am a foreigner, born abroad, I come to live in the UK, but I intend to go back eventually, I have a funny status, I'm still a UK tax resident, because I'm living in the UK, but my domicile, my tax home if you like, is in the country I came from. Many countries have systems that try to encourage new visitors by giving them a favourable tax treatment for the first few years, the UK's is weird in almost every aspect.

So, the first thing that's weird is that where your domicile is, is a complicated question, not set out in any legislation, but born of 200 years of case law driven in part by who, where your father comes from, sorry, mothers, you don't count, that's very odd. Second oddity is once they arrive in the UK, they don't get an exemption from UK tax, they're still tax on their property in the UK, but they're not taxed on their foreign income and gains. So, a non-Dom like me is still taxed if they put money in the Halifax on the High Street, they're not taxed on their Cayman Islands bank account. And the third weird thing, if they bring that money in the Cayman Islands into the UK, it's called a remittance, and it is taxable.

So, put all this together what does it mean? It means that if you are a normal middle-class person and a doctor, dentist, baker, lawyer coming to the UK, then you probably don't find these rules very useful, because you probably don't have an offshore bank account, you probably don't want to spend time and money on advisors managing your remittances, these payments into the UK to, to get a good tax outcome, and the rules aren't very useful to you. If, on the other hand, you're a gazillionaire, an oligarch, and oil sheik, something like that, and these rules are wonderful, because with a bit of planning you can spend all of your time in the UK, keep the bulk of your wealth offshore, and do it in a form by careful management of these complex remittance rules, so you pay perhaps zero tax, in the UK. And you might even, if it's zero tax, you don't even have to file a tax return, so HMRC don't even know who you are.

Paul Johnson

And you say that as if actually most other countries do it more sensibly.

Dan Neidle

Most other countries do it more sensibly, the US doesn't do anything at all, you come to the US, they think you're damn lucky and they tax you, many countries in Europe, say, say, Portugal have an exemption which lasts for a certain number of years. And if I ruled the world, I would have an exemption for a limited number of years, you can debate for there, four, five, I'd have it a complete exemption, no, silly remittance rules, I’d have no two-hundred-year-old concept of domicile, I’d have a simple statutory test. And I'd cap the benefit at some generous but sensible figure, £5 million perhaps, so that it's really useful to even upper middle-class people moving to the UK, but it can't be abused by oligarchs. So that's what I do if I ruled the world, but we have the opposite system, we have a system which is a very little use to normal people, but absurdly generous to super wealthy.

Paul Johnson

And is that, I mean, I suppose one of the responses to that might be, let me be clear, this is not my response, but I'm putting a possible response, it’s actually, rather good we get these sheiks and oligarchs here, they bring awful lot of money with them, they spend an enormous amount of money and actually, you know, this is a deliberate attempt to grow the economy by having these massively rich people here and not in France, and spending money here, and not in France.

Dan Neidle

Do they? I mean this this is a question of economics not tax law, and I hesitate to even express a view. So, I'll ask it as a question but, it, it could be said that when someone of that level of wealth comes into the UK, they are inflating asset prices, they are diverting the economy into areas where, from a big picture we would rather that it was not diverted, when we, when we have close to full employment, the economy as a whole has a kind of choice, whether we want people in high end fashion retailers, or if we want people being doctors, computer programmers and so forth, and the presence of the very wealthy may distort us towards the fashion retailers. Paul, this is very much your territory rather than mine, but I don't think it's a slam dunk at all when you can just say, ah, they, they bring lots of money into the UK, that's a good thing, full stop.

Paul Johnson

No, no, I entirely agree with you. Helen, did you have anything to add on this particular topic?

Helen Miller

One thing I was going to flag is, one we haven't talked about very much evasion, by which I just mean, you know, not just, not just using the rules to sort of manipulate things and sort of legally get away with tax, but just outright, you know, not paying tax that you should. Now there's not great data on this, at all, so, we're a little bit in the dark as to how much evasion goes on. But yeah, there have been leaks from things like Panama Papers and some academics have done some work on this, and you can sort of do some back envelope calculations that says, how much income at the top are we missing cause evasion. And I wouldn't put much stock in these numbers, it's very back of the envelope, but you can do some things that say you might be missing something like 8% of income for the top through evasion. The reason I bring this up now in relation to the non-doms is because you know, although there's a huge uncertainty about how much we're missing at the top through straight evasion, we won't necessarily be able to tax that income, so you could you could find that there's quite a lot of income at the top, but if it's the income of non-doms, they're not necessarily evading UK taxes. So, there might be income up there, but if we carry on having this non-dom regime, it isn't necessarily income that currently we would get back into the UK. So, I think sometimes you see newspaper stories about these big sums, they're not big sums that the UK are necessarily trying too tax. Now as Dan set out, we could, in more cases, if we could find some more income, and we changed our rules, but currently there’s a lot of offshore income that we're not trying to tax.

