Fiscal black socks

As I learnt last night on twitter, Jeremy Corbyn has an appeal that stretches across the political spectrum. He appeals to many on the left as a leader of the Labour Party because so few leaders before him have been ready to speak the truth without fear of the consequences. And he appeals to many Conservatives as a leader of the Labour Party for the very same reason.

Now, if Corbyn is to kick off of the clogs of convention across all areas of policy what will he reveal in mine? Of this there should be little doubt: the black socks of a wealth tax.

Capture

Wealth taxes have a powerful appeal to tax reformers on both the right and left. Income taxes place all of the burden on productive strivers and privilege those who hold fallow wealth. They moderate income inequality but leave untouched disparities in wealth. They permit inequalities to ossify over generations. Wealth taxes offer solutions.

The problem with wealth taxes is that they are really difficult to execute. Labour’s election manifesto in 1974 provided

REDISTRIBUTE INCOME AND WEALTH. We shall introduce an annual Wealth Tax on the rich; bring in a new tax on major transfers of personal wealth; heavily tax speculation in property – including a new tax on property companies; and seek to eliminate tax dodging across the whole field.

(I enjoyed that last bit: the same pledge could be found in the 2015 Manifestos of all the major political parties). But as Denis Healey noted in his memoirs

Another lesson was that you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.

But let’s not focus on the problems. To do so would be to misjudge the mood. Today at least. Let me instead focus on the prize: if it is worth having we might then turn then to ask whether the problems are worth tackling.

We are not blessed with high quality wealth data in the UK but this may not matter for present purposes.

Data in the World Wealth Report 2015 produced by Capgemini and RBC suggests there are 550,000 individuals in the UK with wealth of above $1m owning an aggregate of $2 trillion – or about £1.3 trillion. According to the ONS, aggregate net UK household financial wealth in 2010/12 was (coincidentally also) about £1.3 trillion. But this figure excludes non-financial assets such as houses. Update it and include all household wealth and you instead have a figure of £9 trillion.

Which of these – or other – data sets you focus on rather depends on what you are trying to accomplish. But what interests me is how you might raise a meaningful amount of money from wealth taxes – and in a way that is politically palatable or even attractive to the electorate. This looks to me like a cut in income taxes funded by an increase in wealth taxes.

For these purposes, the Capgemini number works as well as any.

If you charged a 2.5% annual charge on aggregate wealth of £1.3tn your theoretical yield is £32.5bn per annum. That’s a little more than what you’d need to fund a top rate of income tax of 30% kicking in at the present higher rate threshold (my calculations from table 2.5 (2015-16) here). A charge of 5% would fund a top rate of income tax of 20% with a surplus of around £5bn –  enough to mitigate the effects of many of the Conservatives’ welfare cuts in this term.

How might the electorate like those socks?

27 thoughts on “Fiscal black socks

  1. A couple of questions:

    1) What is the moral justification for a tax on assets bought with income that has already been taxed?

    2) If people’s wealth is tied up in illiquid assets like property, how would they pay the tax? If it paid from income, than why not just increase income tax? If it is paid from the sale of the assets, why not just increase CGT? The problem is that assets have no actual value until the point they are transferred. Which leads to the next question…

    3) Who would work out what someone’s wealth is? I could tell you my house was worth £490k when I bought it five years ago, but until I try to sell it I couldn’t really attest to its value now. Similar houses in my area have been sold for quite a bit more, but they’ve had a lot more work done to them than our’s, so who really knows? Likewise, I bought a 1968 grand piano at auction a couple of years ago, and paid a fair bit of cash to have it restored to its former glory. How much wealth tax should I pay on that, given even I couldn’t tell you what it’s worth?

    4) Would it be justified or even possible to tax people’s overseas assets? If not, why would the very wealthy ever bother investing here?

