The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.
– Jean-Baptiste Colbert, Finance Minister to Louis XIV
Starting in early 2020, life as we knew it came to a stop, as governments around the world locked up their countries to fight the COVID-19 pandemic. The resulting economic impact was as unpredictable as it was unprecedented. Chancellor Rishi Sunak reported in December 2020 that the UK had spent £280 billion on COVID-related financial assistance and health measures, and that the UK’s national debt had risen to an unprecedented £2.1 trillion.
As the vaccine roll-out gathers pace, policymakers are starting to consider how to deal with the fiscal carnage dealt by the pandemic. One of the solutions under serious consideration is whether a new UK wealth tax could an effective way to help fill the enormous gap in the UK budget.
A New UK Wealth Tax?
At its simplest, a wealth tax is a levy demanded by the government on any personal assets such as property, securities, art, cars, and cash. It is appealing for many reasons, notably that it would fight inequality, and could raise significant revenue.
A wealth tax seems fundamentally just because the rich have significantly more resources than the rest of the population. The top 10% of wealth holders have average net worth of £1.5 million and would seem able to bear this tax. In addition, the wealth tax satisfies increasing calls from politicians and activists for the rich to pay their “fair share”. A commission set up to study views on a UK wealth tax recently concluded that people in this country support the idea principally because they think that the gap between rich and poor is too large and has only widened in recent years.
To be most effective, a wealth tax would need to apply to all assets, whether located in the UK or abroad. But assets such as property, rare art objects, and businesses can be very hard to locate and to value, and a tax on wealth held overseas creates significant collection and evasion problems.
Equality aside, a wealth tax could be an effective way to raise revenue from untapped resources. A modest wealth tax, such as the proposed below, would raise approximately £50 billion from a one-off tax, taking into account the estimated administrative costs of £1.3 billion. This proposed tax would set a rate of 1% tax on assets greater than £1 million, rising to 2% on assets over £5 million, assessed only once but payable over five years. From this modest, one off-tax, £52 billion would be raised for the UK Treasury. Approximately the same revenue could be raised from a one-time 1% tax on assets greater than £1 million with a 3% tax on assets over £10 million. Different variations are possible, and the UK Wealth Commission provides a nifty tax revenue simulator that you can try out.
A wealth tax carries with it certain dangers, the most significant are that the rich will find ways to avoid it and that the tax will result in rich people moving to areas with lower taxes. If the wealthy choose to leave, the UK will not only lose the instant revenue of the one-off tax but also the income tax, VAT, stamp duty, and other taxes they would have paid in future years. It is the economic equivalent of killing the golden goose. Some experts have concluded, however, that this isn’t a real risk because the rich don’t really move to avoid taxes and most billionaires live in the same place that they were born.
There are even some moral arguments against a wealth tax based on the fact that the capital was already taxed when the income was earned. In addition, issues of liquidity can develop if a family has to sell a business or home because they don’t have enough cash to pay the tax.
Many European countries previously had wealth taxes but most of them have since been repealed because they didn’t raise significant revenue and had high administrative costs. The Organization for Economic Cooperation and Developments estimated that these European wealth taxes raised 0.2% of gross domestic product, with very significant compliance costs and evasion. In Sweden, for example, because debt was deductible, the rich borrowed to invest in assets exempt from the tax to reduce their “net wealth” for purposes of the wealth tax. In addition, many wealthy Swedes (including the founder of Ikea) fled Sweden to avoid the levy. In France, likewise, business leaders left the country for Belgium, which did not have a wealth tax.
The UK Labour Party even tried to implement a wealth tax in this country in the 70s. Former Chancellor of the Exchequer Denis Healey admitted in his memoirs, though, that despite Labour’s commitment to a wealth tax, he “found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”
Based on these previous negative experiences with the wealth tax, avoidance, evasion and administrative costs need to be considered when designing a new wealth tax for the UK.
A Modest Proposal
To implement a UK wealth tax that produces significant revenue, compromises need to be made.
A new wealth tax should be a “pop” tax, imposed on very short notice with immediate effect to reduce avoidance. It also should be implemented just once but with payments spread out over a five-year period in order to aid with issues of liquidity, rather than becoming a new form of annual taxation which is more likely to lead to rich people fleeing the UK over the long term.
To appear fair, the tax should apply to all people resident in the UK over the last three years and it should not be possible to avoid it by leaving the UK, thus reducing the risk of people fleeing the tax.
The tax could be assessed on UK assets whose value would already be known by HMRC or other government entities such as cars, property, businesses, insured assets, and financial assets on tax returns and government records. While there are some equality concerns with levying a tax only on known UK assets, evasion and collection costs would be reduced for HMRC.
To disincentivise the rich from finding loopholes, any tax should be modest. A one-time wealth tax at low rates (a marginal rate scheme from 1% of wealth over £1 million to 2% of wealth over £5 million) is more likely to be paid than a more draconian tax on worldwide assets for which loopholes would be more valuable. Under this plan, demands on individual taxpayers remain fairly modest. Most people, including all households with less than £1 million in assets, would pay nothing. A household with £1.5 million of wealth would face a tax of £5,000, and a household with £20 million of wealth would pay tax of £340,000, assessed just once and payable over 5 years. Paying this tax should be sold as the honour of every well-off person, to reduce the government deficit and to support the NHS – not just a “soak the rich” play.
A well-designed wealth tax could help plug holes in the UK deficit, but expectations about its revenue-raising effect should be realistic. A modest, one-off wealth tax aimed at generating about £50 billion over 5 years would minimise “hissing” and collect as many “feathers” as possible, without killing the golden goose.