We already have a lot of taxes on wealth in the UK – capital gains tax (CGT) on returns or inheritance tax (IHT) on transfers, for example. What we don’t have is a wealth tax which taxes the ownership of that wealth.
They are harder to manage if you’re applying them to a large section of the population. The administrative costs of valuing everyone’s holdings annually is expensive so governments end up creating proxy values for lots of things, which leads to tax avoidance.
Switzerland is the model that is always held up but the Swiss don’t have CGT, so in a sense wealth tax stands in for that.
Property wealth is not the most important source of wealth by a long way. At the top end [Advani’s report A wealth tax for the UK modelled thresholds of £500,000 up to £10m], wealth from business is very important and pension wealth is also substantial. A mansion tax taxes people who hold wealth in the specific form of a property, not those who put their money in a pension or a business venture. A tax on wealth should be regardless of the form in which it’s held. Unlike a mansion tax, a wealth tax takes account only of the equity that you have in that property.
We suggested giving people time to pay it, the default option being five years. We also suggested a liquidity test that takes account of your income and, if the value of the tax is too large to pay over five years, then a longer period to pay would be totally sensible. In the extreme case of the old lady, then a way of rolling it up and paying it at death would be reasonable. The authorities would recognise that fairness means people aren’t going to be let off, but we can afford to wait.
It would be up to the Valuation Office to create a model of housing values. That would give a benchmark valuation and if individuals disagreed, there should always be the option to go and get valuations and have that overwritten. Getting valuations for properties is something we already do for IHT.
The liquidity test should prevent that from happening so we wouldn’t create mass sales. If that did happen, the government probably pitched the tax rate wrong.
In the US there has been a lot of discussion about annual wealth tax but I haven’t seen anything about a one-off wealth tax – although there’s been a motion in Canada supporting it. We hoped when we wrote the report, it would be useful for people in other countries to look at. I can’t say there’s anything about the US that immediately makes me think it wouldn’t be a good idea.
A one-off wealth tax would raise substantial amounts of money in ways in which a government controls the redistributional effects and decides where the threshold starts and how progressive the structure is. In the current crisis, younger people have been much harder hit economically, they’ve been more likely to lose their jobs or been unable to get into the job market and it’s been about protecting older households. There’s a sense that, as wealth is something that tends to be held by older households, it’s more natural to look there.
If income tax was raised instead, then that’s only affecting the people who are working now, and it also discourages people from spending money. In that context, it seems much more sensible to have the wealth tax, particularly for a country where the economy has been really squeezed. The UK government says, like Labour, that it cares about equality of opportunity and I think a one-off wealth tax seems a straightforward argument for any political alignment.
I think that’s unfair as they were also asked about raising the top rates of income tax, which most people don’t pay, and they were much less in favour of that.
Arun Advani is assistant professor of economics at the University of Warwick; a research fellow at the Institute for Fiscal Studies; and a visiting fellow at the LSE International Inequalities Institute. He studies issues of inequality, tax compliance and tax design, and co-wrote the report A wealth tax for the UK which concluded that a one-off wealth tax would be the preferred way of raising money to tackle the COVID-19 crisis.
To explore the revenue that could potentially be raised, the Wealth Tax Commission has built this interactive website.