A wealth tax for the UK?
Fancy paying a one-off tax of 5% on your worldwide wealth over £500,000? Well that’s one of the projections that the UK’s Wealth Tax Commission has put forward.
The Commission was established in July 2020 to consider the viability of a tax on assets. It published its report on 9 December 2020 strongly recommending such a tax.
This is one reaction to the large hole in public finances due to the various (and generous) Covid-19-related support handouts made by the state of public finances. The rate and basis are estimated to raise at least £260 billion by taxing the wealthy.
It is the assets that aren’t being transacted, and consequently are not being taxed, that are under the microscope here.
So why have so many countries given up on their prior versions of a wealth tax? The number of EU countries with a proper wealth tax has shrunk from 12 in 1990 to just one today – Spain. Other EU countries including Belgium and France, have a limited wealth tax – France’s being on property only. The US has toyed with the idea for decades, most recently during the last presidential election, but it hasn’t got past the first base.
Design and valuations are the main issues. Over 50 percent of personal wealth is estimated to be held in non-financial assets.
Especially in these troubled times, it is tantamount to economic suicide to tax enterprise, when job creation will help significantly to aid the recovery process.
Which assets to include or exclude creates further problems and scope for abuse.
A wealth tax is inevitably a dry tax. There is no cash generated to pay the tax, as there would be in, e.g., a sale of an asset.
Capital flight is a major concern. Wealthy individuals and their businesses can easily migrate at a country with a more benign tax regime, specifically one without a wealth tax.
Today many countries have a friendly tax regime for attracting new arrivals. In several countries, these are relatively new initiatives aimed to draw wealthy individuals. A wealth tax would work against such an initiative.
The UK’s political environment is a big stumbling block. It seems neither of the two major political parties has the appetite for a wealth tax.
Lastly, wealthy individuals resident in, or with assets in, countries already having a significant death tax rate (in the UK it is penal 40%) would be understandably aggrieved at paying a similar “living” tax. This would probably require such countries to re-consider and re-design their death tax and even their capital gains tax regimes.
The Commission’s solutions to some of the above
A one-off wealth tax over an annual tax would vastly reduce administrative costs.
Such a tax would only require assets to be valued once.
The tax would be payable in installments over five years with interest (with a tax on pensions able to be deferred until retirement or earlier drawdown) to circumvent the dry charge issue.
There would be no exemptions.
The tax would be introduced without prior warning (or perhaps even retroactively), to counteract avoidance planning.
It is easy to understand the motivation for a “new” tax to plug the Covid-19 holes in treasuries worldwide. It is equally, perhaps more so, hard to design an equitable tax on untransacted assets that would solve the numerous problems set out above. Many countries have tried – and failed!
We remain extremely doubtful that a wealth tax can and will be imposed in the UK, or in most other developed countries.