Treasury officials are pushing for the largest tax rises in a generation to plug the gaping holes in the public finances, in a move being resisted by Downing Street, The Telegraph can disclose.
The proposed quintuple whammy of tax increases would enable the Exchequer to raise at least £20 billion a year, and some could be introduced as early as in the Budget.
While no decisions have been made, multiple sources have told this newspaper that proposals under active consideration include aligning capital gains tax (CGT) with income tax, slashing pension tax relief, raising fuel and other duties, the introduction of an online sales tax and a simplification of the inheritance tax system.
Some or all could be introduced to pay for the Covid crisis, to finance general government spending pledges and to compensate for the reduced tax take caused by a shrunken economy.
However, the proposals have been met with fierce opposition in No 10, with senior figures said to be instinctively opposed, and expressing frustration that officials are failing to present other options, such as cutbacks to Whitehall departments’ current spending budgets.
While Downing Street has indicated it could live with a few billion pounds worth of tax rises, especially the elimination of perceived loopholes for the wealthiest in the areas of capital gains and pensions, Boris Johnson’s aides fear conducting a major tax raid on Middle England in the midst of the pandemic risks derailing the economic recovery.
Instead, they favour introducing cuts to current spending, but are said to be highly frustrated at the failure of officials across government to identify unnecessary spending.
They are backed by senior economists and business leaders, who warn that raising taxes in the midst of the worst recession in 300 years would be “whistling in the wind”, and have called for Rishi Sunak, the Chancellor, to focus on stimulating growth.
The revelations are also likely to infuriate Tory backbenchers, especially in southern England and London, which would bear the brunt of the hikes.
According to insiders, officials are considering proposals that would equalise capital gains tax and income tax rates.
This would result in the levy on profits from asset sales rising from 10 per cent to 20 per cent for basic-rate taxpayers, and from 18 per cent to 20 per cent for profits on the sale of second homes.
For higher rate and additional rate taxpayers, CGT could rise from 20 per cent on asset sales and 28 per cent on property sales to 40 per cent respectively.
Discussions have also been held over scrapping the various reliefs applied to CGT and replacing them with indexation allowances, meaning only gains in excess of inflation would be taxed.
The shift would effectively represent a return to the Eighties, when Lord Lawson, who served as chancellor under Margaret Thatcher as Nigel Lawson, taxed gains at the taxpayers’ marginal income tax rate.
Treasury insiders said any potential change to CGT would be about longer term reform to make the taxation system “fairer”, rather than a quick-fix to “fill a fiscal hole”.
It forms part of a wider debate about whether the burden of taxation should be shifted away from labour and “earned income”, towards so-called “unearned asset wealth” or “unearned income”, they said, a terminology more commonly used by the Left.
The proposals are likely to be viewed as politically toxic among Conservative MPs, who have long argued that major hikes to CGT would hit middle-income earners who have saved and invested as a means of helping to fund their retirement.
Other options include slashing pensions tax relief from 40 per cent for higher rate taxpayers to a flat rate of 20 per cent.
Under current rules, tax relief is paid on savers’ pension contributions at the rate of income tax they pay, and income tax paid on the benefits.
But the proposals would cut in half the 40 per cent relief enjoyed by an estimated four million taxpayers, effectively increasing their average tax rate.
Treasury insiders have described the relief, which costs the Treasury £40 billion per year, as “totally unfair”, and argue that cutting it to a flat rate of 20 per cent would raise between £10 billion and £20 billion annually.
They indicated that any change would take between two and three years to implement, as it would require HM Revenue & Customs to design a new system for calculating contributions.
“But then going forward you are projecting enormous savings off the tax relief,” one source added.
One source also warned that a failure to cut relief would leave officials with little alternative but to focus on other areas of taxation.
“If we don’t do something strategic then we’re stuffed,” they added. “What we don’t want to do is increase income tax rates.”
There is a determination to press ahead with an online sales tax, which would help to address the perceived unfairness with high street stores, which are required to pay business rates.
The Chancellor is said to be conscious of the need to “address the balance” between major online retailers such as Amazon, and struggling high street competitors.
However, the move is opposed by a number of business groups, which fear it will leave the UK “out of kilter” with other countries and dent its competitiveness internationally.
Even traditional retailers now derive a greater proportion of their revenues from online and will also be hurt.
Business leaders are braced for new green levies, while fuel duty is expected to be hiked for the first time in a decade.
The freeze has remained in place since 2011. Other duties could also be increased.
Meanwhile, officials are understood to be studying proposals to “simplify” inheritance tax in a move that is likely to lead to an increase in revenues.
Approached for comment on Saturday night, a Treasury spokesman said: “We do not comment on speculation about tax changes ahead of fiscal events.”
It came as senior business leaders urged Mr Sunak to focus on bringing forward further support measures to aid the economy recovery.
One told The Telegraph: “The thing we know without doubt is that if we can get the economy growing, that will be the best way of paying down the debt. Invest in growth, get the economy firing, make it a V and then you can generate revenue.”
Paul Johnson, director of the Institute for Fiscal Studies, added: “We’ll need tax rises eventually but this budget seems unlikely to be the moment when they’ll be announced, at least for 2021, because of the uncertainty over the state of the economy.
“Secondly, the scale of the deficit and the respective spending demands are such that tinkering with small tax rises isn’t going to cut the mustard in the next four or five years.
“It’s going to have to be real substantive change.
“The trick they need to play in this budget is to get the right level of stimulus as opposed to the reverse, whilst persuading people that they are taking seriously the need to deal with the deficit in the medium run.”