In an apparent re-run of Harold Wilson'�s 1970s investment income tax surcharge, Labour plan to re-introduce such an additional layer of tax to what is termed 'unearned income'�.
The Wilson Labour government applied an investment income surcharge of 15% and kept the top rate on investment income at 90%. In 1974 the cut was partly reversed and the top rate on earned income was raised to 83%. With the investment income surcharge this raised the top rate on investment income to 98%, the highest permanent rate of tax ever applied in the UK.
In a speech in Lincoln on 18 February 1974, Dennis Healey, the then chancellor promised he would "squeeze property speculators until the pips squeak." However, he later denied having used the phrase, whether as Shadow Chancellor of the Exchequer, from 1972 to 1974, or as Chancellor of the Exchequer, from 1974 to 1979, saying the Times newspaper may have misquoted him.
Proof of the pudding: it wasn'�t long after (1976) Britain faced its worst ever financial crisis. The Labour government was forced to apply to the International Monetary Fund (IMF) to bail it out. An IMF loan was granted but the fund insisted on deep cuts in public expenditure, greatly affecting economic and social policy.
New tax on buy to let
Rachel Reeves yesterday said she would apply the extra layer of tax on buy-to-let and other investment income such as stocks and shares, but admitted '�Now is the wrong time to raise taxes'�
While criticising Boris Johnson for presiding over a 'triple whammy'� of tax rises, including an increase in National Insurance contributions, a freeze to income tax thresholds and higher council tax, she nevertheless proposed her own tax hike.
Speaking in Bury, Greater Manchester Ms Reeves was with Christian Wakeford the Tory MP who defected to Labour this week. Ms Reeves cited the increased pressure on families as energy prices increase and Britain heads for a cost of living crisis as the reason behind her bombshell revelation for landlords.
In another interview yesterday Ms Reeves said Labour would keep the NHS and social care dividend that the Tory Government plans, to be paid for by increasing National Insurance.
She said that to pay for the NHS dividend, instead Labour would increase taxes on buy-to-let properties and those who earn money from investments.
The tax will hit the elderly hardest
This new tax would have the effect of hitting elderly voters, those who, faced with zero returns on cash deposits, have have put their savings into property or the stock market.
A recent report from the University of York and the Nationwide Foundation found that a substantial number of 'baby boomer'� landlords were now 'ageing out'� of the rental market, and they are not being replaced at the same rate by younger landlords due to diminished returns and more stringent regulation.
This could mean that there are not enough rental homes to go around in future, especially for those tenants on lower incomes and who receive benefits. Another tax hike would simply accelerate this process further.
Ms Reeves went on:
'We've said that it's not right that the only people who are being asked to contribute to the health and social care levy are those people who go out and work every day and the people who employ them. If you get your income from stocks and shares and dividends or a portfolio of buy-to-let properties, then you pay no additional tax whatsoever in this health and social care levy,'� she stated.
However, according to research by the London School of Economics, buy-to-let landlords are most likely to be white collar professionals, 12 per cent of buy-to-let landlords are blue collar workers, while seven per cent are retired and use their property income as a pension. Young couples now make up 35 per cent of buy-to-let landlords in the UK.
The Laffer effect
History has shown that raising taxes too much discourages enterprise and puts a damper on economic growth. The Laffer effect takes its name from economist Arthur Laffer who developed the inverted 'U'� 'Laffer Curve'�, based on the economic principle that people will adjust their behaviour in the face of the incentives created by tax rates.
Higher taxes decrease the incentive to work and invest, compared to lower rates. If this effect is large enough, it means that at some point further increases in the rate will actually lead to a decrease in total tax revenue for the Treasury. For every type of tax there is a threshold rate above which the incentive to produce more diminishes, thereby reducing the amount of revenue the government receives.
Landlords already selling-up
With a desperate shortage of rental accommodation at reasonable prices, landlords are already selling up in large numbers as they feel the pain of existing taxes and government regulations. Another 15% of extra tax on top and the number of private rental homes for rent in Britain could drop dramatically.
According to the Nottingham Building Society almost a million landlords, more than a third of the total, will review their property portfolios this year, with the number planning to sell homes already outnumbering those planning to buy new ones. In some popular parts of the country a severe lack of rental homes has recently led to bidding wars.
Ms Reeves'� plan may well reduce the National Insurance the average worker pays, but if they don'�t have a roof over their heads, they are likely to be far worse off.
Treasury sources told The Daily Telegraph that raising the required �12 billion for the national health and social care levy could only be achieved by increasing either NICs or income tax.
Ms Reeves replied to this by saying:
'Well, there's lots of [academic] papers out there from different organisations that show you could do exactly that [set the new tax]. We will set out our plans ahead of a general election, but it's not right just to ask those people who go out to work for a living to pay higher taxes, especially at a time when the prices of everything are going up.'