It wasn’t a huge shock yesterday when the final report from a body called ‘the Wealth Tax Commission’ came out in favour of a wealth tax. The more cynical among us might suggest this feels like a group of fairly left-wing academics claiming Covid as a reason to implement something they have always supported anyway. The way the authors have chosen to argue their case, however, has actually made a very good case against the idea of introducing a new wealth tax for the UK.
The report argues that, in the extraordinary circumstances of the Covid-19 crisis, a one-off wealth tax, on all property including main homes, pensions and so on, could:
“Raise significant revenue in a fair and efficient way, be very difficult to avoid, [and] work in practice without excessive administrative cost”.
Reading the report itself, it’s telling that almost all of their case for a wealth tax appears to rest on it being one-off. This is a tacit admission that the traditional objections to a broad-based wealth tax – that it would be a nightmare to administer, would damage saving and investment, and would easily be avoided, especially by the wealthiest – are actually pretty valid. There is a reason that most of the countries who have tried wealth taxes, such as France, have ended up abolishing them.
The report points out that you can try to get around these problems by just imposing a single, one-off levy on wealth, based on valuations made on or before the day the policy is announced, so individuals have no opportunity to make arrangements to reduce their liability. Administration would be less of an issue as it would only be one valuation and compliance effort made at a single point in time, rather than a whole new tax to be administered permanently. Investment and savings would, in theory, not be damaged if everyone was convinced that this was indeed a one-off windfall tax.
The authors make a reasonable case that many of the usual objections to a wealth tax are less applicable if the tax in question was ‘credibly one-off’. I would question how possible it is to persuade everyone it is a completely unique action and they need not change their behaviour (it seems unlikely that investors would simply ignore a tax raid amounting to more than a quarter of a trillion pounds because ‘it’s just a one-off’). However, just as importantly, it’s really not clear to me the precise problem a ‘one-off’ wealth tax would be aiming to solve.
A one-off levy would, by definition, do almost nothing to address the long-term sustainability of the UK’s public finances. The most obvious argument for an extraordinary tax such as this would be to drastically reduce the public sector debt-to-GDP ratio over a short period. This would only really make sense in the context of a debt crisis which, as Julian Jessop pointed out on this site yesterday, seems an unlikely scenario at the moment. The expanded stock of debt is probably manageable. What is more important is that the longer-term outlook for borrowing is kept under control. A one-off wealth tax might mean we can reduce public sector debt in the short term, but it would not help to ensure that the debt ratio stops rising every year after the tax ends. Public finance management should be about structural balance – whether what you’re bringing in every year, over many years, is enough to pay for what you’re spending every year.
Where the authors of the report have a real point is when they argue that there are major difficulties associated with an ongoing annual wealth tax, that our existing taxes on wealth and property are outdated and dysfunctional, and that the priority should be reforming those taxes. One does wonder why they don’t make more of this, either in the body of the report or the dramatic-sounding press release.
Take council tax, one of the worst of a bad bunch of property taxes we have in the UK. It is based on property values from 1991, and the existing band structure is regressive and outdated. The average council tax bill in London is roughly the same as in the West Midlands, despite Londoners having higher average incomes and much greater housing wealth. There is a compelling case for reforming the way we already tax different forms of wealth, not introducing an ongoing annual wealth tax.
If you ignore the headlines and read the report itself, it becomes clear that this wealth tax only really ‘works’ if it’s a one-off, yet making it a one-off renders it largely pointless. It’s a solution looking for a problem, all couched in the usual flimsy ‘Covid changed everything’ justifications. In other words, in their efforts to demonstrate that a one-off wealth tax could be both economically efficient and raise substantial revenue, the Wealth Tax Commission have done a good job of torpedoing the case for a wealth tax.
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