Analysis: The pitfalls of a wealth tax
Nick Clegg's call for a tax on the wealthiest to help "hardwire fairness" into the coalition's austerity drive was strong on political messaging, but weak on detail. Patrick Stevens, president of the Chartered Institute of Taxation, has been assessing the pros and cons of the measure…
By Patrick Stevens
The infamous American bank robber, Willie Sutton, reputedly told a journalist who asked him why he robbed banks that it was "because that's where the money is". The same irrefutable logic would appear to be behind the case for a wealth tax.
If the Treasury is depleted, not enough tax is being brought in and ordinary families are struggling to make ends meet, those sitting on large amounts of wealth must surely be worth tapping for a bit of it?
Of course it's not as simple as this. But before considering the potential difficulties, it's worth assessing the case for a levy on wealth for the UK.
First and foremost there is a ring of natural justice about it. Taking the most from those who have the most to give seems fair. The measure also appears popular, albeit rather more so among the 95% or so of the population who would not be liable to pay it! There is undoubtedly a sense among many people, fuelled by high profile media stories about tax avoidance, that some of the wealthiest are not paying their 'fair share'. This has already contributed to putting proposals on the table for a tax reliefs cap, a general anti-abuse rule and the extension of legislation around Disclosure of Tax Avoidance Schemes. A tax on wealth, whether temporary or permanent, could be seen as a natural next step.
A related point is that most wealth is tied up in property, which has experienced huge increases in value over the last 30 years, which some might classify as unearned windfall gains, deserving of a windfall tax. Those who have bought in the last few years though, might take issue with such an assessment!
Additionally, in the debate about whether we should tax wealth or income, a shift to wealth has one big thing in its favour – significant evidence, from OECD research in particular, that taxes on land and other wealth are less damaging to growth than taxes on either personal income or corporate profits (with VAT and sales taxes coming somewhere inbetween). In our current economic circumstances this argument weighs especially heavily.
In the debate about tax people often talk about the wealthy and those with high incomes as though they are the same people. They are not. Of course there is a substantial overlap but there are significant differences. In particular high earners tend, on average, to be a little younger than those with the largest amount of assets. Our current tax system raises about six times as much from personal income as it does from taxes on property and other forms of capital. At the top end the difference is even more stark – high earners pay nearly half their salaries in tax, but unless a wealthy individual moves to a new mansion every year – or dies – the tax they pay on their wealth will be negligible. There is a case to be made that there is an imbalance here which should be evened out a little.
However the counter-arguments are also strong. These fall broadly under two headings – a challenge to the claim that wealth taxes are fair, and the huge practical difficulties that operating such a tax would present. These difficulties would be especially disproportionate if the tax was introduced for one year only.
On the first of these, while we don't currently have a wealth tax we do have a number of taxes which already tax wealth in various ways, generally at the point at which it is transferred from one owner to another. Inheritance tax is the most obvious example, but there are also capital gains tax and stamp duty on property and share transactions. Additionally we of course have the annual council tax charge, although the amounts involved are pretty small for the very wealthy – and you could also argue that it is a tax on residence rather than ownership, given that tenants rather than landlords tend to pay in rental properties.
Second, those with wealth are not necessarily able to lay their hands on it that easily. Most of our national wealth is tied up in property. Someone with a £2 million house may seem well-off but if they are on a low fixed income, as many pensioners will be, finding the money for a £10,000 annual charge (which is what a 0.5% levy would correspond to) may present a huge challenge. There is a reason why most taxing of wealth currently takes place at the point it is being transferred – because it is easier then to skim off a portion of the proceeds of a sale. To go back to Willie Sutton, that is where the money really is. The rest of the time, a £2 million property or family heirloom may be hard to realise the value of.
There are ways round this problem. One, that was put forward in the context of the proposal for a 'mansion tax', is that people not in a position to pay the charge now should be allowed to roll it up until they are or, in the case of pensioners, until they die, when it can be taken from their estate.
