Taxing times ahead both economically and politically - Peter Shand

Tax is a word that makes people wince. It brings an intrinsic sense of pain and unfairness, much like toothache. It is perhaps a difficult ‘sell’ to promote it as a key solution to current economic difficulties. You won’t find many gluing themselves to busy roads demanding government hits them harder with higher personal taxes.

The middle ground in political thinking, often the compromise allowing everyone to claim victory, is a rather empty, lonely place. We are, in so many aspects of life, in the grip of extremes of opinion and polarised views.

As I write this, Chancellor Jeremy Hunt will, figuratively, be putting pen to paper for the delayed autumn budget. By the time you read this, we’ll know the outcomes.

Budgets are traditionally a time for mild generosity, for governments to be seen to be giving away. This one will probably be more about taking. The severity of that taking (and its targets) are subject of fierce debate as commentators ponder what the balance between spending cuts and tax hikes will look like.

Peter Shand is a Partner, Murray Beith Murray

Whatever Mr Hunt has announced, both he and the Prime Minister will hope measures taken will fill the UK’s fiscal black hole.

The Bank of England is also in on the act, having just raised interest rates to three per cent (the biggest increase in 30-odd years) to try to combat soaring inflation. The impact? More expensive borrowing and predictions of the longest recession in a century.

Looking back can often help us find parallels in how turbulent economic times were handled. The UK only paid off its World War I debts in 2015, having borrowed heavily. Part of its fundraising came from a sharp increase in taxes, broadening the base for lower middle-classes and increasing rates for the wealthiest.

In the US, Roosevelt’s New Deal led to an increase in taxes to generate funds. The Revenue Act of 1935 heralded the arrival of the Wealth Tax that took 75 per cent of the highest incomes. However, many wealthy people used loopholes to avoid tax and the resulting Revenue Act of 1937 cracked down on this tax evasion. Sound familiar?

Today, people and their wealth are more fluid and capable of moving to more benign jurisdictions. Economic flight might be seen as morally questionable, but a professional adviser’s role is to mitigate tax within the rules. Many will shudder at the memory of the UK’s top tax rate of 83 per cent on earned income in the mid-70s. No doubt private client lawyers earned their crust then, helping protect assets by responding appropriately to the wider economic environment.

Recent figures on the UK tax gap, the difference between what should be and what is actually collected, make sobering reading. In 20/21 the figure stood at £32 billion – almost half from tax fraud.

HMRC’s report highlighted the biggest tax gap culprits as small businesses, with the criminal fraternity a distant second. Interestingly, wealthy individuals had the smallest tax gap by customer group, something legitimate tax advisers should trumpet as they strive to keep clients on the right side of the debate and the law.

We’re in an economic pickle and, in years to come, I wonder how historians will view the 2020s. I suspect it will be seen as a period of great division, in political and economic senses. Little wonder, then, that the “2022 World Stock Market Decline” page on Wikipedia, has already been chronicled as a chapter in its own right.

Peter Shand is a Partner, Murray Beith Murray