Here’s how a levy on assets could work, just don’t call it a wealth tax
Debate around wealth taxes have become a meme, far too ideological and not technocratic enough. But there is a way to raise a levy on assets without distorting the economy, says Tim Sarson
Last week I was scanning the list of topics I’d written about for CityAM in the last two years and there was one big missing piece: wealth tax. And, to be honest, that’s been deliberate. What, really, is there to say that hasn’t been said before? It may be a hardy perennial of tax commentary world, but as a topic it’s a bit of a dead end.
The consensus is this: wealth taxation is interesting in theory, impossible in practice. It might well be more economically efficient and fair to tax capital than income, but wealth and capital are mobile, no country has successfully managed to make a wealth tax stick and we’re further away from any sort of global consensus on anything, let alone net wealth taxation, than we’ve been for decades. A dead end.
But it’s in the news yet again. What does that tell us? That wealth tax has become a meme. A beautifully political one which both sides of the divide love to talk about. Beloved of the left because it’s the perfect “tax on others”, and beloved of the right because it’s suitably terrifying: the taxman is coming for your hard-earned wealth. And a suitably vague term that lends itself to shapeshifting. Last month Wes Streeting was proposing a ‘wealth tax’ that was nothing of the sort, just an alignment of the Capital Gains Tax rate with income tax.
A meme can function as a sort of shortcut that tells you what the user thinks about society and class and business, and it’s a way of putting a policy in an ideological box. Isn’t the perfect recent example of this the “mansion tax”? A term designed to look punitive, a justifiable curb on excess. Mansions are what flash types with ideas above their station have. Similar vibes with “windfall taxes”. Or, if you’re the other way inclined, the reduction in Agricultural Property Relief (APR) for Inheritance Tax is the “family farm tax”.
Focus on the national tax base
I think this is the fundamental problem with the wealth tax discussion and why we’ll never get round to addressing some quite major problems with our current model of tax and spend while these memetic shortcuts are hanging around. The debate is too ideological and not nearly technocratic enough. Too focused on niches, not enough on the broad national tax base.
Our working population is shrinking and seems likely to keep doing so, while as I highlighted last month our consumers are on a spending strike. Some of that, but by no means all, is demographics. More Brits are above retirement age and fewer young people are entering the workforce. Some is behavioural: housing wealth and lifestyle preferences mean many can retire or semi-retire early. Some may not be by choice: KPMG’s latest economic outlook forecasts UK unemployment to jump to 5.3 per cent.
If we continue relying for a large majority of our revenue on payroll and consumption taxes then government finances will keep getting squeezed.
Some sort of rebalancing would make a lot of sense. Let’s dismiss some of the sillier ideas out there, like robot taxes to counter the rise of artificial intelligence, and think again about asset-based levies. I can see two ways we might be able to do this.
Firstly, we can rethink property taxation. I’ve mentioned land value taxes before because, in principle, they encourage productive economic activity and discourage asset sweating and land-banking. There’s very little philosophically to hold against them. Land is the definition of immobile, unlike other assets, so a land tax base should be stable and predictable for both taxpayer and government. Land taxation is also, economically, a better way to get revenue from commercial property than the current business rates regime or from residential property than council tax clinging to valuations from 35 years ago. The main challenges are practical – valuation and collection – and political, the cash poor old widow in the big rambling house. One of those memes again.
But secondly, perhaps we are writing off net asset taxation too readily. Let’s consider how the funds industry works. If you’re a private investor in equities or alternatives, it’s likely your fund manager is charging an annual fee based on the value of assets under management, sometimes combined with a share of portfolio growth. That mixture of flat fee plus share of upside is the so-called “two and 20” model: two per cent of assets under management and 20 per cent of growth. The annual percentage fee will sometimes be lower with a larger portfolio, as the effort per pound invested reduces. But crucially it’s charged on all investment pots, not just the largest ones.
What if we made moves towards something similar in the tax system? A relatively lower rate of tax on income and gains, combined with a flat percentage on net assets, set at a level low enough to allow most households comfortably to outgrow the tax rate, and crucially levied above a relatively modest minimum threshold so that we’re all in it together? I’d love to see some Treasury modelling on this. I’d also love to see some focus group responses. Yes, there may be some complexity and yes, people may fraudulently hide assets, but they fraudulently hide income right now. And for most households, net assets are mainly property anyway.
Just don’t call it a wealth tax.
Tim Sarson is head of tax at KPMG