Do Wealth Taxes Work?

The Wealth Tax Commission had several recommendations on implementation: 

• A wealth tax should be difficult to avoid, 
• It should be better than any alternative (i.e. if the best way to repair the economy is through income tax, it would be better to do so rather than introduce a wealth tax),
• If it were put in place, it should be a one-off 'guillotine' tax to help with the current crisis, payable over 5-10 years, and not an annual tax. This would mean that avoidance would be difficult, and it would not need to lead to a behavioural change or people selling assets,
• It should cover all types of property so that individuals of similar means would not be taxed differently because of the types of assets, which could also lead to avoidance as people would pick and choose where to invest in order to avoid the tax,
• Payment should be capable of being deferred for those who do not have liquidity at that moment, in order to make it fair and workable,
• It should have territorial limits, and be imposed on a resident basis as opposed to a citizen or domicile basis,
• There should not be exemptions to avoid distorted behaviour (as an example, there were arguments in favour of excluding pensions but it was noted that those who had invested in property as their pension should not be penalised unfairly),
• Low-value items should be excluded,
• There is debate over business and inheritance assets, and whether there would be exclusions for public assets. 

It goes without saying that wealth tax is not universally popular, and has been phased out in most other countries. Some do still have vestiges, such as in Italy, but most have chosen inheritance tax over wealth tax. 

ARGUMENTS FOR:

• The redistribution of concentrated wealth,
• Encouragement towards the productive use of assets (such as in Italy, where the disclosure of assets and public assets has lead to support of art and monuments),
• Revenue increase.

ARGUMENTS AGAINST:

• Potential exodus of the wealth and the wealthy out of the UK, 
• High compliance cost
• Risk of double taxation
• Liquid scenarios of wealth, with no income

THE DEBATE:

Few countries currently have a wealth tax. Norway has an annual wealth tax which is considered successful because it raises a good amount of revenue and is easy to maintain. France has one too, but it is limited to tax on property. Spain is one of the few which has recently announced an increase in their wealth tax.

Some types of wealth tax have arguably worked. For example, in 1996 there was a one-off wealth tax in Italy so that they could fill their deficit and join the EU. As it was only a one-off there was less of a compliance cost. Now, Italy has wealth taxes but they only apply to real estate and certain financial assets, with low rates of under 0.2%. 

When we opened the discussion to the floor it was clear that the predominant opinion was against wealth taxes. Someone quoted Chancellor Denis Healy who famously said 'squeeze the rich until they squeak', only to flirt with the idea of a wealth tax and conclude '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.'

Similarly and more recently, Rishi Sunak reportedly read the Wealth Tax Commission report and dismissed the idea of a wealth tax as 'un-Conservative'. 

While it was reasserted that a one-off wealth tax could work, this idea was rebutted with the point that it would never be just a one-off, and that income tax was supposed to be temporary. Is that money just too tempting?

Another criticism to the Wealth Tax Commission report was the fact that the boundary may be too low, as anyone with assets over £500,000 would be liable for a 5% tax. This would be a huge swathe of the country, and would (it was argued again) lead to an exodus out of the UK. It was noted that it would almost certainly be by a retrospective tax, too, which would contribute to the dismantling of trust with the UK government and lead to people searching for somewhere more credible to put their wealth. 

It was suggested that for the wealth tax to be workable to a government, they would raise the threshold above £500,000 to avoid angering too many voters. Any higher, and the revenue raised just would not be worth it for the risk of flight and impact to the credibility of the UK government. 

HOW MUCH OF THIS IS POLITICAL?

Wealth tax, it was noted, is much more 'political' than other taxes. Because of the rising anger against the increasing disparity between the ultra-wealthy and those less fortunate, voters are becoming increasingly polarised and vocal on the subject. Is wealth tax being considered as a way to appease them?

This is where morality becomes tied to wealth. With people like Jeffrey Bezos having their taxes leaked to the press it is becoming increasingly evident to the general populace that tax avoidance is not only possible, but legal. The moral question as to whether the wealthy have an ethical obligation to pay more tax is becoming more mainstream. 

Philanthropy is one way that the ultra-wealthy may be able to prove themselves as morally in line with the general populace's views, if they wanted to maintain control over how to utilise their funds, but this too is becoming increasingly controversial. Philanthropic spending often goes towards vanity projects, charismatic cultural funds or could, arguably, go towards problematic funds who finance climate-change skeptics. 

Henning Wehn, a German comedian, said in 2019 – 'We don't do charity in Germany. We pay taxes.'

However, is this demonising of success a bit of a witch-hunt? It was questioned whether it was UK-centric, but it was pointed out that it's increasing in the US too. There is a potential for civil unrest on the horizon which will only become more of a threat with the widening wealth inequality. 

Some ultra high net worth clients are even requesting to pay more tax at the moment, which is previously unheard of. 

CONCLUSION:

It was noted that, moving forward, it is necessary to find the balance between fair taxation and remaining an attractive location for the ultra-wealthy to settle. Taxation is not going to completely fix the economic fallout of the pandemic, and especially not if it's taxing the few rather than the many – no matter how wealthy they are. 

Instead, we should look to encourage success and talent in the UK, so that others will want to invest in the country and create more jobs. A one-off tax with high compliance costs is unlikely to resolve anything, especially in the fallout after Brexit, which has already led to many leaving the UK and many more contemplating it. We must be careful to ensure that people feel as safe as possible to bring their wealth to the UK.