Rebuilding government finances after COVID: Is a wealth tax part of the answer?

11 November 2020

By Arun Advani (Assistant Professor of Economics and Impact Director of the CAGE Research Centre at the University of Warwick)

Four hundred thousand million pounds. That looks set to be the additional borrowing by government this financial year. It is eight times the pre-pandemic borrowing predictions, and comparable only to the world wars in terms of borrowing as a share of national income.

Unlike previous recessions, these numbers are in large part the result of active policy decisions, such as the introduction of the furlough and self-employment income support schemes. And as we (one day) come out of the health crisis, further spending is likely to be necessary, if “levelling up” and “building back better” are to be more than warm words.

Paying for the recovery

The initial funding of the recovery is likely to be yet more borrowing. Unemployment will be higher, and spending lower, than before the pandemic. And some of the temporary changes in working habits and lifestyles are likely to remain, with less travel and commuting as people in some jobs have adapted to at least partial working from home. This means that any recovery will also need to include a transition into different jobs, or jobs in different places. Supporting such transitions and economic recoveries, so-called “countercyclical policy”, is a crucial responsibility of government.

Ultimately however, either taxes must rise or spending must fall. It is difficult to see where spending cuts could be made, with the Austerity of the decade pre-COVID having already severely trimmed large parts of the state. This suggests significant tax rises are on the way: not imminently, but probably before this Parliament is out.

“Traditional” tax options

The standard prescription for raising any serious money is to turn to “the big three”: Income Tax, National Insurance Contributions, and VAT. These are all “broad based” taxes, paid by a large share of the population. This means that small changes in tax rates can bring in substantial amounts of revenue for government.

There is money to be had from other sources too. Now is a good time to fix some of the longer-term structural problems with the UK tax system, and raise some money at the same time. For example, capital gains – the money people make from selling assets for more than they acquired them – are taxed at a much lower rate than income. This has led to more people structuring their income in a way that takes advantage of this anomaly, causing huge variation in the tax rate people with similar incomes pay.

Aligning tax rates between income from work and income from capital gains could raise around £12 billion pounds. This is equivalent to raising VAT or the basic rate of Income Tax by 2p, or raising both the higher and additional rates of Income Tax by 5p. The government appears to have recognised this, reducing one of the largest capital gains reliefs at the March 2020 budget, and more recently setting up a review into the taxation of gains.

A new wealth tax

A more radical option is a new “Wealth Tax”. Taxes such as Capital Gains Tax and Inheritance Tax are already taxes on wealth, but only when there is some return from or transfer of wealth. Unlike other countries, the UK does not have any tax on overall individual (or household) wealth.

What distinguishes a Wealth Tax from existing taxes on wealth is that it is owed irrespective of the income one might receive from wealth. Some consider this to be unfair: someone might be taxed on wealth more than the income they receive from it. Indeed, for wealth in the form of a car, yacht, or stamp collection this is almost certainly true: there will likely be little or no income. For others this is its very raison d’etre: to raise money from people who have wealth, but might be able to structure their affairs to have relatively low (taxable) income. Either way it presents some challenges for structuring and administering such a tax.

Such taxes have been considered (and rejected) before. So what might make now different?

First, there has been a sizeable rise in wealth inequality over thirty years. This has traditionally been an issue that has exercised the left of the political spectrum. However, with one in ten people now expected to inherit more than £500,000, the implications for equality of opportunity are substantial. This has led to calls from right-of centre commentators and organisations for higher taxes on wealth in some form (though not necessarily an explicit Wealth Tax).

Second, the revenue potential is large. Total wealth in the UK now exceeds £14 trillion, six times (pre-COVID) national income. This is not in itself a reason to have a Wealth Tax, and there are already other taxes on this wealth. But these large numbers make wealth an attractive target for some. And they make it more palatable to engage in the administrative costs of managing the tax, which surely don’t scale with the level of national wealth.

Third, these administrative costs are also likely lower than in the past. Tax authorities now share more information across borders, making offshore evasion harder. The existence of more electronic data on ownership of some assets, means onshore compliance would also be easier to enforce.

Finally, and potentially most importantly for politicians, a Wealth Tax is reasonably popular. Even before COVID more than half of people supported a Wealth Tax (with some exclusions), and that appears to have risen slightly since the beginning of the pandemic, and to hold among a wealthier-than-average population. When compared against revenue-equivalent alternative options for tax rises, a Wealth Tax was considerably more popular than other alternatives. Two in five people selected it as their most preferred option, twice as many as for second-placed council tax rises. Three out of four people surveyed included it in their top three options.

None of this means a Wealth Tax is likely. Though surmountable, there are important legislative hurdles: introducing a new tax is harder than tweaking the rates of an existing one. A wealth tax would also have to fit in somehow alongside the existing taxes on wealth in the UK. Some may also worry about the implications for incentives to save, although the evidence is that this is likely to be small, particularly at high levels of wealth.

To understand whether a Wealth Tax should be part of the recovery, the Wealth Tax Commission (of which I am a Commissioner) has undertaken the most in-depth study of a Wealth Tax for the UK in almost half a century. We have drawn on evidence from across the social sciences, and have published all the evidence we have taken so others can reach their own conclusions. On the 9th Dec we will publish our final report on whether, given the trade-offs outlined above, a Wealth Tax would be appropriate for the UK. I hope you can join us at the launch.

With thanks to Emma Chamberlain and Andy Summers, my co-commissioners at the Wealth Tax Commission, and to the other contributors to the Commission.

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Arun Advani is Assistant Professor in the Economics Department and Impact Director of the CAGE Research Centre at the University of Warwick. He is a Research Fellow at the Institute for Fiscal Studies, and a Visiting Fellow at the International Inequalities Institute. Arun studies issues of inequality, tax compliance, and tax design, with a focus on those with high incomes or wealth and is co-chair of the Discover Economics campaign, aiming to increase the diversity of people who study and work in economics.

The perspectives expressed in these commentary pieces represent the independent views of the authors, and as such they do not represent the views of the Academy or its Campaign for Social Science.

This article may be republished provided you place the following statement and link at the top of the article: This article was originally commissioned and published by the Campaign for Social Science as part of its COVID-19 programme.