Commission offers qualified support to a one-off wealth tax
If the government chooses to raise taxes as a response to the coronavirus pandemic, it should go for a one-off wealth tax, says a commission of experts.
The Wealth Tax Commission, which reported today, 9 December, conclude that an annual wealth tax would be much more difficult to deliver effectively than a one-off wealth tax, and that the government should also implement ‘major structural reforms’ of existing wealth taxes including inheritance tax, capital gains tax and council tax.
In their report the Commission state that a well-designed one-off wealth tax would raise significant revenue in a fair and efficient way, be very difficult to avoid and would work in practice without excessive administrative cost. They estimate it would raise a total of £260 billion at a rate of 5% over £500,000 per individual or £80 billion at a rate of 5% over £2 million per individual, payable at 1% per year over five years (after allowing for behavioural responses and administrative costs).
The Commission conclude that a one-off wealth tax must:
- Be credibly one-off (calling it a Covid Recovery Tax would help) and not forestalled (and therefore not pre-announced)
- Apply to all residents (including ‘non-doms’) and recent emigrants
- Have a comprehensive tax base including main homes, pensions and business assets (the only exclusion should be low-value items)
- Value assets at their open market value
- Allow for deferral of payment where the taxpayer is liquidity constrained
- Avoid special exemptions and reliefs
The one-off wealth tax should be levied on an individual rather than on a household basis, although there could be provision to allow couples to choose to be jointly assessed, the Commission conclude.
The Commission take no position on whether the government should raise taxes in response to the current economic crisis but say that, if the government chooses to do so, it should implement a one-off wealth tax in preference to increasing taxes on work or spending.
In particular the Commission argue that a credibly one-off wealth tax would be economically efficient: “Since it is based on wealth at a (past) point in time, a one-off wealth tax does not distort behaviour. In contrast, income taxes on employment and self-employment reduce incentives to work, capital taxes reduce investment, corporation taxes encourage companies to reduce (UK taxable) profits.”
Rejecting an annual wealth tax, the Commission say the government should instead focus on reforming existing taxes on wealth (“major structural reforms, not minor tinkering”). They conclude that an annual wealth tax would only be justified in addition to these reforms if the aim was specifically and explicitly to reduce inequality by redistributing wealth. Even then, they say an annual wealth tax would be much more difficult to deliver effectively than a one-off wealth tax. It would, for example, have higher administrative costs relative to revenue than a one-off tax. Unlike a one-off wealth tax, an annual wealth tax could also face significant behavioural responses, they argue.
The Commission’s calculation of the take from a one-off wealth tax assumes a ‘tax gap’ of 10 per cent. This comes from an estimate of the tax gap for an annual wealth tax produced in an evidence paper for the Commission by Sir Edward Troup, John Barnett and Katherine Bullock. However, while using this figure, the Commission think that the tax gap for a one-off wealth tax would likely be lower, because legal avoidance would be more difficult and, given the greater tax at stake per assessment, HMRC could reasonably invest more resources in seeking to reduce losses through taxpayer error and carelessness.
The three members of the Wealth Tax Commission are Dr Arun Advani of the University of Warwick’s CAGE (Centre for Competitive Advantage in the Global Economy) Research Centre, Emma Chamberlain of Pump Court Tax Chambers (and joint chair of the CIOT’s Private Client (International) Committee) and Andy Summers of the LSE Law and International Inequalities Institute. Their report draws on evidence papers from a network of experts including academics, policymakers and tax practitioners. They also commissioned studies of the operation of wealth taxes in seven different countries, written by local experts.
Read the report here.
By George Crozier.