A wealth tax would be popular – but that does not make it right
If I were a rich man — and, no, I am not about to burst into song, despite seeing more musicals on television than is healthy — I would be getting a bit worried about the ever-louder drumbeat suggesting that a wealth tax is on the way.
Rishi Sunak is presiding over a record budget deficit. which will be made worse by the new lockdown and the support measures just announced. He is politically constrained from returning to post-2010 austerity or raising income tax, VAT and national insurance. And while he has said that he does not want to impose a wealth tax — strongly rumoured to have been considered by Sajid Javid, his predecessor, even before the pandemic — the stars are aligning.
The pandemic has hit the poor hardest and will continue to do so, while the policy response, including the Bank of England’s quantitative easing programme and Mr Sunak’s stamp duty cut, have boosted the value of assets owned by the wealthy.
A Resolution Foundation report, The Missing Billions, uncovered a considerable amount of wealth, £800 billion, missing from official figures and heavily concentrated among the richest. It increased the share of UK wealth held by the top 1 per cent from 18 per cent to 23 per cent.
To put that £800 billion into perspective, Office for National Statistics estimates show that household wealth in Britain is £14.63 trillion including private pensions, or £8.53 trillion excluding them.
A poll of Times and Sunday Times readers showed support for a wealth tax; 44 per cent were in favour, 39 per cent against. I am not normally a fan of reader polls, but this was interesting, nonetheless. Readers were uneasy about main homes being included, but many, particularly those who would be least affected, were in favour. People tend to like tax increases that will not affect them.
One key question is what you include in a wealth tax. As noted, if you exclude private pensions, because this is mainly wealth that people cannot benefit from until retirement, the total comes down by £6.1 trillion. If you also exclude property wealth (net of mortgages), which is overwhelmingly in main residences, it comes down by a further £5.09 trillion. More than three quarters of British household wealth is in pensions and property.
That is why, when the Wealth Tax Commission reported last month, it opted to include all wealth, including main residences, in its one-off wealth tax to pay for the coronavirus pandemic. The commission, established last spring, has as commissioners two academics, Andy Summers, of the London School of Economics, and Arun Advani, of the University of Warwick, together with Emma Chamberlain, a tax barrister.
It drew on the expertise of the Institute for Fiscal Studies, the Resolution Foundation and others and used The Sunday Times Rich List to bolster other wealth data. Its final report had a supportive foreword from Lord O’Donnell, former permanent secretary to the Treasury and cabinet secretary. It also published evidence showing that a wealth tax is more popular among the public than raising other taxes.
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The clever thing about its report was that it does not see a wealth tax as a permanent feature of the system, saying that in the long-term beefing up existing taxes offers a better solution. A permanent wealth tax would require regular wealth reassessment, and countries with wealth taxes tend to suffer an erosion of the tax base.
That is one reason why relatively few countries have wealth taxes. Many more used to, but most were repealed in the 1990s and 2000s. According to the Cato Institute, a libertarian, free-market American think tank: “Countries repealed their wealth taxes for a combination of reasons: they raised little revenue, created high administrative costs and induced an outflow of wealthy individuals and their money.”
What about a one-off wealth tax? By one-off, the Wealth Tax Commission has in mind a tax not that would apply for a year — my definition of a one-off tax — but over five years. That is long enough for many to regard it as permanent and to suffer all the negatives associated with that. We are, after all, living in a period in which the temporary has taken on a grim permanence.
I hate writing against proposals like a wealth tax because the knee-jerk response of some — usually those who do not read the piece — is to assume I am defending the filthy rich. But the Wealth Tax Commission’s report confirms that if you want to raise significant amounts of revenue from any new tax, it is not only the very rich you have to hit.
It suggests that £260 billion could be raised over five years by setting an individual wealth threshold of £500,000 and a 1 per cent tax above that. But, and I know this will not be apparent to readers in some parts of the country, it is not hard to get to this — and considerably above it –—in London and the southeast, given the level of house prices and even modest amounts in a pension pot. Indeed, 17 per cent of the adult population would be affected.
The tax could be limited to the very rich, the top 1 per cent, and raise £80 billion over five years, according to the commission. Yet these are the very people who are likely to take steps to avoid it.
There is another problem with a wealth tax. Wealth follows a life cycle, so most wealth ownership is among older people, who one way or another draw it down during their retirement years. Young high-earners could escape the tax while the income-poor, asset-rich would be hit, at a time when they are planning for their twilight years. Some could not afford to pay it.
Fortunately, there is no urgency for Mr Sunak to consider tax increases until the economy is free of the pandemic. And there is a good political argument against a tax that would hit older Tory supporters. Let us see if the drumbeat for a wealth tax remains as loud.
David Smith is Economics Editor of The Sunday Times david.smith@sunday-times.co.uk
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