Moving vans have been spotted outside Downing Street as the scandal involving the tax affairs of the Chancellor’s wife continues to develop. As a result of her ‘non-domicile’ status, it is estimated that Akshata Murty avoided £2.1 million per year in UK tax, based on dividend income of £11.6 million she received through the £700 million of shares she owns in her father’s India-based IT company Infosys.
To claim non-domicile status costs £30,000 per annum—a trivial sum for the ultra-rich, but enough to make it too expensive for ordinary people for it to be worth their while. It is therefore a clear example of how the tax system is designed to benefit the rich at the expense of everyone else. Economist Jo Mitchell estimates that, in light of Sunak’s National Insurance Contributions hike in the spring budget, Murty’s tax avoidance represents the equivalent of a £500 transfer from 9000 median income households to the Chancellor’s household—meaning that for 9000 households, the NIC increases fund Rishi Sunak’s family, not, as claimed, the country’s health and social care.
Even if Murty were to pay tax on her dividends, it would be at a lower rate than people who earn income through wages or salaries. The rate paid on dividends is linked to the income tax bands. Where earnings from work over £12,570 are taxed at 20%, dividends are taxed at just 8.75%; where earnings from work over £50,271 are taxed at 40%, dividends over that amount are taxed at just 33.75%. Similarly, unearned income from capital gains, which arises from the sale of second homes or speculating on stock market, is taxed at rates between 10%-28%, with a tax-free annual allowance of £12,300. No national insurance is levied on these gains.
By contrast, in the Spring Budget 2021, the Chancellor announced the income tax brackets would freeze at their current level until 2026. This means that as wages rise in an attempt to keep up with the increased cost of living, people will be pushed into higher tax brackets—a phenomenon known as ‘fiscal drag’. The IFS estimates this ‘drag’ brought in £12.5 billion in additional tax revenue in 2021-22 alone. Despite the Chancellor back-tracking on his proposed NIC hike by raising the lower threshold, UK families currently face the highest taxes since the 1940s. This has contributed to a 2.2% fall in real household disposable incomes: the largest fall in living standards since records began 66 years ago.
Tax Relief for the Wealthy, Tax Hikes for Workers
The system’s unabashed bias towards tax relief for the wealthy and tax hikes for workers is based on a misguided belief in the theory of ‘trickle-down’ economics, which stipulates that tax cuts for the rich and corporations will lead to higher levels of investment and therefore overall prosperity. And despite substantial evidence disproving this theory, the Chancellor is committed to plowing ahead.
For example, in last year’s spring budget, Sunak announced a 130% ‘super-deduction’ allowance for business investment in equipment, lasting until 2023. In effect, this allowance means a 25p deduction in a company’s tax bill for every £1 invested. This came alongside an increase in the Annual Investment Allowance (the amount of investment companies can deduct from their profits for tax purposes) from £200,000 to £1 million from 1 January 2019 to 31 March 2023. Despite these generous tax breaks, the OBR estimates the effects will be short-term, simply encouraging businesses to bring planned investment forward from future years.
Another failed policy that attempts to encourage investment is research and development (R&D) credits. R&D claims allow companies to deduct investments in ‘innovative projects in science and technology’. The loose definitions surrounding what constitutes R&D have made it subject to huge amounts of fraud: the cost of R&D claims has grown by over 240% over the past four years, far outstripping the rate of actual R&D expenditure reported by the Office for National Statistics.
HMRC estimates that the amount lost to fraudulent or ‘incorrect’ R&D claims in 2020-21 was £336 million, a £25 million increase from 2019-20. While Sunak claims that he wants to end a system that funds ‘billions of pounds of R&D that isn’t even happening in the UK’, he has simultaneously extended reliefs to cover data purchases and cloud computing costs, creating further opportunities for exploitation. The easier it is for companies to claim expenses this way, the higher their profits are post-tax, which means more dividends for shareholders—like Sunak’s wife.
A Different Kind of Tax
As growth forecasts for the UK and global economy become increasingly bleak, the legitimacy upon which capitalism has rested for so long is beginning to crumble. In a world of low growth and rising wealth inequality, it is becoming clear that redistribution of resources from the wealthy to ordinary people is essential to sustain standards of living while mitigating environmental destruction caused by the conspicuous consumption of billionaire oligarchs.
Contrary to this, the government is giving tax advantages to the rich, enabling them to hoard wealth and squander it on ocean-polluting super yachts, while reducing the standard of living for ordinary people by raising taxes, cutting benefits, and freezing pensions. The purpose of these tax hikes on workers isn’t to raise revenue but to supress demand—therefore off-setting the reduced supply from global supply chain disruptions in an attempt to protect the investment returns of the rich.
If the Chancellor is serious about encouraging investment, he needs to strengthen collective bargaining rights to ensure workers have high enough wages to keep up the rising cost of goods and services. Historically, the factors that kept real wages high during periods of inflation were trade unions bargaining for pay increases. From 1974-81 trade union membership averaged 50% of all UK employees, falling to 36% by 1991. Today union membership is just 24% of all employees, concentrated mostly in the public sector. Never before has union density been so low in the face of such rampant inflation. There is no precedent to predict the impact this will have.
Rather than making it easier for the rich and the large businesses they own and profit from to lower their tax liabilities, the government should be ensuring the rich and their businesses are paying their fair share. In their 2019 manifesto, Labour proposed to abolish the Non-Dom status, ensuring that rich people residing in the UK, earning millions through dividends on overseas investments, would be have to pay their fair share of tax on that income. The importance of policies like these has never been clearer.
What is also is clear is that Rishi Sunak has a conflict of interest when it comes to making choices about who and how to tax—and that he has chosen to do it in ways that protect vastly wealthy people like himself and his family at the expense of everyone else.