A third difficulty, and another reason why most taxing of wealth at the moment takes place at the point of transfer, is that wealth can be quite tricky to value. Successive governments have put off council tax revaluation because of the scale of the task and the political risks involved. Large scale property valuations for a wealth tax would present similar challenges; fewer properties would be involved but the sums in question would be larger, so would be likely to be contested more frequently. Valuations of other items – art, expensive jewellery, other collectors' items – would be likely to present even greater challenges. The descendant of a famous sportsperson might be able to raise large sums by selling off their medals and other memorabilia, but if the market hasn't been tested, it will be tough to put a value on it. It will not be impossible – items like this get valued for insurance purposes all the time – but it is likely to be a laborious and hotly contested process.
Then there is the equally tricky question of what should be included in an assessment of someone's wealth. Should there be exceptions, such as the one in existing inheritance tax rules to allow trading businesses and family farms to pass down to the next generation? If so, this may prompt people to buy agricultural land as an avoidance strategy, pushing the price of the land up further. If money in savings accounts is included then what about money in pension schemes, even if it might not be accessible for decades down the track? What about wealth invested overseas?
This begs the question of who would be included in such a tax. Would it extend beyond those currently tax resident in the UK – ie loosely those residents here for most of the year? Most people would expect to see the expensive London pads of wealthy foreigners covered by any wealth levy though, even if they are only here for a few weeks a year, but it would seem excessive to tax their worldwide assets, so there might need to be a different set of rules for non-doms and/or non-residents.
Preventing avoidance would be a real challenge. Just consider inheritance tax, which is inherently avoidable with a little planning. Of course, property can't be relocated to a tax haven, but ownership can be, and often is, obscure, 'enveloped' within a company or trust which may be based offshore. The government is currently changing the stamp duty rules in response to apparent unfairnesses in this area. The French wealth tax (the only one in the EU at present) is levied by household rather than by individual, in part at least to stop wealthy individuals putting half their wealth in their spouse's name, and it is likely that any UK wealth tax would have to be too. This would present problems around household definition similar to those being faced by the new high income child benefit charge (and existing tax credits claimants). I wouldn't expect to see too many wealthy couples divorcing to cut their tax bills, but it is conceivable that two property owning singletons could be deterred from setting up home together by the prospect of a hefty tax bill landing on them. This would be more likely to happen if the tax were a long-term fixture rather than a one off.
And of course if the tax is pitched too high there is the ultimate avoidance strategy – leaving the country. A bit extreme perhaps, but there is ample evidence that the French wealth tax has led to flight, including to the UK, by some of that country's wealthier people. At the very least you suspect that French wealth tax exiles in the UK might think again about where to make their home if the UK follows the French lead.
All of the challenges set out above are surmountable with a bit of work, and most of them are faced in relation to one or more existing taxes; there would, however, be a likely cost of significant additional complexity in a tax system which is already among the world's most complex. Any attempted short-cuts may offer up avoidance opportunities – the 18th century window tax was intended to be a rough and easy proxy for wealth but prompted widespread bricking up of windows by those reluctant to pay.
And how much would such a tax raise if it was introduced? Obviously it would depend on the level set, and then on the extent of exemptions, and whether it was a one-off or repeated. UK total net worth has been estimated by the Office of National Statistics at £6.8 trillion (end of 2011 figure) but it is anyone's guess how much of that would fall within the scope of a wealth tax. There would also be likely to be substantial administrative costs.
As the arguments and analysis around the 50p income tax rate has shown, the extent of behavioural changes around the levying of a new tax are especially hard to anticipate. The recent increase in stamp duty on high end properties is reportedly leading to lower than expected income for the Treasury because it has depressed the market in this sector (though some of this could have been due to forestalling ahead of the charge's introduction). Some French commentators have claimed that more has been lost to capital flight as a result of their wealth tax than the tax itself ever raises.
Putting all these factors together it is hard to say other than that the tax take from a levy on wealth is inherently uncertain. It has the potential to raise significant sums, but any government relying on it to pay the national bills will be engaged in a risky endeavour. Nevertheless most of us would accept that taxes on property and capital do have a place in our tax system. If the government does want to shift the burden more on to these, and weight it towards the wealthiest, then that is eminently achievable. But it would be a lot of work to do for a one-off, as opposed to a permanent change.
Patrick Stevens is president of the Chartered Institute of Taxation
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