Labour’s Double Whammy On Capital Incomes

Sure, of course, bein’ for de workers ‘n’ all dat, Labour’s going to try to screw the capitalists. But we really should ask them to think, even just a little bit, no?

So, they’ve got a few tax changes they want to make. Which I explained to my 86 year old, non-financially trained, Mum. I’f got about half way through when she shouted “But that doesn’t work!”

Quite so. And if this can be seen by my 86 year old, non-financially trained, Mum, why can’t the assembled intellects of the Labour Party grasp it?

The problem here is that they are doing two different tax changes. Firstly, the rate of corporation tax is to go back up to 26%. Well, OK. As you wish really.

Then they also say that capital incomes should be taxed at the same rate as labour ones. Well, OK, as you wish.

But they fail to understand how those two interact with each other. Because in the English system the corporation tax is paid on the profits before they become the dividends paid to the shareholders. Then they’re taxed again, or at least liable to taxation again, in order that capital incomes do in fact pay something similar to labour incomes.

So, if you’re a higher rate taxpayer you collect your dividends and then you pay more income tax upon them – to add onto the corporation tax already paid so that you are paying something close to your marginal income tax rate.

Conceptually it doesn’t really matter very much whether you tax this capital income stream at the level of the company, or the individual. But conceptually it is true that we need to add up all the bits of tax to get to that total tax rate.

No, we can’t say that the companies pay the one tax, the individuals the other. After, Saez and Zucman tell us that the shareholders bear the full burden of corporate taxation. So, they’re bearing the full burden then, aren’t they?

So, these two tax changes interact. We now have 26% corporation tax on a profit. Plus the recipient is now to pay the top 50% rate on the dividends received? Note what’s just happened here. We’ve got a system where capital incomes are taxed more than labour incomes. When theory tells us they should be more lightly taxed anyway.

Yet the insistence is, from Labour, that they should be taxed equally. Well, OK, but that’s largely what the current system, by design, actually does.

My Ol’ Mum can see this. Why can’t Labour?

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But if we required that corporations pay all the tax on that income stream, the only thing lefties would see is that the individual end-recipients were “getting away with something,” as those do who hold tax-exempt government bonds; such as accepting lower-than-market returns or putting their money into designated projects.

Raising money to run the government is not the goal. Administering discomfort is.