If you think a wealth tax won’t hit you, you’re wrong

The idea of a new wealth tax in the UK isn’t going away. In the last week, two parties have floated new plans.

The Greens suggested an annual tax of 1-2% on personal wealth over £3m, something they think would raise £40bn of other people’s money for them to spend.

The Labour party has also had another go and come up with an additional estate tax. This would be charged at 15% and supposedly be hypothecated to cover long-term care costs. It would come on top of the 40% the heirs of anyone with any wealth pays already (assuming they haven’t avoided it).

All this makes us rather uncomfortable. We think that income in the UK is over-taxed relative to wealth. But that doesn’t mean wealth in the UK isn’t taxed.

There is the 2% inflation target (an effective wealth tax in that it reduces the value of your cash in order to keep the state show on the road); there is unindexed capital gains tax, which along with the inflation acts as a very nasty wealth tax (see my writing on the matter here); there is inheritance tax (although I would argue this is more an income tax on heirs – see my thoughts here). There is stamp duty on property and share purchases and there is council tax (a low tax on wealth, but one nonetheless).

When people suggest they are keen on wealth taxes, further questioning usually suggests that they have two thoughts on it. The first is that we won’t see a wealth tax in the UK without the removal of some other tax (not many countries have a wealth tax and a high rate of IHT). And the second is that if there is a wealth tax it won’t hit them.

They are certainly wrong on the first: the UK is a tax adder not a tax subtractor. And if they aren’t actually on the poverty line, they are very probably wrong on the second: fiscal drag will soon take care of that.

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  • Clive

    “…the second is that if there is a wealth tax it won’t hit them”

    I’ve always thought that people in favour of mansion taxes and the like ask themselves the question “would I like people who are wealthier than me to pay more tax so that I can pay less ?”. They give a resounding “Yes” as it seems a no-brainer. However, they were only actually asked about the first part (more taxes on the rich), they incorrectly inferred the second part (less tax for them to pay)

    p.s. thought from your comments in the FT last weekend you were on holiday for a month, Merryn ?

    • GFL

      Yes if a wealth or mansion tax is introduced it will not be long before a fairly sizeable percentage of the population pays it. The truely rich can move their money faster than governments can tax them – the upper middle class, like always will get it in the neck.

      I think it’s a little sad that people on medium incomes have so little ambition they already believe they will never have any real wealth. In America, for example, success is something everyone strives for, in the UK it is considered dishonest.

  • Greg

    QE and low interest rates have benefitted those with extreme wealth with property at the expense of those who are poor in rented accommodation. They have seen vast capital growth and mortgage re-payments shrink giving them increased yields too, whereas those trying to save for a deposit have seen their savings eaten away by inflation.

    The gap between the rich and poor has been rapidly widening and something needs to be done to address the problem that has been largely caused by Government and BoE policies intended to create economic growth.

    Council tax is not really a tax on wealth – it is regressive and arguably more akin to a poll tax – a tax paid to live in a certain sized house irrespective of the value of the land it sits upon – with a person in 4 bed mansion in central London paying a similar amount to someone in a more modest home in the north.

    Inflation also arguably hits the poorest more than the wealthy as the wealthy generally have assets which increase in value whereas the poor have little/no savings and have to spend what they earn in order to make ends meet and generally see the lowest below inflation pay increases.

    I would argue that a progressive wealth tax on all is fairer than income tax. Income tax can be a disincentive to earn, yet the lack of a wealth tax encourages those with assets, land and property to rely on those to generate an income and they can sit back and become lazy. The lack of a proper tax on land together with Government policies which encourage Buy-To-Let have resulted in extortionate house prices and people who arguably sit back and reap the rewards without contributing to society or economic growth – that is why we need a wealth tax – not the type of wealth tax recently proposed but one based on land values – a Land Value Tax – that would encourage creativity, improvements and efficient land use, control house price inflation, deter land banking by developers and arguably lead to a fairer society with more affordable housing for all. Housing needs to become first and foremost a place to live rather than an investment.

