Could a UK wealth tax work? MPs question experts
The House of Commons Treasury Committee held an evidence session on Wednesday 18 November as part of its inquiry into Tax after Coronavirus. The inquiry is examining the tax system following the reconstruction of the economy after the unprecedented economic fallout of the pandemic.
Witnesses in this session were: Dr Arun Advani, Assistant Professor, Department of Economics, University of Warwick; Emma Chamberlain OBE, Barrister, Pump Court Tax Chambers; Robert Palmer, Executive Director, Tax Justice UK; Sir Edward Troup, Former First Permanent Secretary, HMRC; and Tim Worstall, Senior Fellow, Adam Smith Institute. Advani and Chamberlain are two of the three commissioners of the UK Wealth Tax Commission, which will publish a report on 9 December on whether a UK wealth tax is desirable and deliverable.
The session began by exploring the cases for and against a UK ‘wealth tax’, with witnesses telling the MPs that valuation would involve some complexity but would only be different in scale to what is already done for inheritance tax purposes. The question of whether all assets would be included or whether there would be exemptions for main residence and/or pension savings would be key, the discussants agreed, along with the threshold for the tax and whether it would be a one-off or repeated annually. Those witnesses who were open to a wealth tax were more supportive of it as a one-off than as an ongoing annual tax, and favoured a broad base without significant exemptions.
The panel discussed the experience of other countries which have adopted wealth taxes, the potential for avoidance of such taxes, and the effectiveness of existing taxes on wealth in the UK, such as inheritance tax and capital gains tax, and taxes specifically on property. There was no consensus among the five witnesses, or indeed, so far as can be judged, among the MPs on the committee. The discussions will feed into deliberations on the committee’s final report, which is likely to be published in February.
The case for (and against) a UK wealth tax
Treasury Committee chair Mel Stride, Conservative, asked for the arguments in favour of wealth taxes when the UK already has taxes on income derived from assets, capital gains tax and inheritance tax. Tax Justice UK’s Robert Palmer replied that wealth is deeply unequally shared and this ‘stifles equality of opportunity’. If we are thinking about how we raise taxes to pay for COVID-19, taxing those who have wealth and assets is a good starting point, he opined. “Since the 1970s, wealth has increased from three times the national income to seven times the national income,” he explained. “At the same time, the amount of tax we get from wealth has remained the same. You have people on £100,000 who are often paying higher tax rates than someone on £1 million or £10 million.”
Palmer said that a wealth tax is seen usually as an annual charge on someone’s net wealth (total assets minus any loans and debt), you would have a threshold, and a rate at which you would charge it. He suggested a one-off wealth tax paid over five years at five per cent could raise £250 billion over that period. If you were going to do a wealth tax, you would want to keep the base fairly broad because otherwise you will end up with people trying to shift money around, he said. Something around assets of £1 million or £2 million would make sense as the threshold for falling within a wealth tax. In general comments on the need for tax reform, he said the capital gains tax system is ‘distortive’, our property tax system is ‘broken’ and the way pensions are taxed is ‘problematic’.
Is there ever a good time for a wealth tax? asked Stride. The Adam Smith Institute’s Tim Worstall said we can tax consumption, incomes and capital incomes, but capital itself, wealth, is just not the right thing to be taxing. He said a wealth tax is a ‘deadweight’ cost because it stops some economic activity happening.
Former HMRC head Sir Edward Troup talked about complexity in the tax system. Sir Edward said the debate should be whether the complexity of a wealth tax is worth doing for whatever objectives are claimed for the tax and the amount of money that would be raised. If it were possible for it to raise the amount of money Palmer had suggested then the complexity might be justified, but he was sceptical it would be possible to raise this much.
How much could it raise?
Labour MP Rushanara Ali enquired what it would take to raise £200 billion over the five-year period that Robert Palmer referred to. University of Warwick’s Dr Arun Advani said a one-off wealth tax would say, “Look, we want to raise a lot of money over a short period of time.” He explained: “If you wanted £200 billion, you could design that as a 4% tax on all of the wealth that people have above the first £500,000 of net wealth they have. If you have a house but you have a mortgage, you take that off the value of your house. That would cover about 7 million people in the country—15% of adults would be covered by something like that. You could say, “Pay that off over five years.” That would be 0.8 per cent of their wealth per year. Something like that would raise something like £200 billion.”
