There has been a plethora of politicians on the Left calling for a “Wealth Tax” recently although none of them has explained what it means. In truth they have no idea because the matter is complex. Don’t you think that in a hundred years of modern Britain if a wealth tax was a good idea, or even possible, some Government would have tried it?
The Leader of the Opposition knows this. Starmer was asked about the clamour for taxing wealth and said this: “People who earn their money from property, dividends, stocks, shares – capital gains tax, these should all be looked at as a broader, fairer way of raising taxes.” . Of course this wasn’t a call for taxing assets at all but for taxing what they produce (basically income). We already do this of course. Your income in Britain is taxed whatever produces it, whether you work for it or not.
So let’s try and define what wealth actually is – you’ll certainly need to do this very precisely if you want to tax it ! And I’ll share with you my own portfolio in my dotage ! For some years now I’ve really only had two assets – my house and my pension. The value of the former depends on the property market – on a day to day basis the changes in value don’t bother me though at some point we might want to sell and then it would. We are not there yet.
My pension, like most people of my age from a Defined Benefit Scheme, has a value that you can calculate. Basically it’s the Discounted Cash Flow value of future pension receipts with a life expectancy assumption built it.
So my “wealth” is House value plus Pension value. You could add these together and tax it every year at (say) 5% of value. But this would be double taxation. I already pay income tax on my pension at the marginal rate, and Council Tax on my home – tax that is vaguely asset value related. Good luck with putting that in a manifesto and being elected on it !
My financial affairs are rather simple but I know many friends who have more diverse assets in their wealth build up. Stocks and shares, second homes, paintings, jewellery etc etc. The liquid assets like the equities are again already taxed by taxing the dividends they earn or the capital gains if you sell them. You could nominally tax “wealth” by increasing the tax rate on unearned income as Starmer is suggesting but in fact this is income tax by another name.
Most of the loud rhetoric about a “Wealth Tax” is done by reference to the “Fat Cats” in the “High Wealth Individual” category – the “Ultra Rich”. Let’s have a look at them (the example is from America but the same broad categories apply here):
For the individuals in the top three categories money management is highly organised. They may take a personal interest in that themselves (most do) and they can certainly employ smart people to advise them. Even with today’s tax model many of these very wealthy individuals will choose to place their money and often themselves out of the taxman’s reach offshore. Tightening up on this is possible and there are no doubt ways to do this under consideration. International cooperation is vital but post Brexit EU tax avoidance rules have no effect here. It would be a long haul.
The reality is that the modest wealth most of us have to some extent is already taxed – certainly if the asset produces income like dividends or property rentals. We can tinker with this – increase Council Tax on U.K. second homes for example. But if that leads to selling your cottage in Cornwall and buying a villa in the Algarve the taxman loses out!
The cry for a Wealth Tax is all too often driven by a wish to punish the rich rather than to significantly raise tax revenues. I personally subscribe totally to the principle “From each according to his ability, to each according to his needs” – although it was Karl Marx who said this that doesn’t make me a Marxist ! Tax the rich more than the less rich and don’t tax the poor at all. And yes assets are a subset of wealth. But the vast majority of us don’t have much in the way of wealth other than, if we are lucky, a home and income/pension.
I sense the pursuit of a “Wealth Tax” is a chimera and many who cry out for it can’t or won’t think it through.
One thought on “What is wealth and how do you tax it?”
How do you make society fairer? The only method is to take from the ‘haves’ and provide the ‘have nots’ with the things they need. I agree with “From each according to his ability, to each according to his needs” Yet ability and needs are seen differently by everyone. It requires a government of decency to administer it.
Most western democracies have been trying to do that since the industrial revolution with spectacular success in Europe and abjective failure elsewhere.
Recently however in Britain since the days of Margaret Thatcher, Monetarism, and the ending of the Keynesian consensus, tolerating extremes of wealth and poverty has once again become socially acceptable. Political parties of every colour have treated taxation as a pariah rather than what it really is. An effective tool to create a fairer society.
If a wealth tax drives individuals to extremes of hiding that wealth then the way to prevent it is through draconian measures such as asset seizures and confiscation. It can be done to Oligarchs then it can be done to tax avoiders.
Britain is a country with extremes of wealth and poverty not seen in other European states. It is getting worse and the Tories have every intention that should continue.
How much longer the population squeezed on every side will tolerate it is anyone’s guess. I foresee a massive backlash coming against this inept government trying to return the nation back to an illusion of colonial power. We see that with the current ludicrous royal tour of the Caribbean’s former colonies and a royal boat.
Starmer if he gains power will have little choice but to tax the rich more in some meaningful and powerful way in order to return the country back to some form of fairness and decency. He will have a difficult, even impossible task.