Wealth tax: will it work?
Back to wealth tax, eh?
Well, let’s blame the Guardian.
Earlier this week, it published a letter signed by 83 of the world’s richest people. They called upon fellow members of the wealthy elite to dig into their coffers and help pay for the economic damage caused by Covid-19.
This echoes the so-called ‘millionaires letter’ which was published some months ago.
One of the 83 names behind this ‘cunning plan’ was the co-creator of the Blackadder series and various vehicles for Hugh Grant’s particular brand of foppish-ness, Richard Curtis.
For the culinary minded, it also included Jerry Greenfield who was co-founder of Ben and Jerry.
The letter called for “our governments to raise taxes on people like us. Immediately. Substantially. Permanently” and that “millionaires like us have a critical role to play in healing our world.”
Vomit inducing, I know.
But this chimes with the wider calls for a tax on wealth rather than income. Despite the economic woes created by Covid, the wealth of the ultra-wealthy seemingly spreads.
Perhaps unsurprisingly, the Labour party has requested that the Government considers introducing a wealth tax which would apply to the richest members of society. As with the signatories to the letter mentioned above, this is to help us climb out of the Covid created economic doldrums.
Sir Keir Starmer QC, has stated that:
“We are saying to the government, look at the idea of a wealth tax, we certainly support the principle that those with the broadest shoulders should bear the greatest burden.”
Thomas Piketty and wealth tax
Piketty, the French economist has stated that billionaires are harmful to economic growth.
His book, Capital in the 21st Century, became a global bestseller and effective instruction manual for those who subscribe to the ‘tax the rich’ ideology. He followed this up with an equally substantial tome called Capital and Ideology.
Piketty has called for a wealth tax of 5% net value in excess of €2 million or more. This cranks up to an eye watering 90% on those with a net worth of worth more than €2 billion!
Piketty stated that:
“Entrepreneurs will have millions or tens of millions… But beyond that, those who have hundreds of millions or billions will have to share with shareholders, who could be employees. So no, there won’t be billionaires anymore. How can we justify that their existence is necessary for the common good? Contrary to what is often said, their enrichment was obtained thanks to these collective goods, which are the public knowledge, the infrastructures, the laboratories of research.”
Wealth tax around the world
Piketty’s plans appear to have, unsurprisingly, hit the mark with left leaning commentators.
However, have we seen any such plans around the world?
At the beginning of the year, Senator Elizabeth Warren, at that time a hopeful in the 2020 US presidential race raised the prospect of a wealth tax.
Warren dubbed this the “Ultra-Millionaire Tax”. It would impose a 2% federal tax on every buck in value of an individual’s net worth over $50 million and an additional 1% over $1 billion. It was estimated that almost $2.8 trillion would be raised from the 75,000 richest households and be worth $2.75 trillion over ten years.
The idea of such a wealth tax seemed to disappear with her hopes of the presidency when she pulled out in March.
France has had two stabs at a wealth tax:
- from 1982 – 1986; and
- from 1988 – 2017.
This was a graduated system with the most recent highest rate being about 1.5% on net worth exceeding €10 million. It applied to the worldwide assets of French residents.
Although it might be argued that such a tax might have had political and societal advantages, it raised only a few billion euros at its height. Further, it is asserted that at least 10,000 of its wealthy residents left the country.
Of course, this not only reduces the effectiveness of the wealth tax but also their other taxes walk out of the door as well. It is estimated by French economists that the tax cost twice as much revenue as it raised.
President Macron scrapped the tax in 2017
About half a million people in Norway are liable to a 0.85% tax where the value exceeds 1.48 million Krona – or about £126,000.
This is certainly not a recent foray as it was introduced in 1892.
Most families in Norway pay at least some amount under the wealth tax but it raises a mere 1% of Norwegian tax revenues.
Other wealth tax and similar taxes
Spain and Switzerland both also levy a wealth tax.
Other countries operate a form of tax similar to a wealth tax, include the Netherlands and Belgium.
