Top Taxes: Calls for a UK wealth tax reach fever pitch
July 12, 2020
3 min read
What's going on here?
Pressure is increasing on the government to consider a wealth tax to fund public spending once the economic fallout of the coronavirus pandemic reveals itself.
What does this mean?
By all accounts, the government is going to be forced to raise additional taxes to pay for the measures implemented to combat the coronavirus pandemic. This is because government spending has ballooned, with significant outlays on measures such as the job retention scheme (to see our article on that, click here) while tax revenues have fallen. When spending exceeds tax receipts in this way, the government borrows the difference (known as the deficit) by issuing bonds.
On 8 July 2020, chancellor Rishi Sunak made further concessions on VAT and stamp duty. These developments further strengthened the case for tax increases down the line. One option would be a new wealth tax. In early July, the former head of the civil service Gus O’Donnell predicted that such a tax was more likely than ever. Soon after, shadow chancellor Annelise Dodds MP signalled the Labour Party’s support of such a measure.
A wealth tax can take many forms. Internationally, the most common incarnation is a tax levied on property, pensions, securities or even works of art. Ordinarily there is a minimum threshold of wealth under which no tax will be charged (in Spain this figure is €1m) and regimes also permit exceptions for assets such as primary residences and family shareholdings.
What's the big picture effect?
Raising taxes is never politically appealing and introducing entirely new taxes can be politically ruinous (as the Thatcher administration found with the poll tax). That said, introducing a UK wealth tax seems to have public support. A recent YouGov poll found that 61% of the population support a wealth tax on individuals with assets over £750,000 where pensions and primary residences are excluded. Such popular support could help to push a wealth tax up the government’s agenda and ultimately through parliament.
The reason why a wealth tax has support in the UK is not a simple matter. One explanation is the current, startling distribution of wealth in the UK. The median household wealth of the richest 10% of Brits is 315 times that of the poorest 10%, whereas the median household income of the top 10% is 6.8 times that of the poorest 10%. As the economic burden of pandemic policy continues to swell, it makes sense that those with broader shoulders foot a larger proportion of the bill. Indeed, the Labour Party is interested in a wealth tax because they fear that otherwise, lower- and middle-income workers will bear the burden.
Taking a step back from the merits of a wealth tax, it is worth investigating how the current tax system has facilitated the unequal distribution of wealth in the UK. The UK has experienced a decades-long wealth boom, driven by rising house prices and the success of private pensions. Naturally, these assets are collected mostly among the older cohorts of society. With greater wealth accumulation comes larger inheritances and the data attests to this; inheritances having doubled over the last 20 years. A coherent inheritance tax (IHT) regime would catch these transfers, but for a tax with rates of 20% and 40%, it makes up a surprisingly small part of all tax receipts; IHT accounted for less than 1% of all tax receipts in 2018-19.
One reason for modest IHT receipts in the UK is of course private client practices at UK law firms. It is the imperative of these firms’ clients to get ahead of tax regimes and structure their affairs so as to minimise liability, often by using complex trust arrangements. The data holds that this approach has enjoyed great success in recent years. For any legislature introducing a new tax, the ability of tax planners to obviate the rules is a credible threat to its effectiveness.
The justification for a wealth tax in the UK is strong, but the practical implementation of one is likely to be politically and legally challenging. Happily, it is a few months until the chancellor must deliver his Autumn budget, so there is time yet to thrash out the detail.
Report written by Sam Denison
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