A thoughtful analysis appeared in this journal of our final report on a wealth tax for the UK (‘The Wealth Tax Commission’s final report’ (P Barclay, G Price & T Schlee), Tax Journal, 8 January 2021).
For a full discussion of the final report, we would refer readers to the frequently asked questions that deal with some of the misunderstandings that have emerged and the longer final report (or for a quick read the executive summary). However, we would like to respond to some specific points raised in the article.
Although commentary on annual wealth taxes tends to overlook the remarkable success of Switzerland in raising revenue from its annual wealth tax, nevertheless the Wealth Tax Commission explicitly rejected the idea of a UK annual wealth tax in favour of reforming existing taxes. There are many reasons set out in the report why a one-off tax works differently: for example, it is much harder to avoid; only one valuation is needed; and it introduces less complexity into the tax system overall.
However, we reject the suggestion in the article that a one-off tax payable over five years would soon become a permanent wealth tax. We note that one-off taxes are often suggested for specific assets: why would such a tax imposed on all assets be different? Germany, Ireland and France introduced forms of one-off wealth taxes and there is no evidence that people feared a recurrence. (See evidence paper 7 for a history of one-off taxes.) Clearly the public understands that covid-19 is a once in generation crisis - and if revenue has to be raised, it may require an exceptional and one-off response.
Contrary to what was implied in the article and elsewhere, we did not make any recommendations on thresholds or rates and specifically rejected doing so. We merely illustrated different yields on varying thresholds (and rates) by examples. Apart from the fact we did not agree amongst ourselves, our own preferences on these issues carry no special weight.
A few obvious points can be made though:
For example, with an exemption threshold of £2m per individual, equivalent to £4m per household, only the top 1% would pay. At 5% payable over five years, it would raise £80bn (£16b pa) after administrative costs. Given IHT can only muster £5bn a year, this is not an insignificant sum.
Our recommendation was conditional: a one-off wealth tax is a good idea if and only if the government wanted to raise taxes to generate significant revenue. If it is deemed that there is no need for additional revenue, then (apart from structural reforms) no tax rises are needed. But if there are rises, a one-off wealth tax would be preferable to income taxes. We agree it would not directly help the UK structural deficit which by its very nature requires either ongoing increases in tax, reductions in expenditure or increases in productivity. However, it would delay the point at which such other permanent changes would need to be introduced. Since alternatives such as income tax and VAT rises would have negative economic effects, a one-off wealth tax would smooth the transition before these rises come in.
We do not accept ‘that the primary policy effect of a wealth tax would be redistribution’. This is true of an annual wealth tax but not a one-off tax. The report shows the rising levels of inequality on wealth in the last 30 years – something that should concern us all – but the one-off tax would not deal with this, since rates of accumulation are fastest for those with the highest wealth. To the extent that this is an important concern, other changes to the (ongoing) taxation of capital are needed.
A one-off tax takes money from the wealthiest part of the population but based on a detailed article of national data there is little evidence that many would struggle to pay it or that they would be forced to sell assets. If (as the article suggests) a ‘solidarity tax’ i.e. an additional levy on income is likely to be preferred by politicians, it is hard to see why this would be ‘fairer’. To raise any significant money, it would have to apply across all income thresholds – thus affecting the lower paid and the very frontline workers who have contributed most in the pandemic.
The article notes other options such as narrowing the gap between employed and self-employed workers, increasing dividend rates or aligning CGT with income tax. Such changes may or may not be desirable in their own right but are unlikely to raise anything like the same sum of money, so the chancellor will need to consider whether the pain is worth the reward. Any tax rise is extremely difficult. It is less so if it is seen to apply fairly across a broad base to all assets of the wealthy rather than focusing only on land, business, financial assets or income.
The article suggests that there is not genuine public support. Evidence paper 2 provided detailed study of public opinion based on a wide group of taxpayers, using surveys and focus groups, with Ipsos MORI expertise. It illustrated that a wealth tax was significantly more popular than other ways of raising revenue across all taxpayer groups including those who would have to pay it and irrespective of political persuasion. Importantly, a wealth tax was three times more popular than raising top rates of income tax, so this support is more than pure self-interest.
