The Tory Tax Problem May Be Britain’s, Too

and deems Zharwie's tax issue public. He joined Bloombergoli this week to wade in on the ongoing drama that's become something of a scandal in facts around in the Conservative Party chairman and whether he has been truthful about his tax affairs. And listening to Dan talking, you could draw the conclusion that he doesn't think Zahawi is being entirely truthful. And of course British Soon, AXT spokesman this week, has

declined to vouch for the former chancellor's honesty. But it's shot me yet another light, hasn't it on the deep connections between the Tory Party and the city of London, but also the enormous wealth of many of the people right at the top of the Conservatives. And this big problem right in the middle of the economic troubles that the country finds itself in, is causing a great, big

political headache for the Prime Minister. I'm David Merritt and this is In the City Plumberg's podcast, connecting you to the stories and the voices at the heart of the City of London. So this week the Tory Party is in term on again, this time about the tax affairs

a former chancellor, the deems a Harwi. And we've learned a lot about Mrs a Harwi's enormous wealth and the relatively small amount of tax he's paid on that, and perhaps he's quotes carelessness with filling out his tax return, something that I know is on everyone's mind as the

deadline loom. So we spoke with Professor A ruined Advanney, who studies tax systems around the world, how governments deal with wealth, and he's got some suggestions for how the government could better handle the very highly politically charged question. But first we spoke with our man in Westminster and the lord of all the WhatsApp chats groups amongst Tory MPs are very own Alex Wickham. Alex, thank you for coming back to in the City pleasure. Thank you for

having me. Have you done your tax return yet? I actually have the all the sort of little journalistic add ons all good. Yeah. I actually came into the office Loso. We came to do obviously, the deadlines looming. I thought I needed, I need to be undistracted, and it was added. You know, it's given an added piquancy. I think that

she is never a fun job. But the kind of the contrast between you know, all those boxes that say things like, you know, foreign investments, income from other sources all around the world, you know, no, no, no, no no, and you know, poultry amount of kind of interest given to me by my bank. And I just sort of sat there comparing this with the eye popping numbers of our form a chancer and thinking, well, I feel a little bit insignificant. Do you think people around the country

are feeling that as well? I think that is exactly exactly it. You know, regardless of the ins and outs of whether he's paid his taxes, whether he's in whether he's in trouble with the taxman, etcetera, etcetera, this his scale of this. It's just something that sums up one of the problems that the government has, which is if you're if you're a normal person, you look at the Deans of Hardway and you sort of go well, I mean, how can you have forgotten to pay three three million

pounds in taxes? How can you have been careless about that? As his statement his own statement says, I mean careless is oh yeah, you know I missed, like you say, ten pounds of interest off my off my taxmiit or something. We've obviously we've had the non dom raw over the prime minister's wife. We all know about his extensive wealth.

Is the woralth is prime minister we've had and then of course we've just had this issue about the former Prime minister Boris Johnson and the BBC chairman Richard Sharp alone for eight hundred thousand pounds to cover his I mean you know that sort of and a number that people won't be able to identify with. And so in terms of kind of how much you would need to live your life, it's more than a lot of people learned in their careers. So how much damage is all

of this doing out there in the country? Do you think in terms of the political fortunes of this government. I think quite a lot. I mean, on the one hand, you know, the tax of the private tax of hairs of cabinet ministers are quite technical, very technical, and so even we as journalists don't understand the ins and outs of them. We don't know the full details. Yet the Prime Minister doesn't. That's why he's you know, called this inquiry into the Deans are We. But it's the principle

that everybody can get. Everybody understands it. Like you say, if a normal person goes to the bank for a ten thousand pounds loan to do some home renovations or something, you know, compared to the money that Boris Johnson is talking you know, is talking about, and then and then certainly on on an even different level to that than than the demons of are We money. And there's nothing intrinsically wrong with being a rich person a and who's

been successful in business. It's great that we politics can attract successful business people into it to to you know, get the finest minds and all of that sort of thing. But the problem is when you've got the deems are Harway worth tens of millions of pounds having to explain to Rishi Sunac with his family worth hundreds of millions of pounds about you know, where this five million pounds

worth of tax has gone missing? It is just, you know, it just feeds into the native that the Tories just don't get it during a cost of in crisis, inflation, prices rising, all of this sort of thing. It just feeds into it. And everybody can understand that, and everybody can see, you know, ultimately they're not quite like us. But you know, to be fair, as you said, we

want to attract business people into politics. And that's just remind everyone that the Deems are Harry founded the polling company you gov went on to be enormously successful and influential still is in fact, you know, ironically, of course, I'm looking at a you gov poll. In your story, Alex, you wrote going the Tories are lagging a buy more than twenty points. But you know it's you guys who

are giving that information. But I think you know, the broader point here is that we do want successful people, or people who know how to run businesses and know how to create wealth and boost the economy running the government. So shouldn't we be a little bit more relaxed about some of the stuff. I mean, I think British voters historically they don't really go for the politics of envy.

