The question which is torturing Rishi Sunak and Jeremy Hunt will soon confront the Labour Party. In the Autumn Statement on Thursday the Chancellor will reveal his decisions on taxation. Even allowing for the fact that spending cuts are coming, the burden of taxation will have to fall somewhere. The Labour response will tell us something too about how they would act.
In the prelude to Thursday, Hunt has floated some unlikely options. There have been rumours that capital gains tax will be applied to the primary domestic residence and whispers of a large increase in inheritance tax.
There is a logical case for either. The housing market locks out most people under the age of 30 and there is no good reason to treat property as a separate asset class, exempt from the taxation of the rest. House-price inflation is not a reward for clever entrepreneurial activity, it is a happy accident for the fortunate.
Likewise, my children have done nothing to merit the inheritance they receive beyond the dubious distinction of being born to me.
If there were no politics in policy, these are good ideas. But policy is drenched in politics and there is no prospect of either. Look what happened when the Prime Minister toys with ending the triple lock on pensions. In an old nation, in which the people who have accumulated capital vote in large numbers, it is very difficult to make changes of this kind.
Labour will also find wealth taxes difficult, which means the burden shifts to the corporate sector. Corporate taxes will surely grow under Labour from the mere eight per cent of the total they comprise at the moment. On Sunday, Rachel Reeves, the shadow chancellor, said Labour would extend the windfall tax on energy producers until 2027/8, increase the rate of the levy to 78 per cent and eliminate the existing loophole for companies which declare they are investing. These changes would bring in an additional £34 million over the period of the tax, on top of the £28 billion which is already planned.
Ms Reeves also hinted that Labour was thinking about bring capital gains tax rates in line with income tax rates. If she did that, it would raise something in the order of an additional £20 billion a year. She also implored Sunak to use the G20 summit to press for a deal on the minimum global corporate tax rate on multinationals which, she suggested, could raise £7 billion per annum.
At this point, when the politician declares that there is money to be claimed either from tax avoidance or from avoiding waste, the alarm bell goes off. And it is worth noting the scope of the British state these days.
Even if Labour was to press the button on all those mooted changes, they would only raise about £35 billion a year. Public spending is more than £1,000 billion a year. The trouble with taxation is that the easiest taxes to raise also carry political consequences. It is always tempting to raise VAT on essential items because the money comes in quickly and reliably. Yet VAT is also regressive and places an unfair burden on people who really cannot afford it, especially now.
Income tax and national insurance contributions together account for almost half the revenue raised by the state and no serious money-raising can avoid them, which is why Hunt is very likely to raise taxes, probably by moving the thresholds to drag people into higher rates.
The fact that Sunak and Hunt will be raising taxes this week shows that fiscal policy is usually a pragmatic reaction to necessity rather than a display of ideological virtue. This is exactly what Liz Truss and Kwasi Kwarteng got wrong. They wanted to signal to the world their intellectual purity. Taxation was not, for them, just a way to raise money. It was a way to show who you really were.
The Labour Party has the same affliction, though it points in the opposite direction. There is a hairshirt tendency within Labour that likes tax and thinks it signals the way to an equal society. There is a residual distrust of business which regards the corporate sector as a piggy-bank for social schemes.
These sentiments will not survive the passage into government. Sir Keir Starmer has shown a determination to throw off anything that stands in the way of victory for Labour.
This may be one of his toughest calls. What to tax and how without incurring political costs that are greater than the revenue raised.