Who might have to pay a Labour wealth tax?

Chancellor Rachael Reeves approved £10bn of pay rises to date will need funding. The latest train drivers’ settlement probably ends up with more taxpayer subsidy and the NHS needs more cash to meet the pay demands. The government has ruled out changing the main rates of Income Tax, Value-Added Tax (VAT) and National Insurance, and ruled out increasing the burden on working people.

This leaves open raising or changing several other taxes. It means pensioners, savers and business owners could be a target. It also leaves open changing eligibility or incidence of the big taxes. We know there will be the imposition of VAT on school fees, an increase in the taxes paid by non-doms and an increase in windfall taxes. What else might come our way?

The Trades Union Congress meeting this week include people who think the UK should introduce a wealth tax. The Green Party put one in their manifesto and some left-of-centre think tanks have, in the past, proposed such a measure.

Taxing wealth

The UK already taxes wealth in a variety of ways. It is, of course, true that taxes need to be imposed on those with more wealth and income as they have the means to pay them. If a state increases taxes on those with low incomes and little wealth, they must increase benefit payments to enable people to pay them, so it is a largely a self-defeating exercise.

The UK taxes asset transactions in shares, land, and buildings. It taxes gains on a variety of assets including shares and property. It taxes ownership of a home through Council Tax. It taxes the transfer of wealth on death through Inheritance Tax.

The idea behind a wealth tax is to capture a larger sum, either by the annual taxation of a person’s total wealth at a small percentage, or a one-off levy on wealth to reduce state debt.

Reality of a wealth tax

A wealth tax would require taxpayers to make an annual declaration of their total net wealth. They would need to procure bank statements and savings statements of all deposits and funds held, and portfolio valuations from their investment managers.

The government would need to decide whether tax-free Individual Savings Accounts and pension funds would be excluded or included. Taxpayers would need to provide a valuation of their properties, and of any valuables or collections from stamps and coins to art works and rarities. Cars and boats would need a mention. If someone owns private companies and other unquoted investments, they too will need to be valued.

This would represent a large annual burden to compile the information and satisfy the Inland Revenue that, where needed, independent and fair valuations had been procured. People would then be charged, say, 1% of their total wealth a year as an additional tax.

The Green Party proposed a levy of 1% on assets of more than £10m. If the threshold for paying the tax were set too low – say at £2m or less – then someone living in a two-bed flat in central London which they owned could face a large tax bill when they maybe have a low pension income and no other wealth. They would face a further tax for living in their own home.

People running a small unquoted company could also face difficulties if the company was not generating much free cash but was sufficiently valuable to put them into the tax bracket. People with more than £10m of assets would be more likely to have more than one property and have deposits or financial assets which could be used to meet the levy.

The US Congress has recently looked at the potential of a wealth tax. It looked at charging 1% a year on assets of more than $20m and 2% over $100m, with several other permutations. The idea was to keep the numbers of taxpayers involved quite small whilst capturing large sums from those with multi-billions of wealth. This would maximise revenue in relation to costs whilst minimising hard cases that did not have the cash to pay the bills. There are no proposals from the two main parties to impose such a tax across the Atlantic.

Democratic Party Senator Elizabeth Warren proposed a wealth tax that only became applicable at even higher levels, starting at $50m. She said that US taxpayers would have to carry on paying this wherever they lived in the world. If they insisted on renouncing citizenship and going elsewhere, she proposed a large exit surcharge.

Advocates of a wealth tax argue it on two main grounds. They want to spend more on public services and income support for those on low incomes, so they see it as a useful source of extra revenue. They dislike wealth inequality as well as income inequality, so they wish to tax some of the wealth away.

The French experiment

Between 1988 and 2017, France had a wealth tax, which was initially imposed by President Francois Mitterrand and the socialists. Called “impot sur la fortune” it was levied at 0.5% on quite modest assets, rising to 1.5% on bigger fortunes. Emmanuel Macron abolished it, as he was persuaded that it was losing France revenue, replacing it with a similar tax just on property.

The economist Eric Pichet calculated the tax lost twice as much revenue as it collected. There were reports of 60,000 millionaires leaving France between 2000 and 2016, of the undervaluation of property and loss of other tax revenues as people paid the tax and so paid less VAT and income tax. Others in France think it was an important statement about equality which made a modest contribution to revenues.

Several other European countries have abandoned wealth taxes for similar reasons. Only Norway, Switzerland and Spain still have wealth taxes. Switzerland has no capital gains in compensation and some cantons have no Inheritance tax. None of these countries collects much revenue from this source.

The problems with a wealth tax

The UK Labour government of 1974-79 proposed a wealth tax but did not try to implement it. It decided the measure would raise too little revenue to justify the political battle to bring it in. It saw that its introduction and administration would be complex and expensive.

Defining what constitutes wealth for tax purposes is an issue. If it is decided to leave out people’s main home, or their pension savings or art and collections, classic cars or business property for example, then it will greatly distort savings and investment decisions. If it does not leave out any asset class, then the administrative complexities and costs of valuations becomes very great. People will make special cases of exemptions as the UK has accepted for Capital Gains Tax (CGT), where a person’s main residence and their pensions savings in a fund are exempt.

There are three main arguments against a wealth tax.

• It would lead to too many rich people leaving the country or reorganising their tax affairs to cut their liability.
• It is tough on those who have a valuable home or a small business but little income, so it could tax them out of their home or their livelihood.
• It produces little or no net revenue if too many people leave or legally reorganise their affairs to minimise the tax.

Likelihood of full wealth tax is low

There are likely to be tax rises in the budget on 30 October, given the government’s wish to spend more and given their concern about the size of the budget deficit. It is quite likely these tax rises will be imposed on richer people – and may well entail more taxes on buying, selling and holding real estate and financial assets.

There are various changes they can make to reliefs and to rates for CGT, stamp duties, Council Tax and Inheritance Tax. A full-blown wealth tax is less likely given the costs and complexities associated with it and the problems it poses for people with unquoted businesses or expensive single homes who might not have the cash to pay the bills.

To avoid hard cases, any wealth tax would have to start at a high overall level of wealth of, say, above £10m. It is very likely the government will put through a carbon border tax, which will raise the costs of imports. Any major tax reform of wealth and property would usually be put out to an extensive consultation before considering legislative change.

A wealth tax would require a complex piece of new primary legislation, spelling out the detail on which assets will be included, how they should be valued – and when and how the tax should be paid.

For more on this subject see:

Will Labour’s tax plan include a wealth tax?

Will Labour tax my pension, my home and my savings?