Advani said that if you want that kind of level of revenue, you do not exclude assets such as homes and pensions. Doing that, you are instead loading more tax on to the remaining assets, so people with businesses, say, would be having to pay more tax if you were trying to exclude other assets. He also said a one-off wealth tax is more straightforward than an annual tax in which you must think carefully about all the avoidance and mitigation issues.
Ali opined that that there is probably a case for a wealth tax alongside other taxes because, if we are to believe and accept the arguments that analysts are making, the tax base will still have to be increased across the board in society, the issue is how you make sure it is ‘just’ and generally fits with a levelling-up agenda as opposed to that ‘being just rhetoric, frankly, to win elections’. The question is whether it should be over a longer period of time, she said.
Advani said you could set whatever the tax rate was at some point in time and allow the payment period to be longer – but the longer the period, the more unreasonable it may seem to people. A one-off wealth tax does not change your incentives in the future for wealth creation but clearly an annual wealth tax does. He added: “As much as we should be worried about taxes on wealth damaging incentives to create wealth, taxes on labour damage the incentives for people to work for the wealth creators.”
Barrister Emma Chamberlain said a one-off wealth tax could raise a large amount of revenue much more efficiently than many other tax rises, and it could be targeted. What about people leaving the country? if it is a one-off wealth tax that is retrospective to a past date, that point has been and gone. You would have to be careful, if you have a one-off wealth tax that is retrospective, that you do not tax someone who has only been here a year and they just happen to have arrived in 2020 and leave in 2021. If you are going to introduce a wealth tax, you want to keep it quite simple, she suggests. “I would always prefer a lower threshold because I think it leads to less avoidance. If you have a higher threshold, you will get more avoidance around that.”
Edward Troup said if you want big money, you must go for the big taxes - income tax, VAT, national insurance; the case for this being a big tax has not been made, he said. He thinks you need a mix of taxes to stabilise the public finances.
Tim Worstall said depending on how we unwind or do not unwind QE, we may or may not need more tax revenue in the future. Once the vaccine is around and the economy has returned to normal, he does not see the case for higher taxation and more government spending because the problem ‘will be behind us’, he claimed. One-off wealth taxes are not all that good an idea simply because, once it has happened once, absolutely nobody is ever going to believe that it will not be done again, he said. He added that ‘a retroactive tax is an appalling idea. It is akin to theft’.
Why have other European countries such as France and Germany abolished, changed or moved away from net wealth taxes in recent years? asked Julie Marson (Conservative and pictured thanks to Parliament UK). Emma Chamberlain said it is all because of the administrative difficulties of an annual wealth tax.
Arun Advani said in terms of an annual wealth tax for the UK, he agreed with Chamberlain that starting an annual wealth tax at net assets of £500,000 seemed relatively low. That would look something more like Switzerland, but we have other wealth taxes and it is probably better to fix the others, he said. The important thing is that part of the reason there ends up being pressure from various groups for an annual wealth tax in the UK is that we know that the other taxes we have on wealth do not function very well. The capital gains tax review that came out from the Office of Tax Simplification last week highlighted some of the problems and suggested solutions to some of those, he said. In a world in which we can fix the existing capital taxes, pressure for an annual wealth tax in the UK will substantially diminish, he claimed.
There are not many examples of countries that have done comprehensive one-off wealth taxes in the recent past, said Advani. The one-off wealth taxes that were comprehensive were mostly done after the second world war. In the more recent past, the one-off wealth taxes we have seen have been in countries like Ireland, which had a pensions levy; we have not seen people in Ireland stopping saving in pensions just because there was a one-off pensions levy 10 years ago. Advani said wealth taxes in other countries have mostly not been designed to try to reduce inequality. Even the ones that have had some amount of gradation in terms of having higher rates as you go further up still have not gone to the kinds of rates that are designed to try to reduce inequality.