  • BlackPoplar

    Have to agree with Greg – regardless of my dislike of our tax system, something needs to be done to urgently tackle the widening wealth gap in the UK. Our modern society and economy is based on a healthy middle class, and it is being progressively squeeze into a 2-class system.

    This 2-class system is no good for environmental or sustainability concerns, either. It will be increasingly essential that an increasing number of people have the money to influence the environment ‘with their feet’. Organic foods, solar panels, hybrid and electric cars, etc. These things should not be the reserve of the (liberal) wealthy, and that is why liberal people tend to see why such a high concentration of wealth is so bad for society. (I am speaking as a Conservative.)

    However, I do not agree with taxing money after income. Double-taxation is morally wrong.

    Inheritance tax is morally wrong. Once earned, it is a person’s right to do with it as they please – whether that’s buy a Ferrari or pass it on to their kids to better their futures.

    Tax on savings is morally wrong.

    Any tax on wealth already held would be morally reprehensible, and set the wrong precedent.

    We need to be controlling taxes and making them more logical, proportionate and auditible / attributable towards their functions. Simple and effective.

    Not more taxes in an already defunct system.

  • BlackPoplar

    P.s. I also agree with Greg regarding lack of a proper tax on land. However, I don’t agree that a ‘wealth tax’ is the way to resolve it. I agree with just about everything else he says, but I would say that the solution is to reform Council tax. Likewise, I believe in limiting the number of properties that a person or any legal entity to which that person is a main component can own.

    Our major problem in this regard is our natural hatred of ‘limiting things’. Irrational, greedy and, quite frankly, ignorant and weak-minded people always ask the question, “why shouldn’t someone be able to have as much of X as they want?”

    The answer, quite simply, is because it has never been a good thing, and it will be an even worse thing as time goes on!

  • mr clyde

    I think we all agree with Greg, it is how the end is achieved where the disagreement is. Greg and I have argued this point ad nauseum, however I remain of the view that a universal CGT properly applied to all assets would be the simplest, workable solution. And no, paying CGT on the gain made on an asset initially paid for with taxed income is not double taxation, as the gain has not yet been taxed.

  • Mombers

    Seeing that the effect of taxes on a fixed supply are to reduce the price, the only people who will be ‘hit’ by this tax are those who have enormous unearned home equity. On top of it, many of them bought when prices were depressed by domestic rates and rent controls. Buyers will benefit from a wealth tax on land as they will not pay any more but the supply of under-occupied houses coming onto the market will give them more choice.
    Taxes on earned wealth that is not fixed in supply will of course have a detrimental effect and do not have the moral case of taxing unearned wealth.

  • Greg

    The problem I see with a tax on general wealth/assets over £3m (other than one on land/property) would be how assets/wealth would be traced and valued. Surely such a tax would be easy to evade/avoid – assets would be purchased and stored overseas, hidden in cellars and attics or buried? It would also arguably be extremely obtrusive – surely there would need to be inspectors checking people’s homes or a requirement that HMRC had copies of all insurance policies, thus it would be difficult and expensive to collect – unlike a Land Value Tax.

  • Stephen L

    Greg you’re very convincing, mr clyde “thinks we all agree with you” but I’m glad you now realise it would be very intrusive, that Inspectors would be required to knock on our doors to check up on us. During the last financial crisis the government begged us to spend and told the (impoverished) banks to loan even more to allow this, in order it might gain enough VAT to balance its books. (Notwithstanding as Bill Bonner points out it’s the unspent bank balances that provide the wherewithal to lend to businesses to invest.)
    And when history repeats itself, and it always does, and the law is tightened, will the Mk. 2 Inspector be empowered to instruct me to spend (on a holiday in Blackpool? or a flutter on the Nat Lottery? repaint my front door again?) or to raid my nest-egg “in the interests of the community” a.k.a to balance the government’s books? If I decline will I be up before the magistrates & pilloried in the Daily Wail?
    Be careful what you wish for. I’m glad you’re having second thoughts.

