Why is this issue back in the news?
In a word, Covid-19. The pandemic has blasted a £400bn hole in the UK public finances and has hit the poor far harder than the rich. The best way of addressing these dual imbalances – according, that is, to a group of academics and think-tankers calling themselves the Wealth Tax Commission (WTC) – is a 5% levy on personal net wealth above £500,000, spread out over five years. Many countries are re-examining wealth taxes in the wake of the fiscal havoc wrought by Covid-19, but the only biggish economy to have rushed one onto the statute book is Argentina. Earlier this month the left-populist government announced a one-off “millionaires tax” on people with assets of more than 200m pesos (£1.8m). Under the scheme, which has been approved by Congress, wealthy citizens will pay a one-off levy of between 1% and 3% on net assets, with the aim of raising £2.7bn to help fund Covid-19 measures. In the UK by contrast, the WTC thinks the government could raise almost 100 times that – £260bn over five years.
What exactly is proposed?
The WTC is a group of academic economists from the London School of Economics and the University of Warwick, which formed earlier this year and has drawn on research and evidence from more than 50 tax experts from think tanks (including the Institute for Fiscal Studies), the OECD club of nations, as well as lawyers and policymakers. Its conclusion, in a paper published earlier this month, is that the UK should introduce a one-off 5% “Covid-19 recovery tax” on all personal wealth above £500,000, net of outstanding mortgage or other debt. That includes wealth held in housing (including a primary residence), pension schemes, businesses and financial assets such as shares and funds. Levied over five years, the WTC projects this would bring in £260bn from just over eight million people, or one in six households. In terms of revenue raised, that’s the equivalent (other things being equal) of a jump in the basic rate of income tax from 20p to 29p, or VAT from 20% to 26%.
Is that fair?
Not if you are someone (a reader of MoneyWeek, say) who has thriftily accumulated wealth over decades out of taxed income in order to avoid relying on the state in old age. Nor, say, if you are asset-rich, but retired or approaching retirement with a relatively low income. And there’s a particular unfairness when it comes to pensions. A wealth tax that included pension schemes, as proposed, would be doubly unfair to those of us with defined-contribution (DC) pensions, compared with those fortunate souls (overwhelmingly in the public sector) who have defined-benefit (DB) schemes. That is because, under the current tax rules governing lifetime allowances on pensions, the government assumes the value of a DB pension scheme is only 20 times the annual income paid out. So a £10,000 DB pension is valued for tax purposes at £200,000. In practice, however, a private sector DC pension would need to be far in excess of that to generate the same annual income (and potentially up to £1m depending on assumptions about annuity rates, inflation, and joint life requirements). In other words, a wealth tax on pensions would end up being wildly discriminatory against (overwhelmingly) private-sector workers.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Do wealth taxes work?
With all taxes, there’s a trade-off between revenues raised and entrepreneurial incentives blunted – or simply rich people leaving the country – at a cost to future overall growth. And the experience of almost all countries to have tried a wealth tax is that they prove counterproductive. Wealth taxes tend to encourage capital flight and discourage investment, and throw up distorting effects. For example, since debt is deductible, they tend to encourage the rich to borrow to invest in exempted asset classes (farmland or woodland, say), thus both shrinking the tax base and distorting the economy. For all these reasons, they are far less popular than they once were. Sweden abolished its wealth tax after nearly a century in 2007; France got rid of its version two years ago. However, four European countries still have versions of a wealth tax, namely Norway, Spain, Switzerland and Belgium.
Will it happen here?
It’s unlikely, but it can’t be ruled out. Denis Healey, the Labour chancellor between 1974 and 1979, wrote in his memoirs: “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”. That remains as good a summary as any and a wealth tax is not part of the current government’s plans. “I do not believe that now is the time, or ever would be the time, for a wealth tax,” said chancellor Rishi Sunak in July. Yet even so, argues economist Gus O’Donnell, the unpredictable politics of the post-Covid-19 era mean that nothing should be ruled out. And if the Conservatives are serious about sticking to their manifesto promises not to raise income tax, NICs or VAT, then at some point they’ll need to think seriously about new taxes.
What are the politics of this?
The political reality, says John Rentoul in The Independent, is that Sunak and Boris Johnson will be quite happy to see the idea of a wealth tax gain traction if it means a sigh of relief from wealthy Tory voters when none is ultimately forthcoming. That way, they get a bit of political cover to put up other taxes post-Covid-19 – which they surely will. In addition, it may be that the wealth-tax proposal “acts as a gateway to a return of the mansion tax” on higher-value homes, or to higher taxes on investment gains, or to big cuts in pensions tax relief. It may not come in the form of a “wealth tax”, but one way or another, wealthier Britons will soon be paying more.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
The 30 house price hotspots
While we have seen house prices sliding, these sought-after locations have seen prices jump by at least 5% over the previous 12 months
By John Fitzsimons Published
Working parents will be entitled to 15 hours free childcare for two-year-olds from next year
The government has extended free childcare hours to working parents of two-year olds but it won’t be automatic so make sure you don’t miss out
By Marc Shoffman Published
How to cut the cost of home insurance
Home insurance policies are becoming increasingly expensive, but there are several ways you can keep costs down.
By Ruth Jackson-Kirby Published
Are lifestyle funds still fit for purpose?
Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
By David Prosser Published
NatWest-owned Ulster bank boosts easy access savings rate to 5.2%
Rates on easy access savings accounts have hit over 5%, with Ulster Bank now giving savers the chance to earn 5.2% on their cash savings. We have all the details.
By Marc Shoffman Published
Moneybox raises market-leading cash ISA to 5%
Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
By Ruth Emery Published
October NS&I Premium Bonds winners - check now to see what you won
NS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
By Kalpana Fitzpatrick Published
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?
Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
By Kalpana Fitzpatrick Published
The best packaged bank accounts
Advice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
By Tom Higgins Published
Energy bills to fall 7% under new price cap
Energy bills could fall by an average 7% from October under the new Energy Price cap announced today. We explain what the new cap mean for you and when it will come into play
By Pedro Gonçalves Published