The wrong tax?

A wealth tax is back in fashion. With the UK likely to need a flabbergasting £300bn in coronavirus borrowing (OBS), this is no surprise. The political optics are excellent: 61 percent of UK adults sampled in a recent poll backed the idea, for those with assets above £750,000, excluding pensions and their home. Labour is pushing hard for a wealth tax as part of its post-coronavirus recovery plan

Whilst a fair and watertight design has eluded governments around the world for years, the odds for a wealth tax are narrowing. The rich are certainly getting nervous. But do intractable design and valuation difficulties, along with international competition, mean it is the wrong tax?

Don’t we already tax wealth?

The UK, of course, already taxes wealth. Profits on affluence are taxed through income tax, dividends, capital gains tax (CGT) and more. Major transfers and sales of assets are subject to inheritance tax (IHT) and various stamp duties. The UK is very good at it, too – it is one of the highest taxers of wealth in the G7 group of countries. Recently announced plans to consult on a CGT review, with a possible incorporation into income tax, should tackle the main loophole in the existing regime. A long look at IHT, which largely misses the richest altogether, would help.

However, the bounty that escapes the taxman is the tied-up wealth the rich are sitting on. The assets that aren’t being transacted and therefore present no opportunity to tax under the existing regime. Coronavirus support funding needs aside, there is growing concentration of this: 48 percent of the UK’s wealth is held by just 10 percent of its population (ONS).

Taxing the untaxable

Since Boris Johnson’s election rallying call to level-up the opportunity and wealth gaps, and bolster his newly won support across the Labour’s ‘red wall’, it’s difficult to imagine a better occasion to roll out a wealth tax. So, what is the problem? Why did the 1970’s Labour government abandon its wealth tax manifesto commitment? And why have countries like France and Sweden disavowed their versions?

Design is the main issue. Valuing assets not being transacted (sold) is the chief headache. By some estimates, over 60 percent of wealth is held in non-financial assets. In particular, private businesses which are difficult to value and are illiquid. It also seems economically illiterate to tax enterprise, the job creation engine that will be vital as we struggle post-lockdown. If this is then given some type of tax exemption, it will encourage flows from other wealth stores, distorting pricing and undermining the remaining taxable base.

And which assets to include creates massive problems and scope for injustice and abuse. Many proposals have excluded pensions; but this then creates an incentive to shift assets and capital. If including dwellings, what to do for those with no cash income to meet the tax bill?

Capital flight is the second worry. HMRC has much more sophisticated techniques in valuation and enforcement than available in the 1970s. However, mobility of individuals and their businesses is much easier. Since 2015, the substantial closure of tax reliefs granted to UK resident individuals who are not domiciled in the UK (non-doms) has certainly reduced the immigration of the wealthiest to the UK. A wealth tax would worsen this and encourage many to leave.

Adding to this, the UK also faces tougher competition for wealth. France has withdrawn its wealth tax, ‘L’impôt sur la fortune’ in favour of a property tax. It helped expunge over 40,000 millionaires during its existence. The number of EU countries with wealth taxes has shrunk from 12 in 1990 to just one today – Spain. Many EU states are rolling out their versions of non-dom regimes to attract more wealth. All these states would welcome rich refugees from a U.K. wealth tax.

This is the story globally. A 2018 OECD study found that a net wealth tax results in more distortions and is less equitable than levies on capital income (dividends and interest) or capital gains.

Work with what we have

In the immortal lines of Labour’s Dennis Healey, its feels just and satisfying to “squeeze the rich until the pips squeak.” But taxing the latent wealth of the slippery footed ultra-rich has proven elusive globally. The reality is liberal economics means freedom for the rich too; we may have to learn to live with some of their excess capital accumulation no matter how socially unjust it may taste. Instead of popularism that could undermine the tax base, better instead to refashion the wealth taxes we have today, make them fairer and close the big loopholes.

That is how we will help the neediest in our society, and pay the coronavirus bill.