  • Greg

    Stephen, I’m not having second thoughts about the need to tax wealth – I just feel that a tax on all assets over £3m would be totally impractical and arguably unfair, whereas a Land Value Tax would be relatively easy to collect, impossible to evade/avoid and would arguably be the fairest way to tax wealth – even though a LVT is not strictly a tax. I still believe that growing wealth inequality needs to be addressed otherwise it will result in civil unrest and possibly a revolution.

  • dave21kj

    What is happening at Money Week? A debate on how to get money off the rich. QE was/is a policy that was supposed to get us all spending again and to get the economy moving again, and, shock, it had some unintended consequences. Now we have more meddlers, with more interference, dreaming up new ways to tax even more and take money off, well, someone else! Bit like pre WW2 Germany? History is paved with these good intentions!
    What will happen if Greg et all gets his way? I don’t know. Neither does he. But a system that removes money from a certain class, gender, ethnic group to fund another group will end badly. Perhaps the group we rob will react in some way? Not take it lying down?
    How about an article on lower taxes, fair taxes, less state… or shall we just continue the march to fascism.

    • Clive

      dave21kj

      “What will happen if Greg et all gets his way? I don’t know. Neither does he”

      I agree with you there. It seems to be the class mistake governments (certainly ours anyway) make. They dream up some scheme “If we do XYZ, it’ll put in £n billion”. What they never do – and probably can’t do – is think how people will react. Perhaps money will flood out of one asset into another, perhaps it’ll go abroad, perhaps people will hide it (in extreme cases),….

      Though tax is never “fair” in any absolute terms, the more “unfair” people see it as, the more they’re likely to move/hide money/assets. As to LVT, I don’t see that as easy to implement. Prices move all the time, though strictly that’s house (land and house) prices, not land prices – which is rarely priced on its own.

      So I’m not one of the “we all agree with Greg” either.

  • Greg

    “Now we have more meddlers, with more interference, dreaming up new ways to tax even more and take money off, well, someone else!” – you could argue that QE and low interest rates are no different to taxation, accept the Government/BoE are effectively confiscating money from the less well off i.e. renters and pensioners and giving it to those who are more wealthy i.e. those with equity and who have been able to leverage via property ownership.

    No one likes to be taxed, however your attitude is certainly not a fair approach – many of those who currently have great wealth have only been able to do so as they were able to buy houses at the right time, whilst many others were still at school or university. Many of these people will be stuck in rented accommodation largely because of those who have BTL portfolios which have forced up house prices.

    Much ‘wealth’ is not due to hard work and diligence it’s down to luck and being in a position to buy property when it’s affordable, or before ‘windfalls’, due to new road and rail links for example, were constructed using public money – why shouldn’t such ‘windfalls’ created by the taxpayer be clawed back ? That’s one of the many reasons why LVT is arguably the fairest way to ‘tax’ wealth.

    “What will happen if Greg et all gets his way? I don’t know. Neither does he” – yes I do actually, it would be much fairer than the status quo. House prices would be more affordable for all, land use would be more efficient and you could extend and improve your home without having to pay any more tax, as it would be based on the value of the land not the building sat upon it.

    Yes, prices move all the time, however the Land Registry is able to provide relatively accurate land values which could be used each year to set the LVT. Of course there would be some who would be worse off, like with any form of taxation, but there would be many who would end up paying much less than the current Council Tax and it would mean the Government could control house prices without needing to increase interest rates.

  • Clive

    Greg

    On second thoughts, I’ll go for it – as I’m sat here in my rented house, with an OK paying job, so less income tax and modest LVT (not a huge house) which the landlord would no doubt pass on, will help preserve my wealth !.

