HAMISH MCRAE: Will Joe Biden trigger tax rise here?

Joe Biden certainly spoilt the party last week with his plan not only to increase taxes in the US, but to tax capital gains as income. When details emerged, the Dow Jones index promptly fell by two per cent and US shares have been wobbly ever since. 

That has helped pull down prices in the UK and Europe too. If ever we wanted a reminder that what happens in the US affects the rest of us, that was as good a lesson as any. 

This is not simply about the top one per cent of wealthy Americans who look like being hit hardest. It is about much less wealthy Britons and Europeans too. 

Finger on the pulse: Joe Biden certainly spoilt the party with his plan not only to increase taxes in the US, but to tax capital gains as income

The prime reason why this should be so is that there is logic to the idea. The main ways in which not only the US but just about the entire developed world have tried to offset the impact of the pandemic have been super-loose fiscal and money policies. 

There has been a huge surge in spending, financed by a huge surge in borrowing. The result has been a big increase in government debts, but also a surge in asset prices – shares in the US, homes in the UK, and so on. Those with the most assets, the rich, have done best of all. So why not tax some of those windfall gains that have accrued to the wealthy and use the money to start getting public debts back under control? What could be fairer than that? 

If President Biden succeeds in getting most of his tax proposals through Congress – never certain in the US system – that would give political cover for other countries to do something similar if that is what they wanted to do. 

Before you conclude that Rishi Sunak will also tax capital gains as income – and I think that highly unlikely – there are some crucial differences between the US and the UK tax systems. 

For a start, the tax take there is much smaller than in the UK – around a quarter of GDP instead of more than one-third. Taxes on high-earners are much lower. 

There are state income taxes as well as federal ones and the top marginal rate in California works out at about 50 per cent. But you have to earn $600,000 a year (around £430,000) to hit that level. 

There are also many more legal loopholes in the US than in the UK that people can use to cut the amount they actually hand over. That applies, by the way, to corporate taxation too. 

Headline corporation taxes in the US have for years been higher than the UK, but revenues as a percentage of GDP have been lower. So while there were squeals of protest when news of the Biden plans came through, I’m sure that when the details are announced, the legions of tax lawyers will set to work to figure out how to keep their clients’ money out of the tax net. 

There is another reason why our Chancellor might not be under as much pressure to increase tax as seemed likely even last month. 

UK public finances look materially better than they did at the time of the Budget on March 3. The deficit for the past financial year is still terrible, but less terrible than the Office for Budget Responsibility expected.

We have just heard that it was £303billion – £23billion less than the OBR projected. There will be some additional costs from Government loans to businesses that don’t get paid back. But the prospects for the current year are improving, as the economy is picking up a little faster than seemed likely a few weeks ago. The strong retail sales numbers say so, and we can all feel a bit of the uplift in the streets – or at least a sense of relief that freedom is in sight. 

My guess is that when everything is clearer in the autumn, the Chancellor may find he needs to tweak his tax plans. The deficit will be coming down, but not fast enough. 

The rich will probably end up paying a little more, maybe through some cuts in pension relief. For example, it would make sense to allow people to put more into a pension pot but cut the rate of tax relief when they do so. 

It will all be done in the name of fairness. Given that one of the many troubling effects of the pandemic has been to make the world a less fair place, it would be hard to argue against that.