High Government debt has generated discussion among advisers and clients about how it will be repaid and whether some form of wealth tax is likely.
It’s no secret the Government debt has reached epic levels – £300bn+ and potentially rising. With interest rates being as low as they are, it’s accepted that servicing the debt may not be as challenging as the size of the debt would (superficially at least) indicate. Low to negative yield Government Bonds (Gilts) are being bought by the market and as part of its continuing commitment to Quantitative Easing (QE), the Bank of England. But gilts have redemption and effective “re-finance rates”. So, its unsurprising that, given the well publicised size of the (Covid support generated) debt there is more than a little interest in how the debt (in principle) is going to be repaid. Yes, interest at current rates can be serviced, and, yes, especially for longer dated gilts, inflation may lend a helping hand – though not, to coin an overused phrase “anytime soon” it seems.
So, being smarter with spending (but without a return to austerity) and, most important, stimulating the economy to a rapid and sustained recovery will both be on the Government’s economic agenda.
It’s inevitable (it probably would have been without the Covid generated economic challenges) that all aspects of existing taxation will be reviewed – at the very least to see where efficiencies can be secured. For example, you can be sure that continued focus on anti-evasion and anti-avoidance will be high on the agenda.
But what about any new taxes – especially taxes that won’t have an immediately and direct dampening impact on demand? We’ve seen talk, with stimulus in mind, of a temporary cut in VAT.
So, how about a wealth tax – we’ve not had one of those have we? Superficially, it could materially increase the tax yield – think of it, a completely new tax applied to as wide a range of capital assets as possible. The economics unit of Manchester Metropolitan University estimated that, if all personal wealth suffered a one off 2% wealth tax, around £300bn would be generated and the Public Sector Net Borrowing Requirement (PSNBR) challenge would be “sorted” – so to speak.
Challenges imposing a wealth tax
There are more than a few challenges to this potentially highly simplistic proposal and to a wealth tax generally. Here are a few of the more common challenges:
1. Which assets should be subject to the tax?
The UK has a well known and long standing deep affinity with residential property. Applying a wealth tax to it would almost certainly generate strong opposition among key sectors of the voting population.
Council tax could represent an easier pathway. Current property values used to arrive at assessable value for council tax purposes were last reviewed in 1991. So, some change/re-rating seems long overdue. However, any additional money generated from this re-rating would flow to local authorities. Presumably, it wouldn’t be too hard to redirect some of that to the central cause.
A “mansion tax” on properties valued at over £2m was discussed (and part of David Milliband’s Labour Policy) as recently as 2015 – it wasn’t terribly well received by all accounts. The Conservatives also decided against any such tax ahead of the last election. Unsurprising.
The philosophical rationale “in the round” for a wealth tax to be applied to residential property (that is owner occupied at least) is that no other tax is levied in relation to it apart from inheritance tax (IHT) in appropriate circumstances.
2. What “threshold value level” (of whatever assets are to be subject to the tax) should apply?
Essentially what should be the exemption/nil rate threshold for a wealth tax? Where should it start? Essentially, what is the definition of “wealthy” for this purpose?
3. Which, if any, assets should be exempt from the “reckoning”?
Effectively, part of the first question. Should any asset that has its income and gains taxable also be subject to a wealth tax? Should private businesses and working farms be exempt? What happens in countries that do operate a wealth tax is interesting – we have set out some information covering ‘The Global experience’ at the end of this article.
Annual valuation (if the tax is to be applied annually) would represent a potentially enormous challenge. Arbitrarily official valuations would be unlikely to be accepted, so this process, with associated appeals, could be unwieldy and costly.
A particular challenge for those who are asset rich and cash poor. A wealth tax applied to residential property immediately springs to mind as an aspect fraught with potential difficulty.
6. The cost of collection
For any new tax this facet cannot be ignored when considering whether the overall objective of the tax is likely to be achieved.
7. The net financial benefit of the tax
This would be in effect a function of:
- The tax rate.
- The threshold above which it is charged.
- Which assets are (and are not) subject to the tax.
- Cost of collection.
The experience around Europe (see ‘The Global experience’ below) is not exactly encouraging it has to be said.
In 1974 in the UK, the Labour Government considered the introduction of a wealth tax (there was a green paper) “to promote greater social and economic equality”. A sliding scale was proposed in the paper (remember in 1974) starting at 1% on wealth over £300k to 5% on all wealth over £5m.
Denis Healy (the ex Labour Chancellor) concluded in his memoirs that “We had committed ourselves to a Wealth Tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle”.
8. Being clear about the purpose of the tax.
Is it to be revenue generative or confiscatory? Whatever the answer, evidence from the countries that have introduced a wealth tax is that it has added very little overall tax yield – see ‘The Global experience’ below in relation to the four countries in Europe that currently operate a wealth tax.
9. The ease of avoidance
Capital is very mobile these days – as are individuals. The more confiscatory/meaningful the tax the more individuals are likely to do, in relation to their assets and (if applied to worldwide assets of UK resident/domiciled individuals) their own tax status. Think “Laffer”.
10. Political philosophy
A wealth tax would seem to be something not naturally “close to the heart” of a Conservative Government – even one committed to “levelling up”.
You can find out about the wealth taxation situation is in Europe here.
If you have any questions arising from this article, please do get in touch.
Article credit: Techlink