    • Greg

      Clive – LVT would be paid by the land owner and cannot be passed on – all tenants would be much better off if LVT was to replace Council Tax and Stamp Duty: http://www.landisfree.co.uk/?p=140

      • Clive

        Greg

        Not sure how you can say it “LVT would be paid by the land owner and cannot be passed on”. Council Tax is paid by the tenant. We obviously don’t have an LVT law yet, but if we did it could clearly say tenants pay the LVT.

        Even if it didn’t – as you know – landlords can ask any rental they want. Only barrier is what the market will accept. If the LVT pushes the costs of housing by £N in a given area, I’m guessing all landlords would move to increase their annual rent by £N. Only option if rents go up (as now) is for tenants to move out.

        • Greg

          I would also argue that ASTs should be replaced with new longer tenancy agreements with greater security of tenure for tenants, and businesses encouraged to invest pension plans and profits in residential property to let long term, rather than private individuals, and scrap BTL which by its very nature increases the cost of housing for everyone.

          Landlords always used to pay the old domestic rates – it was the Conservative Party that changed things in the 1990s so everything favoured the landlord.

          The links explain the economic theory explaining why the LVT could not be passed on – however if tenancy agreements were also reformed alongside introducing a LVT, renting would become a more favourable option for tenants but also more would be able to afford to purchase a home.

          The arguments on the second link (below) show how LVT would be fairer than many people might suppose.

        • Greg

          and if LVT was high it would push the value of the property down so many landlords might decide to sell and more would-be first time buyers might purchase a home instead of rent – so yes the market would ultimately decide what rent could be charged and where people choose to/can afford to live but LVT would place a downward pressure on housing prices and rents.

    • Greg
  • mr clyde

    I apologise if I have presumed too much. The point I was making is that there appeared to be a general consensus through the comments that wealth inequality was widening and that something should be done. What to do is a different matter. Sorry.

  • dave21kj

    It seems the normal argument to the UK being bust is more tax, rather than less tax and less spend. QE is a tax? You are right as it erodes the value of the £ in the long term and reduces interest (for all of us). Money for nothing. Doesn’t work. The argument here and always is to tax “someone else other than me”. Greg does a decent job of trumping up a case against the rich. Hitler did a decent job of the case for robbing the jews; extreme analogy but it is always thus i.e. make a case and rob someone.
    My other point is that meddling never works as one intended (Clive makes the point). The consequences of QE lead to Greg land tax solution. He is also coming up with ideas to deal with the unintended consequences of the idea he supports “longer tenancy agreements”.
    Hearth Tax, Beard Tax, Window Tax, Poll Tax, Bedroom Tax, 50% tax rate… they all had unintended consequences and failed in their objective to raise revenue. Study shows raising tax revenue beyond a given point is difficult. To achieve this requires a police state and removal of freedoms. This is exactly where we are going.

    • Greg

      Capitalism left to its own devices simply creates greed, selfishness and extreme wealth inequality (the analogy of ‘robbing’ demonstrates this perfectly) – the rich owning everything and the poor living in substandard rented accommodation with no security of tenure, unable to have pets, unable to decorate to their own taste, unable to put down routes and unable to make a house a home.

      But of course many with a house of their own, with wealth, with a high income will simply say “I’m alright, Jack” – with an unrealistic belief that others will be able to accumulate the fortune they have – but it will be nigh on impossible for them. They will not be able to save or afford to purchase a roof over their heads – those who already have wealth are always going to be in a better position to outbid them, to buy more Buy-To-Lets and force them remain in rented accommodation forever.

      ‘Freedom’ is to be able to buy a house and make it a home – ‘a police state’ is where the wealthy dictate everything – how and where everyone else should live.

      The argument is not to “tax someone else other than me” – it is to ensure the tax system is fair – it is currently far from fair – I believe a LVT is the fairest form of taxation because it gives people a degree of choice how much tax they pay by how much land they own and where they decide to live, it cannot be avoided or evaded – everyone pays it, but those who own the most expensive land pay the most.