Valuations of assets such as private company shares and art are already required on a number of occasions such as death, gifts, splitting of companies, insurance, gifts for cultural heritage. Whilst we agree that annual valuations would be highly undesirable, a one-off valuation of these assets is not unduly difficult in the majority of cases. Valuations are frequently done for all sorts of reasons and there is plenty of case-law and legislation to tell us how to do it. The logic of the article seems to be that we would not tax such assets at all on the basis they cannot be valued! The timing of the first payment date would occur long after announcement and the actual valuation date – designed to give people time to get valuations and pay the tax – and balancing payments could always be used in subsequent years if a formal valuation were not completed in time for the first payment.
The article notes that if tax is levied on shareholders, the shareholders may want to declare dividends to pay WT. This will in turn generate more tax. However, a WT on shares no more has to be paid out of company profits than a beer tax is paid out of beer. Someone who pays tax on their house has to pay it out of taxed earned income or from financial savings which if sold may generate gains. Why should a one-off tax on company shares be any different? Indeed, in some ways shareholders are at an advantage: unlike earnings which are taxed at up to 47%, dividends can be extracted to pay the one-off tax at lower rates of tax – 7.5% to 38.1%.
We suggested a liquidity test to deal with hard cases where the tax really cannot be paid without sale of an asset. In that event payment is deferred.
Further information on our website gives much more detailed article about the design and impact of a one-off tax and also has a wealth of evidence and background papers written by independent contributors on valuation, economics, international comparisons, design and administration. There is also a tax simulator, allowing readers to see how much could be raised by different wealth tax designs, and what the cost of such a tax would be to them.
It has been 50 years since the UK last looked at a wealth tax in any detail – that was why we thought it was worth examining the case for annual and one-off wealth taxes now with an open mind. We did not favour an annual wealth tax partly for the reasons Healey discovered in 1975: ‘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.’
Hopefully the body of evidence and final conclusions will be helpful for future politicians in framing policy and designing a one-off tax to avoid key mistakes.
Dr Arun Advani, Emma Chamberlain & Dr Andy Summers, The Wealth Tax Commission
A thoughtful analysis appeared in this journal of our final report on a wealth tax for the UK (‘The Wealth Tax Commission’s final report’ (P Barclay, G Price & T Schlee), Tax Journal, 8 January 2021).
For a full discussion of the final report, we would refer readers to the frequently asked questions that deal with some of the misunderstandings that have emerged and the longer final report (or for a quick read the executive summary). However, we would like to respond to some specific points raised in the article.
Although commentary on annual wealth taxes tends to overlook the remarkable success of Switzerland in raising revenue from its annual wealth tax, nevertheless the Wealth Tax Commission explicitly rejected the idea of a UK annual wealth tax in favour of reforming existing taxes. There are many reasons set out in the report why a one-off tax works differently: for example, it is much harder to avoid; only one valuation is needed; and it introduces less complexity into the tax system overall.
However, we reject the suggestion in the article that a one-off tax payable over five years would soon become a permanent wealth tax. We note that one-off taxes are often suggested for specific assets: why would such a tax imposed on all assets be different? Germany, Ireland and France introduced forms of one-off wealth taxes and there is no evidence that people feared a recurrence. (See evidence paper 7 for a history of one-off taxes.) Clearly the public understands that covid-19 is a once in generation crisis - and if revenue has to be raised, it may require an exceptional and one-off response.
Contrary to what was implied in the article and elsewhere, we did not make any recommendations on thresholds or rates and specifically rejected doing so. We merely illustrated different yields on varying thresholds (and rates) by examples. Apart from the fact we did not agree amongst ourselves, our own preferences on these issues carry no special weight.
A few obvious points can be made though:
For example, with an exemption threshold of £2m per individual, equivalent to £4m per household, only the top 1% would pay. At 5% payable over five years, it would raise £80bn (£16b pa) after administrative costs. Given IHT can only muster £5bn a year, this is not an insignificant sum.
