UK Edition
For a Chancellor who will soon be tasked with paying the nation’s Covid debts, the latest polling on where Britons think he should find the cash will have made interesting reading.
An Ipsos Mori poll suggested 41pc of respondents think Rishi Sunak should hit those with more than £500,000 in net assets with a wealth tax: politically explosive territory where few Chancellors have dared to tread. “Novel taxes such as a wealth tax clearly do have a degree of popularity,” said Trinh Tu, the pollster’s research director.
But just when the polling suggests the idea is in fashion with voters, wealth taxes have been on the wane with the governments who have to collect them for years.
The bidding war between Democrat challengers Bernie Sanders and Elizabeth Warren last year over a wealth tax for billionaires may have put the topic in the public eye, but there are now just four developed countries using one: Spain, Norway, Switzerland and Belgium. That compares with 12 in 1990, according to the Organisation for Economic Co-operation and Development.
The reason is that the evidence suggests wealth taxes spell a lot of aggravation for little return. In all four apart from Switzerland - which does not tax capital gains - wealth taxes brought in less than 1pc of the total tax take in 2016. The OECD study was carried out before France scrapped its own version in 2018 and Belgium introduced its own limited wealth tax on securities.
Helen Miller, deputy director of the IFS, says wealth taxes “have never raised very much money” and they are notoriously hard to design without creating distortions. “From an economic standpoint you’d like all assets in there, from artwork to wine to pensions, and even your human capital. As soon as you don’t have an asset class in there people start shifting wealth between assets.”
Then there are the administrative issues. How often should you measure wealth? What about residents from overseas? How do you value a privately owned business? “The big challenge of practicality is that we don’t have a comprehensive measure of people’s wealth,” Miller adds.
Other concerns include the punishing of asset rich and income poor pensioners, while potentially sapping the UK’s appeal as a destination for investment. The OECD also warns of the impact on business dynamism: “Another efficiency related argument is that a net wealth tax reduces the amount of capital available, which may in turn affect entrepreneurship and business creation."
Rather than turn to wealth taxes, experts suggest ironing out obvious flaws in the current system. The closest thing the UK has to a wealth tax is a regressive council tax based on outdated 1991 values, that no politician has dared to touch for a generation.
Then there is the lack of capital gains tax paid on profits from the sale of main homes - another inefficiency it would take a bold politician to remove. George Bangham, an economist at the Resolution Foundation, said: “There is a lot of scope for sensible changes that raise revenues from within the current system.”
Calls in some quarters for a one-off wealth tax to pay down Covid debts win slightly more favour from economists as being less likely to distort behaviour, but the move would still come up against the same practical issues.
Above all Sunak should heed the experience of the last Chancellor who tried one in the UK, Denis Healey. Labour was elected in 1974 with a manifesto commitment to introduce a wealth tax, but eventually left office five years later without doing so.
Healey recalled 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.”
The Chancellor should remember those words if he finds himself tempted.