Anthony Browne, Conservative, remarked that if the UK adopted a wealth tax, it would not be like Switzerland because the Swiss do not have much capital gains tax, and do not have inheritance tax in the same way. The MP probed the popularity of wealth taxes. He said a wealth tax on your savings and assets would be the first tax that breaches an important principle by taxing stock rather than flow. Edward Troup corrected Browne by saying council tax is a stock tax. Sir Edward went on to say the poll tax was a classic example of trying to collect an amount of money with no regard to ability to pay and no flow.
Emma Chamberlain said the trouble is a wealth tax is popular if you exclude pensions and your family house, which is about two-thirds of the asset base. “Annual wealth taxes are slightly different but going back to a one-off wealth tax, which is an important distinction, you can have a grown-up conversation. If the base is broad, the rate can generally be lower and we can all raise something.”
Robert Palmer said Tax Justice UK has found that about half the people it surveyed said they would personally be willing to pay more in tax and, if you look across a lot of research, people want to see more investment in public services.
Wealth distribution and inequality
Tim Worstall remarked that one of the reasons why no wealth tax ever shows that it reduces inequality is because we do not consider the impact of tax and redistribution on the wealth distribution. He suggested the Office for National Statistics should measure the wealth distribution ‘properly’ in the same way that we measure incomes. We need to see the distribution before and after taxes and benefits, he said.
The committee was told by Anthony Browne that inequality of personal wealth for the top one per cent declined from them owning 70 per cent of the wealth in 1895 down to 15 per cent in 1985, but it has been comparatively static since 1985. Arun Advani concurred, but added that inequality in terms of income is getting far worse. He went on to say the counterpart to wealth inequality is generally social mobility, which has been getting worse.
Angela Eagle, Labour, asked Robert Palmer about inequality in historical terms. Palmer replied that part of this conversation is about the mechanics of what a wealth tax would look like, part of it is about inequality and how we raise money, but part of it is also about life chances around equality, equality of opportunity and power. “That is why thinking about wealth and who has wealth is really important,” he said.
Is there not also an issue that the kind of society and the tax system you create have to be seen to be fairer, more effective and open up this idea of social mobility rather than close it down, asked Eagle. Palmer replied: “We can spend a lot of time talking about how you structure the tax system and individual taxes and whether a wealth tax is the right idea, but fundamentally we are living in a country where there are vast swathes of people who are locked out of prosperity, equality of opportunity and being able to make the most of their lives. This is damaging both to our economy and to our democracy.”
Eagle asked Palmer if he agrees with economist and author Thomas Piketty, that in order practically to tax wealth, given the very easy ways there are now to shelter wealth abroad or to have it in tax havens, you need to have some kind of global system to tax wealth appropriately. Palmer said it would be easier to implement a wealth tax now than it has ever been, partly because of automatic exchange of tax information. Emma Chamberlain agreed that common reporting and the general exchange of information has made a ‘huge difference’. She added that people hiding assets in offshore jurisdictions is the major barrier to an annual wealth tax. There are bigger issues on an annual wealth tax, not least valuation, liquidity issues and the sheer administrative hassle of having a comprehensive annual wealth tax, she said.
If we were to go for some kind of wealth tax, given the parlous state of inheritance tax and capital gains tax, might it be worth folding everything into one simple wealth tax, rather than having three, asked Eagle. Advani said the best approach would be just to fix the existing taxes rather than to bring in new ones. Edward Troup added: “There is real risk that we are looking at putting something new, difficult and probably pretty inefficient on top of some already non-working taxes. We should actually go back and look at inheritance tax and capital gains tax.”
Scope of a wealth tax
Labour MP Siobhain McDonagh asked what should be included in a wealth tax. Emma Chamberlain said ‘everything’ has to be included in an annual wealth tax. If you exclude something, you immediately lay the ground for some avoidance the next time around, she added. But she said: “I am not sure we want to turn our nation into one of bookkeepers and valuers, which an annual wealth tax may well force us into.”
Do you think there should be a wealth tax on pensions and homes, McDonagh asked. Tim Worstall replied that pensions are wealth and not a problem, and they should not be taxed. He argued for land value taxation rather than the existing approach to taxing property. If you wish to solve the problem of there not being enough homes, the answer is to issue more planning permissions, he charged.