    5) What most concerns me is the idea that even a 2.5% tax would, after 40 years, wipe out the value of any capital invested and converted to ‘wealth’. Of course there might be capital gains to be had, but eroding the principal seems very punitive and like a serious disincentive to ever try and save or invest. (Why not just tax capital gains instead? Oh, wait!)

    Genuinely interested to know what the answers to these questions might be.

  2. Here is my answer to your first question:

    The assets may not have been earned by the owner – eg the assets could have been inherited. In these circumstances, the owner pays tax on assets that have NOT been bought out of the owner’s earned income.

    Also, under the author’s proposal, income tax would be sharply reduced (perhaps even abolished for a majority). So again, the assets will have been bought out of income either that has suffered no tax or been taxed at a low rate.

    In short, the aim is to replace income tax with a wealth tax. In so far as this is not achievable, it may be necessary to retain an income tax on very high incomes.

  3. A Land Value Tax would do the job. Much easier to assess and collect than a general wealth tax, and with hugely beneficial effects on the UK economy.

  4. No doubt the UK can learn lessons about the design of a potential wealth tax from countries that already have one, including socialist bastions like Switzerland, and indeed those countries that have abandoned one, like Germany and Sweden.

    Even 2.5% sounds quite high for an annual tax on potentially illiquid assets that may be hard to value. I suppose you could defer the tax until the asset is sold, or the person dies. Quite a boon for valuation experts, no doubt.

  5. There are answers to all your questions – some of them very persuasive, some rather more difficult. But my post was quite explicitly about the trade off and its political appeal, which your questions don’t really go to.

  6. “If you charged a 2.5% annual charge on aggregate wealth of £1.3tn your theoretical yield is £32.5bn per annum”
    There’s a mistake in that. It assumes you don’t tell people that you’re going to tax them, and assumes that the yield is the same every year, when in practice it will go down when people are told of the tax and go down again subsequently as people modify their behaviours.
    Cutting spending which is directed to predominantly wealthy people doesn’t encounter this problem – the headline example being agricultural subsidies. What you save each year doesn’t diminish.

  7. As the first commenter asked, I’m not sure what the justification is for such a tax. If I defer my income by saving, should I be taxed on it each year, driving the post-tax interest rate down or even negative and disincentivising saving?

    If we’re talking about entrenched, inherited wealth, I’d say that was another matter, but the answer there is instead a decent inheritance tax (e.g. taxing recipients at the same rate as their earned income).

    There are ways in which capital income is favoured over earned income, but again the best way forward seems to be to reform the taxation of capital gains, dividends, rental income etc (e.g. a rate of return allowance but with all gains above that taxed just like earner income). Taxing the annual returns to wealth is in some ways equivalent to taxing the stock, but it’s theoretically sounder, may come across better politically, and requires only limited change from our current taxes.

    Then there’s pensions: are we after an annual charge on everyone’s pensions pots? Why?! However, there are ways in which the various pension tax reliefs can be changed, raising a lot of money – as Osborne may well do.

    Property is somewhat different, I think, not least because you can tax it all you like without reducing the supply of land. There are several justifications for having a high property tax like council tax. But a land value tax is also a special kind of wealth tax, again because the supply of land is fixed. It’s appropriate for landowners to compensate everyone else for taking up that land, and appropriate that they help fund the community investment that gave the land its value; and it’s economically benign (or even a spur to development).

    But framing such reforms as a tax switch, as you suggest, is probably a wise idea. Higher inheritance tax for higher NICs thresholds is a Labour agenda I could certainly get behind, for example. “We favour earned income over unearned income” (or want to level the playing field, at least!) is a more attractive message than “we hate wealth and can’t wait to seize and spend it”.

  8. I think if you read carefully the sentence you’ve quoted you’ll see there isn’t a mistake. That is not to say that the points you make aren’t, themselves, serious considerations. They’re ones I’ve just chosen not to engage with at this stage of the debate.

