In every country, public finances have been knocked out of joint by the pandemic and the collapse in economic activity caused by lockdowns and social distancing. In addition, there is a growing sense that state planning is back — not in the form of classical socialist economics but in an acknowledgment that governments have a role in shaping markets and giving strategic direction to private investment. Growing inequality, financial instability, the pandemic and climate change have all contributed to swing back from the post-1980 liberalising consensus to an acceptance that smart government intervention in the economy can make for more and better shared prosperity.
For these reasons, politicians and policymakers are increasingly looking at increasing taxes. Now would be a terrible time to do so. But in coming years, it is likely that tax takes will go up.
It is exactly the right time, therefore, to think hard about the best way to tax. At the start of the summer, we covered the launch of a research initiative on wealth taxes, which sought to build a solid evidence base to assess whether the UK should introduce a net wealth tax (that is a tax levied on individuals’ total net worth — the full value of their assets minus any debts).
The Wealth Tax Commission this week published its final report. In advance of that, it published a series of background evidence papers. This is a treasure trove of up-to-date research on net wealth taxation — its history, international comparisons, theoretical motivations for and against net wealth taxes, and estimates of their behavioural, economic and public finance effects. No serious debate on taxation, in the UK or anywhere else, can afford to ignore it.
There is far too much to do justice to it here, so let me focus on some of the quantitative work. The commission has done yeoman’s work in calculating the revenue that could be raised from a net wealth tax at various rates and thresholds — crucial factual input to the relative merit of wealth taxes against other tax policy options. It has even built a wealth tax simulator, which I encourage you all to try to estimate the revenue that could be had from the rates and thresholds you may personally prefer.
I have previously offered my own back-of-the-envelope calculations to point out a useful rule of thumb for net wealth taxes. In most rich countries, wealth is distributed so that if the threshold for paying wealth taxes is set to include just the wealthiest 10 per cent of the population (with no tax on wealth below that threshold), the taxable wealth amounts to about 2 to 2.5 times annual gross domestic product. In other words, a 1 per cent tax on wealth above the amount that gets you into the wealthiest tenth should raise 2 per cent to 2.5 per cent of GDP, before any losses due to avoidance and evasion.
The commission’s much more detailed calculations confirm the rule of thumb for the UK. According to its simulator, an annual 1 per cent tax on net wealth above £750,000 — the 90th percentile in the UK wealth distribution — would bring in £44bn annually net of administrative costs, or a little more than 2 per cent of the country’s 2019 GDP. (This is before avoidance and evasion losses, which the commission estimates at 7 per cent to 17 per cent.)
The commission’s report focuses on a one-off wealth tax of 5 per cent paid over five years, levied on individual fortunes above £500,000 (or couples’ pooled wealth above £1m) — so a slightly larger base, consisting of the 16 per cent wealthiest taxpayers. Comparing this with other taxes, the researchers find that such a wealth tax would generate the same revenue as increasing the basic rate of income tax from 20p to 29p, or increasing all income tax rates by 6p, or raising VAT from 20p to 26p, or raising VAT by only 4p but at the same time increasing the corporation tax rate by 5p.
Any of these changes would be enormous. In other words, the revenue potential is too big not to treat a wealth tax as a serious option. And it should be considered not by itself but against other ways of raising the same amount of revenue. Those who find fault with a 1 per cent wealth tax must ask themselves if they think its effects would really be worse than raising income tax rates by 6 to 9 percentage points, for example. At least on a one-off five-year basis, should we really prefer any of these very large shifts in the main taxes? As the report says, “the distributional and economic consequences of alternative tax increases to any of the ‘big three’ taxes (income tax, [national insurance] and VAT) compare very poorly with a one-off wealth tax”.
Even those who resist the notion that any taxes need to be raised in the foreseeable future need to take the wealth tax seriously. For what the commission’s research shows is that for a stable level of total taxes, a 1 per cent net wealth tax could finance a 9p cut in the basic rate of income tax to just 11p — or a 6p cut in all income tax rates, a 6p cut in VAT or a combined 5p cut in corporation tax and 4p cut in VAT. Any of these, it would seem, could do a lot of good for workers, consumers and businesses — and plausibly a lot more good than a 1 per cent wealth tax would cause harm. If we care about the young, in particular, it is clear that they stand to benefit greatly from slashing taxes on labour income while introducing a wealth tax.
With numbers such as these, the question really needs to be not whether the UK should introduce a wealth tax but whether it can afford not to.
The EU must get better at not just finding solutions to crises, but using them to make leaps into the future, I argue — and the current crisis creates an opportunity to realise the dream of unified financial markets. In an interview with my Brussels colleagues, Paschal Donohoe, the eurogroup president and Irish finance minister, expresses similar views.
In an essay for Prospect magazine, I explore how the pandemic forced Britain to abandon its governing economic philosophy for one that was more protective of workers — and ask whether the change is temporary or permanent.
New documentation suggests the Pfizer/BioNTech vaccine against Covid-19 starts working 10 days after the first dose is administered.
Get alerts on UK tax when a new story is published