However, it appears that in Europe, wealth taxes are very much on the wane.
What might a UK wealth tax look like?
Boris appears to have ruled out a wealth tax in the UK for now. But, in the highly unlikely (!) event of a U-turn by Mr Johnson, what might we need to think about.
There are a number of basic questions:
- Who would be chargeable?
- What assets would be chargeable?
- At what level of wealth does it become payable?
- How much?
The first perhaps is key and it is perhaps around this where some of the important issues arise.
The obvious choice is that one is subject to the wealth tax where one is resident in the UK. However, particularly if the rate is material, then there is a chance that wealthy families would do the same as the French and base themselves elsewhere.
Of course, we have seen this argument before. When the various non-dom reforms have been mooted and introduced we have been warned of potential flight from the UK. It seems (anecdotally) that this has not happened to any major extent.
However, those changes are slightly different as each set of non dom revisions has merely rolled back the advantages of such a status. Attractive advantages still exist and therefore non-doms continue to stay here and take advantage of them in their droves.
The imposition of an annual tithe on capital becomes a new and absolute cost for the pleasure of living in the UK. This might create a more compelling reason to up sticks and find a home that does not (and has better weather!)
Despite it seeming to disappear from the US presidential discourse, the US is perhaps in the best place to create one (albeit the prospect of constitutional challenges have been raised). This is because citizens are taxed on a worldwide basis regardless of where they reside. As such, this would mean they would need to throw off their citizenship to escape it. Indeed, recognising this, Ms Warren proposed a (substantial) exit tax if someone had the temerity to do this.
The UK also taxes by reference to domicile. For IHT purposes, one is subject to tax on UK assets if resident outside of the UK but remain domiciled in the UK.
As such, one might also look at applying the wealth tax along these lines – that one is subject to the tax if domiciled or deemed domiciled in the UK. This would create serious administrative issues for HMRC who would need to be in a position to assess the domicile status of expats each year (rather than on a less frequent event for IHT purposes).
The next question is what assets would be subject to the wealth tax?
Assuming the test is based solely on residence then the starting point would be all worldwide assets would be subject to the tax.
One would likely then carve out assets such as the main residence and any business assets which are owned by the individual. For example by using the qualifying conditions for Business Property Relief.
One would also anticipate pension assets and other tax relieved assets to be outside of the scope.
However, a wealth tax could also be used by the Government, not only as a tax stick, but also as a carrot. A bit like the introduction of Business Investment Relief allowed non-dom overseas funds to be funnelled in to particular UK projects without triggering the normal tax charge, a wealth tax could be used more effectively to encourage investment behaviours. For instance, if one wanted to create investment in certain assets or geographical areas, such investments could be made exempt from the wealth tax for a fixed period of time.
What about assets held in trusts? Would these be subject to a wealth tax? One would assume they would have to be included in any potential wealth tax. More information on trusts is, and will become, available to HMRC.
Next is at what rate does the wealth tax kick in? For example, in Norway, it is at a relatively low level (certainly one would not consider those having to pay it are necessarily wealthy). On the other hand, Ms Warren’s tax was certainly pitched at the wealthy where it only triggered at $50m. I would anticipate that any moves in the UK would be more like the French level assuming main residences and business assets were excluded from charge.
For me, the final one is the least interesting question of all and I will leave that to others. Clearly, it should be at a level that people can pay where their assets are not liquid – other wise it may start distorting investment.
Wealth tax – Conclusion
Unsurprisingly, wealth taxes will always be a popular solution for particular problems for those who support wealth taxes. For example, those who support wealth taxes will see them as the answer to Covid-19, the 2008 financial crisis and, if next year there is an international outbreak of uncontrollable hiccoughing, then that as well.
At the other side of the political equation, a wealth tax will always be as wrong as, well, having to wear a mask when they take a trip to their tailors.
For most in the middle, they will be led by the economics and practical implications of such a tax – for now, I am not convinced that a case has yet been made for either.