      My views about longer tenancy agreements are not as a consequence of advocating a Land Value Tax – it is to address the flaws of the 1988 & 1996 Housing Acts which have resulted in undesirable short term rented accommodation for tenants – a LVT would arguably improve the situation as more would be able to afford to buy a home or pay less to rent.

      • Greg

        *roots

  • Clive

    Greg

    “it is to ensure the tax system is fair”

    As dave21k suggests, what most people mean by “fair” is that the “right people” (usually themselves) pay less tax and others (usually “the rich”) pay more. I’ve never heard anybody suggest a fairer system that gave everybody lower tax bills.

    • Greg

      Surely ‘fair’ relates to one’s ability to contribute? – that’s why the Poll Tax was so unpopular as the Conservative Party argued that everyone should contribute the same amount regardless of their income, wealth or ability to pay. LVT means that you can at least chose where you live and what you pay – it is not strictly a ‘wealth tax’ as someone could store wealth in jewellery, art or vintage cars and live in a small house in an area with a low LVT and not pay very much tax – but most wealthy people would chose to own land in desirable areas and so would tend to and being willing to pay more.

  • Clive

    Not sure I’d agree ‘fair’ means ‘ability to pay’. If A earns £30K and B earns £20K, some would say A paying 150% of what B pays is fair. Others might argue A has £2K spare after expenses, B has 10p, so A should pay 20,000 times what B pays. It’s all subjective, which is why nobody will ever construct a system universally acknowledged as fair, no matter what the scheme.

    • Greg

      Granted, Clive, ‘fair’ is subjective – Right wing parties generally think it’s fairer when everyone pays about the same tax, preferring taxes on spending rather than income, whereas the left dislike taxes on expenditure which they regard as regressive, favouring taxes on wealth and income.

      I think LVT falls in between in that people can choose what land and property they buy and where they live – some areas may cost more in terms of LVT payable but be more desirable/profitable and therefore some may consider the extra tax to live/set up business there worth paying. So LVT could be seen as a tax on wealth or one based on a purchase decision – it seems fairer to me as people can pay whatever they wish based on choices made.

      In theory it should appeal to both left and right wing – it was favoured by Adam Smith, Winston Churchill, American Democrat Henry George, and The Green Party have it in their manifesto…

      • dave21kj

        Greg. The Hearth Tax resulted in the removal of hearths from homes, The Window Tax resulted in people boarding up windows, the Beard Tax no doubt spiked sales in shaving equipment, the Poll Tax was uncollectable, we could go on and on.. I ask you a property tax targeting large properties: What will happen next? So whilst your idea seems fair and reasonable to you it will not achieve its desired outcome. Sure it will rob the initial home owners as property values slump. Is this fair? On-going people will avoid larger properties, just as retailers avoid the high streets, else the revenue stream will drop as the property price drops.
        Why don’t we spend a little less of peoples money. Should this nation be a nuclear power? What services should the NHS provide? How can schools take advantage of e-learning and digital content? Should we be in the EU? How do we reduce social costs? Tax free day is now 30 May.

        • Greg

          Dave – I don’t think you understand it – and neither did I at first – I too criticised it, pulled it apart until I read up about it – I would recommend you do too. It would be introduced gradually, possibly replacing the existing Council Tax first and then Stamp Duty and possibly Capital Gains Tax. People would not avoid larger properties – quite the opposite – they would be encouraged to extend and those with gardens larger than they need would be encouraged to sell land to developers or build a house in the garden for other family members – it’s the land that would be taxed NOT the buildings. I don’t see the relevance of your other points.

      • Clive

        Greg

        “people can choose what land and property they buy and where they live”

        Do you think people will see that as fair and people paying according to ability ?