McDonagh asked Chamberlain if non-contributive pensions could be valued by imputing a valuation based on the income they provide. Chamberlain said defined-benefit pensions can definitely be valued, and we do it all the time on divorce. But she added that if you do tax pensions on an annual basis, you are probably looking at some liquidity issues that are not that easy to solve.
Arun Advani agreed with Chamberlain that all assets including land and pensions should be included in the calculation of wealth for a wealth tax. Firstly, he said, this should be done for reasons of efficiency. When discussing countries that have been unsuccessful in their wealth taxes, one of biggest sources of lack of success is that they have excluded some assets and you have just seen people switch a lot to those assets, said Advani. Then there are equity concerns around this issue that someone who runs a business is now disadvantaged because that was their pension and they are now being taxed, while someone who has an actual pension is not being taxed. His third reason is yield. He said you overcome the liquidity difficulties for pensions and homes by taking money from the funds.
Conservative Felicity Buchan worries about a wealth tax on all assets because a lot of people are sitting on very expensive houses but have very little income and no money in the bank. Advani answered that you could design a liquidity solution for those people where you delay the payment until the point at which they are selling the house or transferring the house at the point of death.
Buchan then asked about the behavioural aspects of wealth tax. Emma Chamberlain said if you have a high wealth tax that is progressive and unlimited, you will see quite a significant behavioural effect of people leaving the country. That is why the design and calibration of the tax system has to be quite careful, she advised. Dr Advani was more cautious: “The evidence from the rates we have seen around the world—as Emma [Chamberlain] said, we have not seen annual wealth taxes with rates above one per cent —is that you certainly see some migration, but it is not very large and it is not large enough that you see any Laffer-curve-type effect, where the revenue that you raise is going to be lower.” He added that one of the upsides of the UK’s new freedom post Brexit is that we have not previously been allowed to have any exit tax. Chamberlain came back and said that if you have a high exempt threshold, you will have the wealthy fragmenting their wealth. They will give it to relatives and use trusts, she suggested.
Advani opined that you would not want to raise all government spending on the back of just capital taxes. You probably also do not want to do it all on the basis only of taxes on labour or on consumption, or any other single source.
Edward Troup talked about property owners who have high-value central London properties and no income. He said: “If you are imposing a tax where you have to make these adjustments so that you only pay the liability when you die or when you get your pension, in the case of pension wealth, you are moving back towards having a tax on retirement or on death. It comes back to the point that, if that is what you are going to have to do to make this tax work, should you not go back and look at inheritance tax, pensions taxation and whatever, and get that right, rather than trying to use this as a proxy for achieving the same aims.”
Harriett Baldwin, Conservative, and a former Treasury minister, observed that figures that were published by the Office of Tax Simplification (OTS) indicated that estates over £10 million actually pay a lower average rate of inheritance tax than estates between £1 million and £2 million. Emma Chamberlain said it is certainly true that inheritance tax is regressive above £3 million. At £2 million to £3 million they are paying an effective rate of 20 per cent, and above £10 million they are paying 10 per cent, and yet the headline rate is 40 per cent. She said the regressive nature stated by the OTS is probably understated because it does not take into account the fact that a lot of very wealthy people would have made lifetime gifts and survived seven years and never paid tax at all. We have 25,000 estates that pay tax, and 275,000 people filing a really complicated return not to pay the tax. There is something wrong with the design of a tax that ends up in that situation and yet does not raise very much money and is incredibly unpopular, she said.
Would you abolish inheritance tax, asked Baldwin. Robert Palmer said the current system is broken. Some of the things that have been suggested, such as a receipts tax, which is where the recipient of the donation gets taxed rather than the estate, might make more sense. They do it in Ireland and he would support introducing it in the UK. He added: “Tax has to be based on consent, and it is really problematic. Politically, I quite like the idea of an inheritance tax, but the way it is working at the moment has lost public consent and is not really raising the money.”
Baldwin said she is in favour of a tax system that encourages more people to become wealthier over their lifetimes.
