There are three real policy responses required. First, it is necessary to reinstate an investment income surcharge in UK taxation. We had one of these until the mid-1980s: income from what might be considered unearned sources (rents, interest, dividends, etc.) was subject to an additional 15% tax rate. This was justified on purely social grounds: there was meant to be a bias to work (and why not?). It does, however, have a purely pragmatic basis as well: horizontal equity in the tax system requires that tax be paid at approximately equal rates from what ever source it arises. This does not happen in the UK, and we have a deeply inequitable tax system as a result. This must be addressed.
Second, it is absurd that capital gains are taxed at a lower rate than income: again, the alignment of rates is essential. Nothing less will do, and at one time the Conservative Chancellor (Nigel Lawson) had the courage to do this.
the standard economics of this is that capital income should be taxed at a lower rate than labour income. Optimal taxation theory. And if you’re not up to date on this then you really shouldn’t be commenting upon tax matters at all.
And candidly, no, Sir John Mirrlees is not a neoliberal.