Could a one off wealth tax rebuild public finances?
We are all aware that the financial support the Government has given to businesses and individuals over the last nine months will have to be paid for.
Ways of increasing the tax raised to at least mitigate the effect of this spending are restricted by the “triple lock” promise. In the pre-election manifesto it was stated that there would be no increases to Income Tax, VAT or National Insurance during the life of this parliament. The government is no stranger to the U turn, but breaching this promise, even in extraordinary times, would not be easy.
A recent report on a proposed wealth tax aims to create a system for “sharing the burden of paying for the crisis across those with the broadest shoulders”.
The Wealth Tax Commission issued its report on the rationale for, and design of, a Wealth Tax on 9 December 2020. The Commission is a self-appointed board of academics with no statutory authority or official role, but nonetheless, its report comes at a time when public expenditure is unprecedented during peacetime and cannot be wholly discounted.
However, in July 2020, only six months ago, Rishi Sunak said, quite unequivocally “I do not believe that now is the time, or ever would be the time, for a wealth tax”. He is unlikely to favour a tax which removes disposable income from the economy at a time when it needs as much stimulus as it can find.
The report considers using the tax to raise £250bn, taxing all individuals with wealth above £500,000 at 5% payable over 5 years – it is thought that this would involve 8.2 million individuals, representing about 25% of all taxpayers. Since there are only about 4.6 million who pay tax at higher rates, it would appear that about half those liable for a wealth tax would pay tax at the basic rate or indeed not be taxpayers at all. Whilst the affordability factor would affect everyone, it is likely to be particularly problematic for this cohort who might be ‘asset rich, cash poor’.
There are many anomalies in the design of the tax. In order for it to raise the required amounts, it would need to include pension rights in some way, but this raises a minefield of problems where fairness between occupational and personal pensions are concerned, or where pensions are already in payment.
Internationally wealth taxes have tended to be phased out in recent years since they are difficult to collect encourage avoidance and are deeply unpopular. A one-off wealth tax could ameliorate these concerns to some extent.
There is no current mechanism to assess the tax and it would take some time to make the necessary valuations and return mechanisms. Politically that might mean that implementation of the tax might come in at about the time of the next General Election.
Changing the rules for Capital Gains Tax (CGT) could raise significant amounts in the long term, and it bypasses many of the affordability arguments – in the vast majority of cases a liability for CGT arises precisely because funds have just become available.
CGT also falls outside the “triple lock” and has recently been reviewed by the Office for Tax Simplification, which found it to be in need of reform. We know that there will be a Spring Budget so those considering capital tax planning would do well to implement any planned measures before then. Raising CGT would not go very far in solving Sunak’s problems, but it could be his first step.