Our recommendation was conditional: a one-off wealth tax is a good idea if and only if the government wanted to raise taxes to generate significant revenue. If it is deemed that there is no need for additional revenue, then (apart from structural reforms) no tax rises are needed. But if there are rises, a one-off wealth tax would be preferable to income taxes. We agree it would not directly help the UK structural deficit which by its very nature requires either ongoing increases in tax, reductions in expenditure or increases in productivity. However, it would delay the point at which such other permanent changes would need to be introduced. Since alternatives such as income tax and VAT rises would have negative economic effects, a one-off wealth tax would smooth the transition before these rises come in.
We do not accept ‘that the primary policy effect of a wealth tax would be redistribution’. This is true of an annual wealth tax but not a one-off tax. The report shows the rising levels of inequality on wealth in the last 30 years – something that should concern us all – but the one-off tax would not deal with this, since rates of accumulation are fastest for those with the highest wealth. To the extent that this is an important concern, other changes to the (ongoing) taxation of capital are needed.
A one-off tax takes money from the wealthiest part of the population but based on a detailed article of national data there is little evidence that many would struggle to pay it or that they would be forced to sell assets. If (as the article suggests) a ‘solidarity tax’ i.e. an additional levy on income is likely to be preferred by politicians, it is hard to see why this would be ‘fairer’. To raise any significant money, it would have to apply across all income thresholds – thus affecting the lower paid and the very frontline workers who have contributed most in the pandemic.
The article notes other options such as narrowing the gap between employed and self-employed workers, increasing dividend rates or aligning CGT with income tax. Such changes may or may not be desirable in their own right but are unlikely to raise anything like the same sum of money, so the chancellor will need to consider whether the pain is worth the reward. Any tax rise is extremely difficult. It is less so if it is seen to apply fairly across a broad base to all assets of the wealthy rather than focusing only on land, business, financial assets or income.
The article suggests that there is not genuine public support. Evidence paper 2 provided detailed study of public opinion based on a wide group of taxpayers, using surveys and focus groups, with Ipsos MORI expertise. It illustrated that a wealth tax was significantly more popular than other ways of raising revenue across all taxpayer groups including those who would have to pay it and irrespective of political persuasion. Importantly, a wealth tax was three times more popular than raising top rates of income tax, so this support is more than pure self-interest.
Valuations of assets such as private company shares and art are already required on a number of occasions such as death, gifts, splitting of companies, insurance, gifts for cultural heritage. Whilst we agree that annual valuations would be highly undesirable, a one-off valuation of these assets is not unduly difficult in the majority of cases. Valuations are frequently done for all sorts of reasons and there is plenty of case-law and legislation to tell us how to do it. The logic of the article seems to be that we would not tax such assets at all on the basis they cannot be valued! The timing of the first payment date would occur long after announcement and the actual valuation date – designed to give people time to get valuations and pay the tax – and balancing payments could always be used in subsequent years if a formal valuation were not completed in time for the first payment.
The article notes that if tax is levied on shareholders, the shareholders may want to declare dividends to pay WT. This will in turn generate more tax. However, a WT on shares no more has to be paid out of company profits than a beer tax is paid out of beer. Someone who pays tax on their house has to pay it out of taxed earned income or from financial savings which if sold may generate gains. Why should a one-off tax on company shares be any different? Indeed, in some ways shareholders are at an advantage: unlike earnings which are taxed at up to 47%, dividends can be extracted to pay the one-off tax at lower rates of tax – 7.5% to 38.1%.
We suggested a liquidity test to deal with hard cases where the tax really cannot be paid without sale of an asset. In that event payment is deferred.
Further information on our website gives much more detailed article about the design and impact of a one-off tax and also has a wealth of evidence and background papers written by independent contributors on valuation, economics, international comparisons, design and administration. There is also a tax simulator, allowing readers to see how much could be raised by different wealth tax designs, and what the cost of such a tax would be to them.
It has been 50 years since the UK last looked at a wealth tax in any detail – that was why we thought it was worth examining the case for annual and one-off wealth taxes now with an open mind. We did not favour an annual wealth tax partly for the reasons Healey discovered in 1975: ‘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.’
Hopefully the body of evidence and final conclusions will be helpful for future politicians in framing policy and designing a one-off tax to avoid key mistakes.
Dr Arun Advani, Emma Chamberlain & Dr Andy Summers, The Wealth Tax Commission