        Take two people A and B, currently live next door to each other, have the same income, same savings, pay the same tax. When LVT comes in, A moves to a cheaper property, pays less LVT. In the short term, we now have A and B on the same income, same savings, A has less outgoings, can save more, has more ability to pay but pays less tax. B has more outgoings, can’t save has much, has less ability to pay, but pays more tax. Seems back to front. Accept B should win in the long run due to house price appreciation.

        re “Right wing parties generally think it’s fairer when everyone pays about the same tax” – hardly. I believe the 1% highest paid pay something like 25% of all income tax.

        • Greg

          Clive, I’m sorry but you don’t understand it either….and why is being able to chose not fair? Why should B feel disgruntled for paying more tax than A if he lives in a more desirable area with more facilities? If B choses to stay there and pay more tax for the benefits of living there (to him) then surely that is his decision and he can’t moan about it? A might be better off financially, but now is not able to benefit from all the convenient facilities near his old home. Why should A pay the same tax as B yet B receives more advantages by living in a more desirable area? Sounds fair to me – why does that sound “back to front”? Did you visit the links above and read up about LVT? It doesn’t sound like you have.

          Re Right Wing parties – yes you’re right, they do pay more – that’s why they don’t like it and don’t feel it’s fair!

          • Greg

            *choose

          • Clive

            Greg

            It was you that said earlier in this thread “Surely ‘fair’ relates to one’s ability to contribute”

            Yet here we have A with more ability to contribute, but he pays less and you defend that.

            I don’t care either way. It’s a hypothetical system with anomalies.

            • Greg

              But it does take into account one’s ability to contribute because you have a choice – you live in a house or rent an industrial unit, office or whatever, that you can afford, knowing what the LVT will be – yes LVT will change over time but then so does Council Tax – you could sell part of your garden or extend and sub-divide the house to provide an additional income. Most other taxation does not provide that choice. People would be willing to pay the tax for the convenience, being near facilities, roads and rail links or simply in a beautiful and desirable location.

              Yes, A in your example might end up with more left over income but might have to pay more for commuting to work and to go shopping etc. Just because you pay less Council tax than someone else should not mean you pay more income tax, surely?

              You say it’s hypothetical – yet I gather it’s in the Green manifesto and also under consideration from both Labour and the Lib Dems. Some Tories favour it too.

              • Clive

                “I gather it’s in the Green manifesto”

                Now I’m really worried.

                • Greg

                  …and was advocated by Adam Smith and Winston Churchill – you still have read up about it have you?

                  I didn’t like the sound of it at first but after reading up about it I changed my mind – all too often people don’t like change and have a fear of the new – change, being open to ideas and not having too fixed opinions about things is good.

                  • Greg

                    Just because an idea is put forward by a party/politician you might not support/like does not necessarily mean it’s a bad policy.

  • Angela

    I can see the point of a hypothecated wealth tax. The money to provide care for an ageing population has to come from somewhere, so why not from inheritance. Even though that seems hard on future, poorer, generations.
    That is not the same thing as an annual tax on capital assets. No political party seems to be suggesting that seriously.
    I would make only one proviso, which is that tax should be linked to income of inheritors.
    Tax should always relate to income, not to capital assets, that are after all, only the accumulation of taxed income.

  • Boris MacDonut

    As with so many things the Greens have the better ideas. A weath tax of 1% on those worth over £3 million. So someone worth £10 million ( who is 40 times richer than average) pays £70,000pa or 0.7% of their wealth which is likely to be growing at around 5% a year anyway.

  • benji

    “wealth taxes” of any kind are a bad idea, including liquid wealth i.e income.

    Instead, only the value we create together should pay for services we share together. Which is why, State revenue collected from land rent is not a “tax” on personal wealth (it is a user fee), and does not penalise productive activities. Indeed, by de-capitalising land’s value, it ensures it is always put to it’s highest productive use.

    A win-win in terms of economic efficiency.

    Banks and landlords would no longer be able to parasite £40bn each, every year in unearned income, and the top 1% would make a fair contribution, as measured by the market, for the benefits they receive.

    It would also vastly simplify our tax system. So a win-win-win-win.

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