  9. Am sure you’ve read my reply to him.

  10. To go back the the author’s main point, is it a reasonable / politically acceptable trade off? As an advocate of an efficient tax administration (someone has to be) I would be lobbying for any funds raised to be thought about net of the cost of collecting the tax before deciding how to spend it. I have doubts that a wealth tax can ever be cheap to collect, but changing the structure of the income tax base is an interesting proposition. Denis Healey’s comment is fascinating. Here is someone politically committed to the idea, but unable to implement it. Of course the key difference is that we have a much more digital process now so it might be easier. However, that is an accusation I will level at Ministers recently – assuming that whatever brilliant idea they have, HMRC will be able to deliver it (with less staff) for little or no cost.

    My preference for the net proceeds would be a much enhanced basic rate band at 20% – say £60,000 or even more, followed by 40%. This would reduce the pressure on productivity in the middle income range. Personal allowances to stay at around £12,000, as I believe that tax should be paid as a recognition of the services that are provided by government. People ARE proud to say they are taxpayers. In passing I will note that the current chancellor’s ambition for a £50,000 higher rate threshold (not basic rate band) is modest indeed. The CPI adjusted HR threshold reached in excess of £50,000 under the last Labour Government in 2009/10.

    So a good trade off? If you can do it cheaply and efficiently I don’t think it is electoral suicide, and reducing the top rate to 40% on higher income is a good quid pro quo. A significant reduction in the number of higher rate taxpayers will reduce the number in self assessment and ease HMRC’s burden. Just deliver it in a slick mechanism and I’m for it.

    But back to Denis….

  11. You’d be my desert island tax adviser, Rebecca.

  12. Well, one pays inheritance tax on assets inherited. If one doesn’t think IHT doesn’t raise enough revenues one can change thresholds or rates.

    Your theory about low income tax offsetting higher wealth taxes only works for income earned in the future. There are millions of people with wealth earned from income that was taxed at everything from 60% to 50% to 45% to 40% etc over the last few decades.

  13. I’m with you on this one. Taxing productive wealth seems a very bad idea. Taxing unproductive, rentier wealth on the other hand…

    Give the ease with which most assets can be moved, I’d be happy with decent property taxes. Looking at the way property prices have risen in East London (e.g. Woolwich and Abbey Wood) with the announcement of Crossrail routes, it’s clear that public expenditure has resulted in the private capture of wealth.

    A general wealth tax though? No.

  14. The trade-off of lower income-tax against a wealth tax is highly desirable economically. The Conservative argument that high marginal rates dis-incentivise is very true, in a way that a small but annual tax on that extra wealth is not.

    Skewing tax away from wealth creation and more towards wealth itself might sound like sleight of hand but the effect on morale/incentive is very different.

    The tax would have to be on wealth held world-wide. The existence and valuation of the wealth would have to be based on self-declaration, backed by that declaration incorporating a caveat that any non- or under-declared wealth was subject to 100% confiscation. No penalties, fines or imprisonment. This would concentrate the mind of the declarant.

  15. First thought – it being clear that you don’t include property wealth (so no worries about the illiquidity, valuation etc of houses) your £1.3tn from the ONS is instead savings in the bank, cash under the mattress, investments, and non-property assets.

    This amount is result of *long-term* accumulation of individual or household income in excess of expenditure. Some of these components are essentially static or declining in value year on year (like cash), some are certainly declining in value (non-property assets depreciating as they become more and more ‘used/second-hand’), and those that might actually increase in value (like stocks’n’shares) are most susceptible to sudden dips in value as stockmarkets go up and down. While on the other hand each year the pot will be topped up with whatever new surplus of income over expenditure there is in that year, in some years of course there isn’t any surplus and people have to draw on savings etc to get by.

