The idea of something for nothing is irresistible. And the fiscal equivalent of “get rich quick” schemes is the wealth tax. Raise huge sums - £24bn or more – thanks to one weird trick that only hits the rich. It’s a tiny tax, and they’ll barely notice.
That’s the sell, and like many such schemes, it’s superficially alluring – but the salesman isn’t telling you the downside.
The wealth tax people are calling for is unusual. We’ve never had a tax like it in the UK. In fact nobody in the world ever has. And its effect is also unusual.
The first problem is the high effective rate the tax creates.
A 2% tax on income is, for a wealthy person, pretty tiny. A 2% tax on assets is different. Take an example where someone has an 8% dividend return on a £100m investment. Right now, after tax, they pay 39.35% dividend income tax. A 2% wealth tax adds £2m of tax, so the effective rate on their £8m of income is over 64%. That’s pretty huge.
This effect – the rate getting higher as the yield drops - is the opposite of what a sane tax should do.
But imagine the return on the £100m is 3%. Perhaps the asset is low risk, under-performing, or we’re in an economic downturn. The wealth tax doesn’t care – it’s still £2m. The effective rate on their £3m of income is now 106%.
Or imagine it’s a startup, valued at £100m but never made a penny of profit. You’ve still got a £2m wealth tax bill. How are you going to pay that? Good luck.
This effect – the rate getting higher as the yield drops - is the opposite of what a sane tax should do. It makes the economy more vulnerable in downturns. And the high rates create a high incentive for people to act to reduce their bill.
The consequence will be less savings and investment. It’s the usual rule – if you tax something, you get less of it. Domestic investors will have an incentive to spend rather than save. Foreign investors will have an incentive to simply pull out of the UK. And the very wealthy will have an incentive to leave.
But we need to be careful here. The media debate about “leaving” is a simplification. People with net wealth of £100m often have homes in several different countries, spending a few months in each one. UK rich lists are dominated by people who came to the UK from abroad and spend comparatively little time here. Ceasing to be UK tax resident will in many cases mean adjusting diaries to spend a few more days in the UK. Easy.
This fall in savings and investment means a hit to growth and employment. Researchers modelled the impact of a similar tax proposed in the US, and found a long-term 2% hit to GDP. Others modelled a proposed German tax – the long-term hit was 5%, with hundreds of thousands of jobs lost. And the very international nature of London’s wealthy population means the UK is more vulnerable than either the US or Germany to migration.
We could tax the wealthy more fairly and make the tax system more efficient and boost growth – all at the same time. But that makes for a lousy banner at a demonstration
It gets worse. These effects also reduce the revenue from the tax. Its revenues are unusually fragile: 80% would be collected from just 5,000 people. A sixth from just ten people.
And then there’s the second order effects, with that GDP impact reducing revenue from other taxes. That German study found that, whilst the tax would raise €15bn each year, the adverse economic consequences meant that €46bn would be lost from other taxes.
And worse still: don’t expect any wealth tax revenue before 2029. The sugar tax took 25 months to implement. The wealth tax is way more complicated. The valuation issues alone are a nightmare.
Does this mean we can’t tax wealth at all? It absolutely does not.
We have plenty of existing taxes on wealth and property – stamp duty land tax, council tax, business rates and inheritance tax, capital gains tax. These are probably the UK’s most broken five taxes. Stamp duty stops people moving, and gums up the labour market. Council tax hits the poor more than the rich. Inheritance tax is optional for the very wealthy. Capital gains tax hurts investment but lets some wealthy people escape 45% income tax.
We could reform all these taxes. We could tax the wealthy more fairly and make the tax system more efficient and boost growth – all at the same time. That’s hard work, and makes for a lousy banner at a demonstration, but it’s the right thing to do.
But the wealth tax? It’s a dead end. Anti-growth, fragile revenue and a drag on investment and jobs.
Dan Neidle is Founder at Tax Policy Associates