Dan Neidle

But I think, generally, and it's a politically sensitive area to touch, but generally tax evasion is not the super-rich. Tax evasion is us, it's every time we pay in cash to a plumber to, to get a cheaper job, and HMRC's tax gap stats bear that out. That almost half of tax evasion is small businesses, and another 15% or so is criminals deliberately evading tax, and that the wealthy are only 5% of tax evasion. So yes, there, there is likely significant evasion in the non-dom world, just because it's the world that HMRC has so little visibility on. But for the normal rich, why would you evade when it's so easy not to pay the tax?

Paul Johnson

So, we shouldn't get our, we shouldn't get hot under the collar about the Panama Papers?

Dan Neidle

The Panama Papers somewhat annoyed a lot of tax people because of the lack of obvious wrongdoing that they showed, it's easy to point at something offshore and go, oh offshore and run around as if that proves wrongdoing. Sometimes it does, sometimes it shows that there are problems in the law that need to be changed like non-doms, like the way in which non-doms in particular structure to avoid inheritance tax and income tax, yes. But I don't think the Panama Papers came close to showing there was widespread use of offshore for evasion by UK residents, or indeed perhaps any.

Paul Johnson

And that's certainly not the popular perception, I think it would be fair to say. We, we we probably ought to start drawing to a close, I mean, we, we don't have time, unfortunately, I think to talk about inheritance tax, which is another area where it remains the case as my predecessor but three, I think, John Kay wrote several decades ago, that inheritance tax is something that's easily avoided if you are healthy, wealthy and well advised, and that, I'm afraid, remains the case. I think we might want to come back to another IFS Zooms In to talk about all of the problems with inheritance tax, but if you want to know how to avoid it, I think Dan has described it in three lines, and I'm sorry if I've got this wrong Dan, but I think you say, you sell some assets, buy some shares on the AIM stock market, live a couple of years and that's all you need to do, is that broadly right?

Dan Neidle

It is stupidly easy to not pay inheritance tax if you have liquid assets, if you are merely comfortably off, and your main asset is is your house and the money you need to live on and your pension, then you, you, you can't avoid inheritance tax. So, it's a very weird tax, which doesn't impact people on low incomes, heavily impacts people in the upper middle, and then again has very little impact on the very wealthy.

Paul Johnson

My blood pressure was going down as you were talking about the Panama Papers, it's gone right back up again as you talk about inheritance tax. Before we stop, have we got any sense of scale here? I mean, how, how much could we get from you know, through sensible reforms, plausible reforms to National Insurance rules, around self-employment, rules around capital gains tax, rules around non-doms? I mean not increasing the top rate of tax for most people, and if we take a reasonably sort of you know central or conservative estimate, are we talking small numbers of billions, tens of billions? I mean what, what, what could you do?

Helen Miller

I think it really is hard without talking about specifically what you would do because there's lots of things you just mentioned there. My sense is that there are things you could do, they're, you know, pretty big things, but achievable things you could do that would get you billions. I think it would be very, very difficult to get tens of billions, partly because we're talking about actually quite a small group, and even if some of them have lower tax rates, they're still quite a small group. So, I think there are things you could do that would get you billions.

I think it's also worth saying that revenue is not the only reason to care about changing these tax rates. Of course, it's a good reason and we should care about revenue. But there are other reasons like fairness, and Dan mentioned earlier, horizontal equity. So regardless of what you think about how much the rich should pay overall, if you've got two rich people who have the same incomes, and one pays a very different, lower tax rate, there's a horizontal equity issue there that I think is much harder to to get on board with. Obviously, this it also affects other, other taxes. So, at the moment, if the government wanted to raise the higher of income tax, it wouldn't raise very much revenue. Why is that? Well, one of the reasons is people can switch their incomes into other, these more lightly taxed forms. So, all these low tax rates are impeding the government’s ability to raise other taxes. And of course, all these tax rates are driving decisions, they're driving people to move to Monaco, to sell their companies in different ways, to change how they operate, and that's not what we want people doing. We want people making good, economically sensible decisions, not decisions driven by tax. So, we should care about the revenue, but I think we should make reforms for many more reasons than just for the money that comes into the treasury.

Paul Johnson

Dan, your view? You, you've just sent something in the in, in the chat saying what about a wealth tax? I think we've got time to talk about that in great detail, but did you-?

Dan Neidle

Can we do one sentence?

Paul Johnson

You do, you can certainly do one sentence.

Dan Neidle

So, I I think broadly there, there are only two types of wealth tax, the first is the type that produces very large numbers, gets newspaper headlines, and is typically promoted by NGOs with no detail of how it actually works, and those taxes are not real, and you would not actually raise much money once you'd be done with the forty-five exemptions you’d need to make them palatable. So, there are unreal populist proposals.

