How Labour could fill the black hole

They have promised to match the Tories by increasing income tax, national insurance, or VAT. Those three taxes bring in 60% of government revenue; nothing else gets close.

And so a new Labour chancellor finds herself with a big headache. The books are far worse than even she feared. The OBR is reassessing its judgements about the last budget, on the grounds that the Treasury hid the truth from it.

Oh, and a host of government departments are in desperate need of cash, because the Tories ran them into the ground. For instance, the Home Office predictions of spending on border security and for processing asylum seekers are quite obviously an utter fantasy.

If I were chancellor, I for one would just bite the bullet and announce that since Jeremy Hunt’s cuts to National Insurance earlier this year were obviously based on dodgy data (to be generous) they could never be afforded and need to be reversed. That cut alone cost the Treasury £10 billion a year, money it now desperately needs.

But Reeves may not feel she can do that, having promised not to touch the big three taxes. So where can the government find more money without hitting the poorest?

Raising fuel duty is desperately unpopular with the public and so – bizarrely since so few pay it – is raising inheritance tax. Corporation tax increases are not really very good for growth and raising cigarettes and booze taxes would not bring in that much, plus they hit the poor. A new windfall tax on energy companies is a possibility but after that, what other options are there?

Well, as a report from the Institute for Public Policy Research (IPPR) think tank on Thursday made clear, wealth is not taxed at anything like the level of income in this country. Capital gains tax is just 28% with plenty of very, very generous allowances. But higher rate income tax and NI is 47% (for those with more than two children the rate can be 71%).

This means the wealthy sit on their assets and workers pay more than their fair share. The obvious solution is to have one tax rate for earnings and wealth, so that everyone contributes the same. The results would be a fairer tax system, one with fewer loopholes and distorting differences in rates across different parts of the economy.

It would help narrow the ever-widening gap between London, the south east and the rest of the country, because so much of the country’s wealth is in the south and is taxed at far too low a rate.

The move would raise tens of billions a year, and it would be a seismic change to a fairer tax system. The rich would scream blue murder, but what can you do when you have promised not to touch the main sources of government income or hit the poor?