    Now it should be obvious that unless the tax base grows faster than the rate of tax applied, in the long term all of people’s wealth will be transferred to government. In those circumstances the marginal rate of tax (or its effective equivalent) must be over 100%. So it seems simply impossible (or at best implausible) to generate a sustainable revenue stream on this basis although it would be a very effective mechanism for putting all of the ‘surplus’ now held by individuals in government hands for redistribution. The rational behavioural response of course being to put all your surplus into property or spend it now instead.

    If instead tax were only applied to the increase in wealth in any year then it might not raise anything at all in some years, but even when it did only very high-sounding rates of tax would raise the kind of sums you are talking about: e.g. if wealth increased by 5% in the year, a 50% tax rate would be needed to raise the £32.5bn.

  16. You do get to some very strange places with trust wealth, etc in lots of these cases. I’m really not sure the best way to capture that.

  17. I agree that there are 101 “wriggles” that will be employed by the slippery, Any Wealth Tax proposals need a good period of gestation and consultation before being implemented in an open-minded and responsive way.

    It could be any of triumph, a disaster or a damp squib, dependent on how it is constructed.

  18. Not you too Jolyon…escaped to the Caymans…?

  19. How do other places do it? I believe France has had a wealth tax?

    By your data a lot of wealth (80%) is non-financial – primarily property.

    That is actually relatively easy.

    There are places that use property tax extensively.

    Most US states include property tax paid each year as % of value.
    Indeed, New Hampshire uses this exclusively: it has no income tax or sales tax.

    As such, that addresses your concern: it clearly is proven to be viable.

    It would probably be good to extend that not just to homes: the Land Value Tax has had a lot of support for several reasons. The Wealth Tax dimension is one, but it discourages “land banking” that in turn helps with property build so has a bonus.

    Yes, these do rely on valuations of property: but between Land Registry, Zoopla and HMRC that is not a hard thing to do. Unlike some other forms of value (“How much is your Van Gogh worth darling?”) houses are traded regularly in an open market

  20. I think the electorate would want most of those questions answered before it voted for such a radical departure from the current tax system.

  21. I don’t disagree with that.

  22. I’m not sure if you have adequately described the prize, or issue, in such a way as to let us consider the proposal. You say that all disparities in “wealth” permit inequalities to ossify over generations, with wealth taxes offering solutions.
    Do all forms of wealth create such inequalities? If you buy a painting by a young artist called Hockney and then watch as its ‘value’ rises inexorably, (along with the insurance premium against loss), what inequality are you creating? Presumably only the potential to sell and obtain some liquid cash. The same would apply to many farmers, not just the lairds who own most of Scotland.
    And you set out a world where the wealth tax allows income tax rates to move downwards. I may be cynical but I suspect Chancellors will be less generous. With a new source of income they may just want to spend more. But that rebalancing will also create winners and losers – Aunt Edith with the multi-million house in Chelsea may have only a small pension, so is excluded from the benefit of lower income tax rates.
    I know you prefer to think of the prize, not the practicalities, but it is surely the practicalities that decide whether the prize is worth the struggle to try to achieve. Politics is allegedly the art of the possible. How can we judge without thinking at the outset as to what we mean by wealth, is it liquid or not, how to treat assets within wrappers like pensions, trusts (offshore and onshore) or companies, the administrative frameworks, and so on. It’s like saying we want to end pensioner poverty, a laudable ideal, without thinking through the implications of paying all pensioners £182.16 a week.

    The following links give a much fuller account than Healey on why the wealth tax was not introduced, and the Mirrlees report chapter on taxing transfers of wealth, rather than wealth.

    http://eprints.lse.ac.uk/42582/
    http://www.ifs.org.uk/uploads/mirrleesreview/dimensions/ch8.pdf

  23. 1) I don’t think there’s much morality in the “already been taxed” argument. For example, I don’t think that taxing income at 10% twice is more or less moral than taxing it once at 20%. And we do this all the time: companies are taxed on profits derived from income which has been subject to VAT; people are taxed on dividends from companies which have already paid corporation tax; companies pay national insurance contributions for individuals who also pay income tax.

