Could we have a wealth tax in the UK?

 

It’s no secret that the Government debt has reached epic levels - £300bn+ and potentially rising. With interest rates being as low as they are, it’s accepted that servicing the debt may not be as challenging as the size of the debt would (superficially at least) indicate. Low to negative yield Government Bonds (Gilts) are being bought by the market and, as part of its continuing commitment to Quantitative Easing (QE), the Bank of England. But Gilts have redemption and effective “re-finance rates”. So, it’s unsurprising that, given the well publicised size of the (COVID support-generated) debt, there is more than a little interest in how the debt (in principle) is going to be repaid. Yes, interest at current rates can be serviced and, yes, especially for longer-dated gilts, inflation may lend a helping hand – though not, to coin an overused phrase, “anytime soon” it seems.

So, being smarter with spending (but without a return to austerity) and, most important, stimulating the economy to a rapid and sustained recovery, will both be on the Government’s economic agenda.

It’s inevitable (it probably would have been without the COVID-generated economic challenges) that all aspects of existing taxation will be reviewed – at the very least to see where efficiencies can be secured. For example, you can be sure that continued focus on anti-evasion and anti-avoidance will be high on the agenda.

But what about any new taxes – especially taxes that won’t have an immediate and direct dampening impact on demand? We’ve heard talk, with stimulus in mind, of a temporary cut in VAT and this came about on Wednesday.

So, how about a wealth tax – we’ve not had one of those have we? Superficially, it could materially increase the tax yield – think of it, a completely new tax applied to as wide a range of capital assets as possible. The economics unit of Manchester Metropolitan University estimated that, if all personal wealth suffered a one-off 2% wealth tax, around £300bn would be generated and the Public Sector Net Borrowing Requirement (PSNBR) challenge would be “sorted” - so to speak.

There are more than a few challenges to this potentially highly simplistic proposal and to a wealth tax generally. Here are a few of the more common challenges: 

1. Which assets should be subject to the tax?

The UK has a well-known and long-standing deep affinity with residential property. Applying a wealth tax to it would almost certainly generate strong opposition among key sectors of the voting population.

Council tax could represent an easier pathway.  Current property values used to arrive at assessable value for council tax purposes were last reviewed in 1991. So, some change/re-rating seems long overdue. However, any additional money generated from this re-rating would flow to local authorities. Presumably, it wouldn’t be too hard to redirect some of that to the central cause. 

A “mansion tax” on properties valued at over £2m was discussed (and part of David Milliband’s Labour Policy) as recently as 2015 – it wasn’t terribly well received by all accounts. The Conservatives also decided against any such tax ahead of the last election. Unsurprising.

The philosophical rationale “in the round” for a wealth tax to be applied to residential property (that is owner-occupied at least) is that no other tax is levied in relation to it apart from inheritance tax (IHT) in appropriate circumstances.

2. What “threshold value level” (of whatever assets are to be subject to the tax) should apply?

Essentially, what should be the exemption/nil rate threshold for a wealth tax? Where should it start? Essentially, what is the definition of “wealthy” for this purpose?

3. Which, if any, assets should be exempt from the “reckoning”?

Effectively, part of the first question. Should any asset that has its income and gains taxable also be subject to a wealth tax? Should private businesses and working farms be exempt?

4. Valuation

Annual valuation (if the tax is to be applied annually) would represent a potentially enormous challenge. Arbitrarily official valuations would be unlikely to be accepted so this process, with associated appeals, could be unwieldy and costly.

5. Liquidity

A particular challenge for those who are asset rich and cash poor. A wealth tax applied to residential property immediately springs to mind as an aspect fraught with potential difficulty.

6. The cost of collection

For any new tax this facet cannot be ignored when considering whether the overall objective of the tax is likely to be achieved.

7. The net financial benefit of the tax

This would be in effect a function of:

• The tax rate.
• The threshold above which it is charged.
• Which assets are (and are not) subject to the tax.
• Cost of collection.

The experience around Europe is not exactly encouraging it has to be said.

In 1974 in the UK, the Labour Government considered the introduction of a wealth tax (there was a green paper) “to promote greater social and economic equality”. A sliding scale was proposed in the paper (remember in 1974) starting at 1% on wealth over £300k to 5% on all wealth over £5m.

Denis Healy (the ex Labour Chancellor) concluded in his memoirs that "We had committed ourselves to a Wealth Tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle".

8. Being clear about the purpose of the tax.

Is it to be revenue generative or confiscatory? Whatever the answer, evidence from the countries that have introduced a wealth tax is that it has added very little overall tax yield.

9. The ease of avoidance

Capital is very mobile these days – as are individuals. The more confiscatory/meaningful the tax the more individuals are likely to do, in relation to their assets and (if applied to worldwide assets of UK resident/domiciled individuals) their own tax status. Think “Laffer”.

10. Political philosophy

A wealth tax would seem to be something not naturally “close to the heart” of a Conservative Government – even one committed to “levelling up”.

 

THE GLOBAL EXPERIENCE

Wealth tax was (a little while back) much discussed in the USA. Bernie Sanders and Elizabeth Warren are both big fans it seems.

Sen. Warren’s original proposal would tax household net wealth above $50 million at a 2% rate per year and above $1 billion at a 3% rate. Sen. Warren boosted the size of the billionaire’s wealth surcharge to 6% from 3% when she released her plan to pay for Medicare for All.

In September 2019, Sen. Sanders proposed his version of a wealth tax plan: a 1% tax on wealth above $32 million for married couples ($16 million for singles) that increases to 8% for wealthier households. Net worth for joint filers between $50 million to $250 million would be taxed at 2%, $250 to $500 million at 3%, $500 million to $1 billion at 4%, $1 billion to $2.5 billion at 5%, $2.5 billion to $5 billion at 6%, $5 billion to $10 billion at 7%, and 8% on net wealth over $10 billion.

So, relatively high thresholds for each, and of course neither are the Democrats’ candidate - that accolade falling to Joe Biden. Whilst not advocating a wealth tax as such, he does propose a tax on unrealized appreciation of assets passed on at death.

So much for the USA. What is the experience in Europe?

Well, more than a dozen European countries used to have wealth taxes, but nearly all of these countries repealed them, including Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, the Netherlands, Luxembourg, and Sweden. Wealth taxes survive only in Norway, Spain, Switzerland, and, in a limited way (on real estate), in Belgium and France.

 

FINALLY

On July 2^nd the Institute for Fiscal Studies (IFS) hosted a launch event for a new project entitled ‘Is it time for a UK wealth tax’? A dozen evidence papers have already been commissioned which are due to be published in October and these papers will form the basis for a final report to be issued in December.