The repeated failure of wealth taxes around the world does not demonstrate they cannot work. Equally, the longevity and stability of such taxes in Switzerland does not prove they are a good idea. As such, it was welcome this week that a self-styled wealth tax commission in the UK examined the question afresh.
The non-government group concluded that an annual wealth tax was undesirable, being extremely expensive and difficult to levy, while also damaging incentives to save and giving a huge boost to the wholly unproductive industry of tax avoidance. Instead, it recommended a one-off “Covid recovery tax”, which its opinion polling said was highly popular among British people and could collect large sums of money.
The commission is certainly correct in arguing that a one-off levy is more efficient than an ongoing wealth tax. People would not be able to avoid it by changing their savings behaviour, and the administrative burden would be lower. It would be the right tax to levy if the UK or any other country was facing a need to reduce public debts quickly in the face of high interest rates or an impending default. Yet none of this is relevant as a response to the Covid-19 crisis, where government borrowing has been easy and, at negative real interest rates, pays for itself.
Even if there was a need for one-off revenues, the evidence on a wealth tax’s popularity is highly questionable, since it falls into the trap of the public always favouring those taxes which sound like charges that only other people pay.
To test your attitude to the proposed wealth tax, take the following quiz on who should pay more.
Should it be: (a) a rich young banker driving her new Lamborghini to and from her riverside penthouse; or (b) an NHS consultant convalescing after weeks on a ventilator having contracted Covid-19 trying to save lives?
How about: (a) the business owner whose motto is “you only live once” and plans for the government to look after him in retirement; or (b) the business owner who’s horrified by the idea of reliance on the state for his pension or social care?
And finally: (a) the playboy Russian son of an oligarch with a rented home in Mayfair; or (b) a headteacher living in one of London’s comfortable suburbs?
If your answers for who should pay more were mostly (b), the one-off wealth tax is a levy you should support. If they were mostly (a), such a tax is unlikely to work.
The NHS doctor would pay more because the present day value of his pension could easily exceed £2m, while the mortgage on the penthouse and the leased sports car ensures the banker pays nothing. In the second question, the wealth tax by definition puts a higher charge on the prudent person who spends tomorrow rather than today. And, third, a very rich young person living off an allowance in a rented home would not be deemed remotely wealthy by this tax.
If the politics of such a tax simply would not work, the economics is not much better. A one-off wealth tax might be difficult to avoid, but this efficiency gain comes with the fundamental equity problem that it does not levy a charge on lifetime wealth. That leaves one generation — those close to retirement age — bearing most of the burden.
An annual wealth tax has the opposite problem. It is more equitable, but has huge administrative costs that undermine its efficiency and legitimacy unless levied at extremely low rates.
But most of all, a wealth tax is unnecessary. Sensible income, expenditure, property and inheritance taxation can raise the revenues required to repair any holes in the public finances and redistribute income and wealth as society demands. The answer to the difficulty of tax reform is not dreaming up new taxes.
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