For the last few years, I’ve been telling anyone who chooses to listen that the tax burden on wealthier investors is set to increase, via a three-stage process.

The first is that allowances will be tightened or abolished. Then we’ll see an equalisation of tax treatments between capital and wealth. Lastly, the pressure will be on to increase mainstay, direct (and indirect taxes). I had assumed until Covid came along that these developments would take many years to evolve but it looks increasingly likely that the changes may happen much quicker than I first imagined.

Before thinking through what might happen in practical terms, it’s first worth thinking through the rationale for tax revisions. On paper, a balanced budget makes some sense, especially (as even Keynes suggested) at the height of the cycle. But when you are in a deep recession, you need the government to run a massive deficit to make up for a huge consumer strike and deficient demand.

But then with the recovery in sight, we all expect Chancellors to be proactive and to signal how they might get the deficit down “in the medium term”.  Or do we?? I ask this question because the US and Japanese situations remind us that a large part of the argument for fiscal incontinence makes sense. The US government under Trump increased its deficit massively to allow for huge tax cuts. The economy boomed, and yet the Treasury buyers strike never happened. Rates kept getting lower. Top of the cycle, the US was running a huge deficit, and no one cared. Over in Japan – which doesn’t quite boast a full reserve currency, though it does have a safe haven currency – massive fiscal deficits have got ever more massive and the markets have shown very little nervousness. In reality, recent evidence suggests that reserve and safe haven currency central banks and government’s can keep pushing the deficit window hard into the future without any major structural distress. Sterling isn’t quite a reserve or pure safe haven currency but it’s not far off, belonging to the handful of ‘safe’ currencies.

So, we could just keep increasing the deficit, to boost growth and not worry about either cutting back spending or raising taxes. The economic evidence that forces you to increase taxes on wealth isn’t overwhelming. Just boost the deficit and then worry later. In essence, we are seeing a lite version of modern monetary theory (MMT) in play as we speak. Many Conservatives privately worry that Boris Johnson is wrong to keep spending and that ‘common sense’ dictates that Rishi Sunak, a fiscal conservative is right. I’m not so sure that is true. I think Johnson may be right – we need to rekindle the wild spirits of capitalism and get people confident and spending.

In part, this is a recognition that large bits of MMT does seem to work…until it doesn’t. I’ll come to the “doesn’t” bit in a second.

First though a quick observation on savings. The BoE recently put out a briefing paper on savings during Covid, which confirmed everything we all intuitively knew. The wealthy saved more, the less advantaged actively cut back on savings.

Here’s the key bit from that report…

“The accumulation of savings was greatest for high-income households (Chart A). Forty-two per cent of high-income employed households saved more during the pandemic, compared with 22% of low-income employed households. Retirees also saved more: 36% of them had increased their savings. The reported income of households that had increased their savings was 45% higher on average than households that had decreased their savings, and their reported holdings of deposits were over three times greater (Chart B).”


Here for me is the crucial bit….

“Our analysis suggests that the accumulation of saving has been concentrated among wealthier and less financially distressed households. These households may be less likely to spend their savings in support of the recovery: higher-income households tend to spend a smaller fraction of their income, both on average and in response to a positive shock to their finances.

Only 10% of the households that increased their savings (less than 3% of the whole sample) planned to spend the money they had saved. About 70% said they planned to continue to hold the savings in their bank accounts. Others planned to use their savings to pay off debts, invest, or top up their pensions.”


This analysis suggests that we have seen a permanent hit to consumption which won’t mostly be recovered in 2021 and 2022.

Back to our analysis of deficits.

The UK government could simply ignore this increase in savings – and its huge distributional consequences – and keep borrowing more. But I think we’ll see a more subtle game emerge.

The first bit is that ‘signalling’ an increase in wealth taxes – on capital – which serves a useful consumption purpose. If you shout loud enough that more taxes are coming on capital pots, one might succeed in encouraging some of that money to be spent BEFORE the changes come in. So one could map a two year window for instance which gives investors notice of changes and encourages them to spend a large bit of that cash imminently.

The cynic could then suggest getting to the two year point and then abandoning the tax rise, ahead of a 2024 general election. That could make sense but it brings me to my second point.

The MMT lite theory works fine until…it doesn’t. And the circumstances that might change that situation are obvious – the return of inflation which even hardcore MMT enthusiasts think will stop government printing press largesse.

At this point, I resurrect my roaring Twenties thesis. What happens if growth surprises on the upside in Covid ravaged UK and as night follows day, UK inflation rates increase? Remember that the UK tends to run a bit hotter on inflation than other major economies, usually to the tune of 1% per annum. If growth surprises to the upside, bond yields will start to increase as investors perceive that the risk of inflation is increasing, possibly dragging up interest rates. At this point we discover that the UK isn’t like Japan and the Treasury really panics about inflation, slamming on the brakes with a new dose of government spending cuts.

To avert this eventuality, my sense is that they’ll start my three-phase process. There’s not a great deal of lost votes in tightening up those allowances as wealthy Conservative voters are hardly going to vote Labour because they worry about some additional capital taxes. So, my candidates for change are as follows:

  • Higher rate tax relief on pensions pegged back to the basic rate
  • The AIM loophole on IHT plugged
  • Entrepreneurs relief new maximum of £50,000

The signalling operation is already afoot, yet my suspicion is that we won’t see substantive changes until next year at the earliest. The other signal will be that CGT and Income Tax might be re-aligned (a great idea in my view) followed by discussion of how the inefficient IHT system can be rebooted, possibly around a new revised tax on yearly gifts.

But my sense is that all these changes are just rounding errors because if the Treasury takes a long hard look at its long term structural finances, allowing for an ageing population, the numbers look terrible – and the budgets even bigger than we all think. Sure, one can carry on deficit funding as I have suggested ad infinitum, but I think the nervousness at policymaker level will grow inexorably. Treasury and BoE economists and decision-makers will worry that as my Roaring Twenties turn inflationary, the UK might find itself in real macroeconomic structural trouble.

Put simply a new view will emerge.

The UK is trying to provide benefits that are equivalent to social democratic Europe with a tax base that is closer to the Anglo Saxon free(r) market model.

We want all the protections they get on the continent but we, the taxpayers, don’t want to pay for it.

Sure, one can try the austerity agenda followed by Cameron and Clegg but it’s a politically very painful thing to do and doesn’t help you win elections.

Sure, we can increase taxes on wealthier types and it will help a large bit, but it won’t solve the structural deficit that will keep getting bigger as we age (and even that assumes that a Roaring Twenties will kick back in extra revenues from a booming economy).

Sooner or later, collectively we face a choice. Taxing the rich won’t dig us out of the hole, and MMT max will scare the living daylights out of everyone once it’s taken to its logical extreme.

The end game is that we need mainstream tax rates that are equivalent to our European social democratic peers. And that means higher basic rates, and higher Vat rates FOR ALL OF US.

An honest government – left or right-wing – would start to promote that message, but it would also be electoral suicide. The one thing we have all learnt is that while voters admire honesty, and want more security, they also want someone else to pay for it all.

Which means those fiscal deficits will carry on increasing exponentially, Japan-style.