Capital gains tax
Tim Worstall told Conservative MP Steve Baker that transaction taxes are a terrible idea and consumption taxes are good.
Do you think that increasing the level on capital gains now could yield additional revenue, asked Baker. Arun Advani responded that people should be equally taxed on all their sources of income. You may well want to support people in terms of the capital they put at risk, but that is different from then offering a lower rate on the actual return they make. He would equalise the rates and ‘do something about the base’.
Worstall remarked that back in 2011 or 2012, the Treasury said that current capital gains tax rates were at about the Laffer curve peak. Part of the reason to have taxation is in order to raise revenue to pay for government. If a higher rate would produce lower revenue, why have a higher rate? He said it is worth reminding ourselves that this suggestion for equalising income tax and capital gains tax also includes an indexation allowance, and you have to have that if you have the same rates. You have to account for inflation. It is not entirely obvious that indexation plus income tax rates produces more revenue than a lower capital gains tax rate without the indexation allowance. It is a complicated calculation, he said. It depends, and it will change year by year, but it is not obvious that the answer is more revenue. He tends to think we are about right where we are at the moment.
Emma Chamberlain said she is ‘slightly sceptical’ about alignment of income tax and CGT rates. “The rate is absolutely critical to behaviour. If you raise CGT rates, I am sceptical about whether you will get more revenue. If you are going to align the rates, you are probably going to need an exit tax, because otherwise before people sell their business they will go abroad, stay abroad for six years, sell while they are abroad, and then you will not get anything. In my view, getting something is always better than getting nothing.”
Robert Palmer commented that part of the problem is also that the current system is pretty distortionary, and so the average tax rate on someone earning £10 million is about 21 per cent, which is less than someone who is on the average wage.
Edward Troup said you can actually say that what was done in 1965 was not a bad way of doing things, “just taxing gains at about half the rate of income tax and be done with it, because some gains represent income that is already taxed—your shares in a company, which has already paid the full amount of tax, for instance—and some represent gains that are completely untaxed, like your holding of gold bullion or whatever else.” Disagreeing with Worstall Sir Edward said there was no Laffer curve for capital gains tax, “for the simple reason that, unlike other forms of income and profits, you can decide when to realise your capital gains. If you think the Government are going to put the rate down, you just do not realise the gains.” He added: “it is extraordinary that the Office of Tax Simplification should be advocating inflation relief in capital gains tax, when if I go out and buy a Government gilt, in normal days when there is normal interest rates and normal inflation, I get no relief against income tax for the inflationary element of my interest. They are now suggesting that we have all the complexity of inflation relief on capital gains. I would not fiddle around with it. Just try to stop as much avoidance as you can.”
The SNP’s Alison Thewliss asked some questions around property taxation. She said the registers for Scotland only cover 39.2 per cent of land mass. Does that present a problem for land value taxation? Worstall spoke about England and said the value is in high-value pieces of urban land, and pretty much all of that has changed hands in the last century and is therefore registered at the Land Registry. You may only have 30-40 per cent of the land area registered, but you have probably got something much more like 90-98 per cent of the value registered. “Since you tax value and not acreage, you are fine,” he said. Worstall added that he is in favour of a requirement that all land must be registered.
Should the Government be revaluing homes in England for council tax after the pandemic, asked Thewliss. Robert Palmer replied that this is one of those things where it is almost universally agreed that our current property taxes in England, Scotland and Wales do not work. We have a regressive system where poorer people proportionately pay more of their income and more of the value of their property in tax than richer people, and there are also geographic variations. People in the north of England and the midlands are paying higher rates of council tax than people in London. There is quite a lot of consensus that we should think about revaluation. You could add extra bands to capture more of the higher-value properties. He argues that we should scrap stamp duty and council tax, and bring in a property tax based on the value of the property.
Emma Chamberlain said: “You could possibly do a substitute for stamp duty land tax. Instead of being taxed every time you move, even if you do not actually make a gain just on SDLT, you might say that if people move but make a large gain, over a certain amount per disposal, that gain, over a certain amount, should be taxed. That would not penalise people who have to move because they need a new job, but rather tax windfall gains on the main residence.”
The session is here.
By Hamant Verma.