You knows, if you look at the last hundred years of British political history, they haven't really elected many hardcore socialists. They haven't really you know, tried to soak the rich too much, you know, generally certainly compared to perhaps some other countries. But you know, you just feel that this is on a different scale, you know, and where it's landed in the political cycles. The timing, right, it's the timing.

Last time we chatted, I think, on in the city it was in the absolute height of the trust drama and we were taking bets about how long she was going to last. And we all know about the lettuce obviously, and I think she didn't even last out that day. But and you talk memorably about the I think the exploding head and vomit emojis on the on the tack

groups on what'sapp? What what sort of emojis are we seeing at the moment of people, how people really chronicling this on those all important WhatsApp groups that I mean, the mood and the Tory Party, let's be honest, is never good and it hasn't been for for years. But I mean it is true though that we're only a few months into is she seen next premiership. He would absolutely have hoped for a honeymoon period. He would have hoped for people to be saying, oh, come on, give

him a chance. He's only been in for five minutes. You know he needs to he needs to work out all works and you know have at least a couple of years before, you know, before we make it make a judgment on whether it's a good prime minister or not. But already Tory MP's are grumbling. And the main issue, to be honest, is gross and tax and you know the Treasury briefing out very clearly no tax cuts coming in the in the March budget. You know you're going

to have to wait. The public finances that we had out this week worse than bad, right, worse than expected in terms of government debt and borrowing. And you know, there is just no good news from the government. I mean, there is a way to raise more money that is perhaps politically palatable, and you can imagine if there was a labor government in power at the moment that they would be looking at things like capital gains, which was the structure that Mr Zahari is is using. Two taxis

his wealth. And you know, people who work in the city of London, the people who are the highest earners in the country. There's a relatively small constituency of people who you could potentially tap from all tax but politically broadly that could find support in the country. But the connections to the city are just a little bit too deep, aren't they for them to consider sort of rinsing their

backers in that way. And a good example of that is is non dom status, where labor have said, you know, we're scrap no non dom status and spend them on a pay rise that probably quite popular in the public right, and it's it's a populist policy. Let's be honest. You know, scrapping nondom status raise a bit of money, but it's not you know, it's not as a silver bullet that that fixes the economy. I mean, Mrs Soon that gave

hers up right, and she did. I mean I wonder if that's whether the story might turn next because talking of HMRC settlements, but I mean labor can it is easy for labor to say, look, identify and take advantage of the of the Tory's weakness as being seen as out of touch and being seen as on the side of the super rich. They can pick something like nondom status,

say we'd get rid of it. It's not gonna probably do that much in damage to the economy in terms of attracting investment and talent into Britain, but it's certainly is something that will resonate with people, and you know, speaking to Tory MP's it is something that increasing numbers of Tory and PISA are saying, We're going to say, why don't we just scraped nondom status, you know, why, why why don't we just try and get ahead of labor on some of this stuff, because otherwise, going into

an action campaign, they're just going to paint us is you know, helping out the helping out the super rich. And ultimately, whether it's the Boris Johnson BBC story, whether it's the Deems are Harby in his taxes, this idea that a sort of elite you know, behind closed doors, sorts it all out with HMRC or sorts all out

with the BBC. It can sound a bit conspiratorial, but also there's an element of truth to it and that is the sort of thing that really does wind people up because it makes it just makes people a bit a bit sick and and you know, ultimately, if if when we're doing our tactual returns, we're we're careless, then we are unlikely to be able to negotiate a settlement with HMRC that makes every unhappy and we don't have

to worry about it. It's going to be much more serious. Well, I was actually when I finished, when I finally filed my one, not we came do actually you know the thing pinged back that I've actually overpaid and I was during rebate, you know, ninety four pounds. So there there won't be a career in politics for you. There. I went out and celebration straight away. Excellent, Alex Wikins, thank

you so much for joining us. Okay, so this whole conversation about Zahawi's tax problems got us thinking a little bit more about how the entire tax system works, or rather doesn't when it comes to how much the wealthy are paying. And we came across the paper from the LSC that asked this question how much tax are the rich really pay? And very pleased to say, one of its co authors, Professor Aaron Advani, has joined us in

the London studio. He's an associate professor in the Economics Department at the University of Warwick, and he's also a research fellow at the Institute for Fiscal Studies. Are welcome to in the city. I guess my first question is, I mean, did this this big story about Saharawi has been dominating the news all week? This is what you study for your work. Do you were you surprised by by what the world is now discovering about his tax offers.