Then there are the, then there's the, and I think it's a singular, very sensible wealth tax proposal from Aaron Advani and the others around the Wealth Tax Commission, which is a proposal for a one-off retrospective wealth tax, which would work but has elements which I think are politically impossible, like being retrospective, like applying to people's houses, like applying to pensions. So, pick your poison, have a wealth tax that works and is unpopular, or wealth tax which is, which is popular but doesn't work. And those are the only two wealth taxes out.

Paul Johnson

I think I broadly agree, the one that you describe as working is essentially what others would describe as expropriating the middle class of their housing and pension wealth, which I think is why you say it would be unpalatable.

Dan Neidle

Yeah, people often point to very large figures of total UK wealth, forgetting that about three quarters of it is houses and pensions.

Paul Johnson

Absolutely. And it's the, it's the people for whom they have lots of wealth in other forms, that it's easy to avoid all sorts of the taxes we've been talking about, including inheritance tax.

Dan Neidle

So, if we want to tax wealth, there are many better ways to do it than a wealth tax.

Helen Miller

It's interesting, right? I think when you get news for the headlines, people often end up talking about either wealth taxes, like trying to think of new instruments to tax people, or we talk about, you know, offshore stuff, and like the exotic ends of this. Actually, a lot of problems we've talked about today are hiding in plain sight, it's a dividend tax rate, it’s the capital gains tax treatment, these are things that aren't big, exotic need new solutions, they’re just we need to get them fixing, sort of plain vanilla problems.

Dan Neidle

But it's so boring, Helen. Life would be so much easier and more fun if we could have a magic tax that solved our problems and doesn't involve making small changes to existing taxes. It it's more fun, it's easier, it gets better headlines, the only small problem is it doesn't.

Paul Johnson

I mean there there's a, there's a whole series of interesting questions about why the, in goodness name, governments haven't done anything about this. Or I mean you're, you're right, Dan, I mean, they've done a lot to close some of the sort of more esoteric or obvious avoidance routes, but they've not done - I mean, they've made, as you said over the last twenty-five years, they’ve made capital gains tax considerably worse, and they've done very little on non-doms, and they’ve done absolutely nothing, really, on inheritance tax in terms of those easy things that that you could do.

So, they're, they're, these are big and, and in terms of wealth, you know there's a whole series of issues with capital gains tax, with council tax, with inheritance tax where you could be much more effective by doing much more boring things than trying to introduce a whole new wealth tax. Unfortunately, we don't have time for the political economy of all of this.

But I think I do, I do end on a feeling, in a way slightly more upbeat than I thought I'd feel at the beginning of this discussion. Yes, the world at the moment is, is seriously unfair in the way that we treat a particular group of people. I'm feeling a little bit warmer towards the bankers, and a little bit less warm towards the private equity managers than I was an hour or so ago. But it seemed really very straightforward, some of the things that one could do. Dan, you made it feel so straightforward all the way through, and now you're sort of pulling a face as if it's not going to be straightforward at all. But the, the, the alignment of capital gains tax rates with, with income tax rates, with, with, with a deduction for inflation, seems like an obvious thing to do. Some of these exit rules, if you're skedaddling to Monaco seems like an obvious thing to do. Obviously, some of the issues around the self-employed and National Insurance are more difficult for all sorts of reasons, but you could certainly make progress in that direction. One needs to think about the taxation of dividends. There are clear, better examples across the world of how we could tax non-doms.

So, in terms of a a set of things to get on with, in a Finance Bill over the next year or two, you'd think you could certainly make some pretty major improvements on the system that we've got at the moment, which does suggest that you know there is scope for another discussion, as I was saying, but not today about why on Earth some of these things haven't happened. But at this stage I will draw the absolutely fascinating conversation to a close. I hope some of what you've heard today hasn't made you too angry, and has actually made you hopeful about the possibilities of change. I, I should also say, one of the things that Helen said right at the beginning, the scale of our dependence on these very rich people in terms of the tax that they bring in, is also a slightly frightening thing, a lot of them as some work by colleagues of ours have shown, are foreign born, and we can do things to frighten them away and, we would lose quite a lot of tax revenue if we did that. So, we are both very dependent on these people, but we also are treating some of them, at least very, very unduly generously.

I will stop there, thank you very much for listening to this episode of The IFS Zooms In. To see more of our work visit www.ifs.org.uk, and if you want to see more of what Dan Neidle has been doing, do go to taxpolicy.org.uk, which is his relatively new outfit which has done lots of incredibly interesting work on a lot of the issues we've been discussing today. And to further support us, do please consider becoming a member for as little as £5 a month, you can find more in the episode description. See you next time.