    The reason we do all these things is (to try) to apportion the tax burden fairly, to make the timing of the tax fair, and to ensure that people don’t avoid tax by casting a wide net over things that could be taxed.

    Wealth tax is no different. It’s not taxing income that’s already been taxed, it’s simply using two methods to get the “fair amount” in total. Of course, if the rate was too high that would be “unfair”, but less so than simply raising the top rate of income tax (because it only captures those whose wealth comes from income taxed in the UK, rather than capital gains, inherited wealth, etc).

    2) Most of the practicalities have been dealt with by wealth taxes elsewhere in the world, but in terms of the why, it captures those who would otherwise not have been taxed, it’s more progressive (somebody who happens to earn a lot of money in one year only has less ability to pay than somebody who has been earning that every year), it brings forward the timing and reduces the ability to avoid tax.

    3) Again, practicalities have been dealt with elsewhere. It’s not necessarily particularly hard – potential methods include best reasonable estimate, purchase price plus indexation, etc., unless a formal valuation is available.

    4) We already tax UK residents on their worldwide income and assets, so I don’t see wealth tax as being any different from a moral or practical perspective.

    5) I’m not sure we should be overly concerned about whether those with very high net wealth continue to save; I can’t think of a single social ill that would result if they didn’t. And a wealth tax would surely encourage investment, not discourage – if you are being taxed on your assets, surely you are more likely to want those assets to produce income at a higher rate (rather than using the cash to buy unproductive assets like second/third/fourth homes, etc.)

  24. To be honest, a tax charge of 2.5% on “wealth” is going to be extremely unpopular when the yield on equities is about 3-4% and the average yield on gilts is about 2%. Such a tax would wipe out any investment income. Given that it is seen as a good thing to encourage people to save for pensions, the fact that this tax would negate the benefits of such savings, which tend to come from reinvested dividends and interest rather than capital growth, it seems like a vote loser to me.

    You could exempt pension plans, but then what would you have left to tax? Would you impose it on ISAs? Houses are quite efficiently taxed already by our local authorities, so are you proposing to add an additional tax charge of a percentage of some deemed value? For all that commentators talk about how easy it is to value houses based on local sales and purchases, the last time a house in my street changed hands was 3 years ago so any valuation is inherently subjective and subject to challenge.

    Maybe there are hordes of people with valuable yachts, antiques and a collection of Rembrandts but surely they do not exist in such number as to create a viable stream of tax income.

  25. One other point not raised above is the issue of personal privacy. A wealth tax will demand information about every bank account, property, car, object of value owned by a person. Giving that degree of personal information to a central government may feel like a violation of personal freedom.

    BTW in the French system objects d’art are exempt. Mainly because Fabius, the socialist minister who introduced the tax under Mitterand, inherited a large collection of art. There’s socialism for you.

  26. I think there’s also a key emotional/perceptual distinction between taxes on income and taxes on wealth. Suppose you’ve got someone on 100,000 GBP income and who has 500,000 GBP of potentially taxable wealth. Currently, there’s 40% tax on income over 40,000 GBP and you’ve got two options: you can either put up that rate to 60% or leave it as it and have an annual wealth tax of 2%, meaning you’d be paying 10,000 GBP a year.

    You’d pay slightly more tax by raising the tax rate, but I suspect that intuitively the wealth tax would be seen as harsher. With the income tax rate rise you’re getting less of what you’ve earned coming in; with the wealth tax you’re having what you’ve already got taken away, and every year you’re having some more of it taken away. You can mentally “see” your account remorselessly going down to zero. Daniel Kahneman’s done studies of loss aversion; I suspect that similarly an “actual loss” of money that you’ve already got in your accounts hurts more than the “potential loss” of money that’s nothing more than a line at the top of your pay slip. But it would be interesting to try the two options on people in an experiment and see if I’m right about people’s intuitions.

  27. Interesting thought – thanks!

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