It's worth saying, you know, we we have access to data from H Marcy for all of the work that we do, and it's all anonymous, so we don't know anything about kind of particular individuals. But I think one of the you know, striking things for me was less about the specifics of his apparent non compliance is he's not paying what you're supposed to have paid. But actually the fact that when you sort of step back, you see that the story is that he got twenty seven

million pounds in capital gains. It's it's been reported, and he was supposed to pay about three point seven million pounds in tax. So when you think of what that is as a tax rate, that's like strikingly low. The thing about that which might surprise other people if they've sort of sating down the numbers, is that it's very low compared to what you'd expect for someone with millions

of pounds. You know, normally we'd think of the headline tax rate for people who are high income as being forty five as the top right, and then there's a couple of pence also of national insurance that they're paying. So you think, you know, you'd be paying getting on for half of that money away, but actually it's much much lower. And that's that's because capital gains have a number of features. One is that they just have a

lower tax rate in general. But then on top of having the lower tax rate of rather than that top you could at the time get up to ten million pounds only ten percent. That's now gone down to one million pounds, but at ten percent, and so that's ten percent is the sort of rate you'd expect someone on fifteen tho pounds a year to be paying, so below a full time million wage salary, and that's the kind of rate you could you could get before up to ten million pounds. You can now get that on the

first million pounds of capital gains. These are numbers which are astonishing for most members of the public. Could you explain a little bit more about this difference. Then there's capital gains, the different rate of tax you can pare on capital gains versus normal income, and why that structural difference favors the wealthy. Capital ens are the sort of thing that most people will never experience in their life in the way they have to report tax on it.

If you think of anything in capital and most people think of having a second home. So somebody who owns a second home and sells it, if the value of that home increased between the time they bought it at the time they sold it, they have to pay tax on them. That's capital gainst tax. That's actually a very small share of what most capital gains come from. Most

capital gains are actually from the ownership of businesses. So if you own a business, you set up a business, at some point you sell it, which is the example you have here with the demons aw We, or indeed, if you set up a business and then at some point you just liquidate the business, so you don't sell that no one wants to buy it from you, but you just say, I'm sort of shutting down the business, and all of the value of the business now comes

to me. Then the change in the value over that time to the value that you sell the business for you, the value of the business when you liquidate it less the value it was when you set it up. That's what you get in capital gains. And those capital gains are taxed are much much lower tax rates than income

tax rates. So as I said, the sort of headline rates, there's a higher twenty eight percent if it's on second and additional properties, and then there's this special low ten per cent rate for people who have a business that they own and manage. They get a lower rate on the first now million pounds. So ZAHOWI sold this business and that's where this big lump sung come came from. So to be to be fair, I guess this isn't the sort of inc that people would expect to generate

year or year out. So is that one of the reasons why the tax rate is actually nominally, you know, quite significantly lower for it. It's interesting the structure of capital gainst tax has changed so many times over the last you know, changed about every ten year. So there's a big reform by Nigel laws gotten Brown and then

two eight was Alistair Darling. And there's the kind of difficulty with Catholic capital gains as you want to find some way to ensure that you are kind of encouraging entrepreneurship. Like one of the things that capital gains are about is if you set up a business and grow it, then that's a capital gain. So you want to encourage that.

But you don't want to encourage is people sort of setting up what is which is not the case certainly in the Harwer's case, where you know you got was clearly a very large and very successful company, but you don't want to encourage is along the side of you know, the small number of cases of someone like Zahawi who sets up a successful business, A lot of people who have a consultancy business that would be just someone paying them an income to work as a consultant, but instead

they take their money through a consultancy business and keep the money in the business and at some point dissolve the company and get the money out that way and get the low rate. So what you don't want to encourage is someone who would otherwise have been paying income tax and two percent national insurance who instead is now able to pay this sort of ten rate by just getting money paid not to them personally, be getting paid to their business and then at some point them taking

the money out of the business. And so that's that's kind of what that trade off is as a one. One way to square that circle is to say, well, what you could do is to have a tax rate on capital gains that looks more similar to the income tax rate, but where because you know, as you say, capital gains are quite lumpy, they sort of come out at one point in time rather than annually. What you could do is to average out the capital and say, okay, you've owned this business for ten years and you've made

million pounds or whatever it is. Will divide that up and think of that as two point seven million pounds a year, and that that's how we'll think about the taxation of it. And then that would be a way in which if you've i mean two points of a million punis is still gonna be in the top rate. But you know, if what you ended up with was forty pounds a year, then not all of that would be taxed at that top rate because it's clearly much lower than what we would charge for the fort rate.

