The government has been urged to launch a one-off wealth tax on millionaire households to raise up to £260bn in response to the coronavirus pandemic, as the crisis damages Britain’s public finances and exacerbates inequality.
The Wealth Tax Commission – a group of leading tax experts and economists brought together by the London School of Economics and Warwick University to examine the case for a levy on assets – said targeting the richest in society would be the fairest and most efficient way to raise taxes in response to the pandemic.
In a highly anticipated report, the group, which has drawn attention from the Commons Treasury committee and the former head of the civil service, Sir Gus O’Donnell, said its proposals would be preferable to a broad-based tax raid on workers’ incomes and consumer spending.
How would a wealth tax work?
The Wealth Tax Commission said a one-off levy would be best because it would not distort behaviour. This is because it would be based on the wealth of an individual at a set point in time, on assets they had already accumulated before it was launched.
It said payments could be made in instalments over five years, and should be made by any UK resident, including ‘non-doms’ and recent emigrants, with personal wealth above a set threshold.
A common concern is that some people hit by wealth taxes might be ‘asset rich but cash poor’ – typically because they might need to sell their home to pay the tax bill.
To avoid this, the commission said payments could be deferred or made in chunks over time, and that pensions-related wealth would be taxed out of a lump sum on retirement.
How would a person’s assets be valued?
Opponents of a wealth tax argue they can be unfair, easily avoided, or expensive for governments to administer because of difficulties in assessing a person’s net wealth.
For reasons of simplicity and fairness, the commission said all assets would need to be included – such as main homes and pension pots, as well as business and financial wealth. Any debts, such as mortgages, would be deducted.
Valuations could be determined by open market value – which would be easy for assets such as stocks, bonds, cash savings and pensions. The value of housing and land could be determined by the Valuation Office Agency – the division of HMRC responsible for calculating property values. However, the commission said householders would have the right to challenge a valuation if they believed it to be incorrect. Shares in private companies would also require professional valuation.
How many people would be affected?
The Wealth Tax Commission report does not set out specific recommendations for how exactly such a levy should work, but provided a range of options.
At individual thresholds of £500,000, £1m and £2m a wealth tax would respectively cover 17%, 6%, and 1% of the adult population.
At a threshold of £1m per household (assuming two individuals with £500,000 each) and a rate of 1% per year on wealth above the threshold, it said a one-off wealth tax would raise £260bn over five years after administration costs.
At a threshold of £4m per household (assuming two individuals with £2m each) and a rate of 1%, it would raise £80bn over five years.
It said a wealth tax could raise £260bn over five years if the threshold was set at £1m per household, with a levy of 1% payable on the value of their assets above this level. This would be equivalent to raising VAT payable on goods and services by 6p, or by adding 9p to the basic rate of income tax for the same period, the commission said.
The tax would apply to a person’s total wealth – including their home and any other properties, pension pots, business and financial wealth. Any debts, such as mortgages, would be deducted. At thresholds of £500,000, £1m and £2m per person, a wealth tax would respectively cover 17%, 6%, and 1% of the adult population.
To sidestep concerns that a new wealth tax could hurt people who are ‘“asset rich but cash poor” who could be forced to sell their home to pay the tax bill, the Commission said the one-off levy could be spread out over five years and people could be offered more time to pay.
Arun Advani, assistant professor at the University of Warwick, who is one of three commissioners behind the study, said: “We’re often told that the only way to raise serious tax revenue is from income tax, national insurance contributions, or VAT. This simply isn’t the case, so it is a political choice where to get the money from, if and when there are tax rises.”
The report comes as the chancellor, Rishi Sunak, explores potential options for raising taxes from as early as next year in response to record government borrowing incurred during the pandemic.
The UK government’s budget deficit – the gap between spending and tax income – is on track to hit almost £400bn this year, as the state pumps billions of pounds into its pandemic response and tax receipts plunge amid the Covid recession.
Although the chancellor has been urged to delay tax rises or spending cuts until the economy is on a sustainable path to recovery, he used last month’s spending review to freeze public sector pay and cut the overseas aid budget. Sunak has also warned that “hard choices” on tax and spending will be required in future.
Calls for a wealth tax have been made before with little impact, amid fears that a levy on assets would go down badly with some voters and could hurt people with valuable homes but low incomes. Sunak has previously dismissed calls for a wealth tax, saying he believed there would never be an appropriate time for such a plan.
However, the Wealth Tax Commission said the timing was ripe for radical change due to the devastating impact of Covid on the public finances and on inequality in Britain.
It said that one-off taxes have been used after major crises before, including in France, Germany and Japan after the second world war and in Ireland after the 2008 financial crisis.
Rebecca Gowland, the head of inequality campaigning at Oxfam, said: “At a time when so many people are facing hardship as a result of the pandemic, this feasible and deliverable one-off wealth tax could transform lives – an uncomfortable truth for vested interests that are likely to resist it.
“The difference this revenue could make for the most vulnerable in society is staggering. Just a quarter of the extra money raised would be enough to keep and extend the social security weekly uplift and allow us to meet our lifesaving aid promise to the world’s poorest people.”