I mean Britain of course, has a big problem on accent that we need to somehow raise more. We had a big, big feature out this week on Bloomberg, like the Little Audrick, about the funding problems of the NHS, and there's some pretty alarming charts in that around the need for Britain to raise more in tax But Britain needs to somehow pull in more money, whether it's from change of the coupital gains system, somehow boosting the coffers of the treasury. How in your view should they do that?

Should they be pursuing the wealthy more to pay bigger share of the tax income, So to think about it less as pursuing the wealthy and more as pursuing wealth. And so the distinction there is it's not about trying to tax people just because they are rich. It's particularly about trying to tax money that comes from wealth, from owning assets and getting a return on that relative to taxing labor. And the moment we tax labor pretty heavily.

So if you work, you know, even if you're on a very high income, you know people who are you know a quarter of people who are earning above a hundred thousand pounds are paying sort of what you'd expect that headline rate to look like, which is, you don't want to get to two million pounds about forty seven percent. But even when you get to hundred and fifty thousand and you hit that rate, it's still the case that you've got most of your income tax at a lower

rate than that. And so you know, the average rate that you're paying is below that, but there's there's a chunk of people who are actually paying those rates. But there are a lot of people who are on those very high incomes who are paying actually their effective tax rate is much lower. And that's because the form in which they take their income. So it could be that they get money is dividends, and dividends attacked at lower

rates than than labor income. It could be that they own properties and they get money from renting them out that's taxed at a lower rate. And also it doesn't isn't covered by the National Insurance or Health and Social care levy that as it was, So there are these kinds of other forms you can take it, and then you as we've just been discussed in capital gains as tax at much lower rate. And so people who get

income or gains. Who get returns from capital from owning assets are actually taxed a much lower rates and people who are taxed on labor income. And that means that it's not just about the difference between rich and poor, although it is the case that money from capital is kind of something that happens more for rich people than for poor people. But it's also the case that even among the rich people, there are some people who are

paying really those headline rates. So people who earned millions of pounds and are paying for there might be a banker in the city and the only income they have as their per y income, and it's very high, but it is, you know, almost offer. It is being tacked away. At the same time, there's somebody else who's a consultant and who instead left, you know, some big consultancy from and they've gone and set up their own consultancy. They're effectively just doing the same job they were doing before,

but they're paying a much lower rate. And actually that's that's bad for growth as well. It's sort of bad because they're getting this lower attacks rate in a way that's not really because they're doing something kind of different, but they're not trying to grow the consultanty and make it some big thing. They're actually just you know, fantastic consultant. But now they've at the same time had to set up their own business do the paperwork. They're the one who has to now do some of their own HR

deals and accountant all of those other bits. There's all the things that they're not the best person to do. It would be much better for them to go and work for some big consultant, so you could do that stuff for them, And so they're being less productive and it's worth it for them because they get such a low attacks rate that their take home is bigger. But

kind of collectively that's inefficient. It would make much more sense for them just to be inside a big company that could organize all of the other administrative bits for them and they could just get on with a bit. They're fantastic. What's the solution here? Should we have a special wealth tax? Lots of countries have a wealth tax, don't they in Europe and around the world. Should should Britain think about that? It's been mooted a few times but always dismiss What should we do? Yes, there's a

few parts to that. So the first thing is if we're trying to fix bits of the tax system and raise money, the first places I would go is to fix some of the problems with capital gainst tax, which

would be something like the Nigel laws and reforms. So equalize the rate with income tax, have an allowance for at least for inflation, certainly like Alma Wilson did, but do the averaging that we talked about, so that you're not taxing the lumpiness of that of that gain, and you're you're spreading out over time and getting rid of the fact that at the moment, if you can hold an asset till you die, you don't have to pay the tax on it, so you kind of hand on

the asset to your your kids and in the capital gains tax gets wiped out, So you'd fix that. You'd fix some of the problems with inheritance tax where agricultural and business property don't get taxed, and pensions in fact, if you can hang onto them, don't get taxed. So if you kind of in the existing tax system, there

are things you would fix. Again. Actually property at the moment, someone who's you know, on minimum wage will will like earn their income and pay income tax and national insurance, and they'll go home and pay their landlord some rent and that rent will be you know that the land will be taxed income tax, but won't pay national insurance. So those kind of things I would fix first, and then they would raise substantial amounts of money. But then I think if you're going beyond that, there is some

case for a regular annual wealth tax. It wouldn't be one that would affect a large sway of the population. The case that people I think could make for an annual wealth tax is if you need to raise some money, you could raise, for example, an annual wealth tax of about one percent on only the wealth above say ten million pounds. So if you have ten million and one pound in wealth, you're gonna pay one pence that you know, it's only once you get substantial above that ten million

pounds you're starting to pay any of that. And that would affect about twenty individuals in the UK. But they would raise quite a lot of money. So a one percent tax above ten million would raise about eleven billion pounds, which is just from just from twenty two people, just frommy people, which is like the same as about putting one and a half to two p on the basic

creative income tax. So it's a it's a substantial amount of money you'll be getting from doing that, But the case we're doing that, it's so it's partly a revenue case. But the other, I think kind of practical case is that we know that for that group, actually, even if you fix those other taxes on wealth, they're probably not going to be enough to get much revenue from those people. And there's just you know, you can see that in

the statistics. So there's a famous graph that the Office for Tax Implification, a government body, put out a couple of years ago, where they showed what the effective tax rate on inheritance taxes and sort of rises so that the headline tax rate on inherence taxes forty percent, but only on the wealth above a threshold. And so as for a couple who own a property, you only start paying after about a million pounds, and so that actually

starts rise after a million pounds. It rises to a peak at about about two million pounds, but then it starts to fall off a ten million pounds. It's down

back about ten per cent. And that's because once you get to those levels of wealth, you know clearly there are things you can do to try to plan to try to minimize your attax, right, and so that's that's kind of the case that people I think can make for a wealth and annual taxes that at those higher levels of wealth above about ten million pounds, the administrative costs of pretty loows you can do deal with all of the valuation and complications that come around that you

can reraise substantial revenue and you're getting tax from set of people who actually won't be paying as much tax from those other capital taxes even if you were to fix those taxes. But but the argument has always been, hasn't it you? You you're frightened people off? People don't care about what's what's the tax. What they care about is like, at the end, after you've paid your attax, what what lifestyle can you afford? And those that's you know, what people a look at when then something do I

want to live here or there or somewhere else? Is like, well, what's my life going to look like there? And so a lot of those other basic services and things in the economy won't be changed by that, actually, you know, sort of conversely, the worry might be for a set of people well as public services in the UK Degrede.

I mean, it's certainly the case that if you're at high enough level of wealth you make, you're potentially more likely to be using private healthcare and private schools, probably not queuing up at any so maybe you're probably not queuing up any or you know, waiting you know how many hours it was now for an ambulance. But it still is the case that it's not a you know, it's not a great place to live, and that's what the society around you looks like. So there is a

case of being involved in that. The other thing actually, just quantitatively that I can say is, you know, specifically for a subset of very wealthy people, who are you know, who are the nondoms, there were actually some big reforms where you know, some of them were brought into you know, the the Nondon regime is one that let people not pay tax on their foreign investment income and foreign capital games like like the Prime Minister's wife, like the Prime

Minister's wife, and for people who had been in the UK for more than fifteen years, or for people who were born in the UK to a UK father who previously were able to claim nondom status if they went and lived abroad for a little while but then came back. For those people, the regime was removed and so that was effectively an increase of about ten percent in their

tax rate, which is pretty large. We actually expected that we'd see some movement based on that, but we actually found about point to percent of people responded to this, which was tiny. Kind of naturally thought, all, let's try and talk some people and see if you can get a sense for what's going on. And that's where you know, when I talked, we actually talked to a few nondoms and they said, look, we you know, we were affected by the former condoms, so we're affected by this reform.

But ultimately, you know, my kids are in schools here and I like that, right, I like the theater, and I like the restaurants. You know, there's all these things in London that you know a lot of nondoms, is what's saying. Nondoms live specifically in London, So this is this is in the city and London is where a lot of them want to be. Of course, the deadlines looming for everyone, isn't it that the January thirty one, you have you done, George, yet I've done mine. I

always end up doing mine between Christmas and years. That's a very good time, isn't it when you know when you're fually miserable. Anyway, we can all just kind of professor ruined Advannie, thank you so much for joining us, Thanks very much, thanks for listening to this week's in the City. Will be back next week, but in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate,

review and subscribe. This episode was hosted by me David Merritt, was produced by Summer Sadi. Additional editing by Blake Maples and special thanks to Alex Brickham and a ruined Varney. And remember, you've got less than a week to finish your tax return.