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Wealth Tax? Really…

Wealth Tax? Really…

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A report from Britain’s Wealth Tax Commission, the London School of Economics and Warwick University finds that the introduction of a one-off wealth tax of 5% would offset some of the costs of the covid-19 pandemic, raising £260bn.

The report comes hot on the heels of the recent OTS report as the government considers its budget deficit, which is on track to hit almost £400bn this year, and the chancellor reviews his options for raising taxes in response to record government borrowing amid the Covid recession.

To put this in context, to raise similar amounts through other taxes over a five-year period, the chancellor would have to increase the basic rate of income tax by 9p, all income tax rates by 6p or see all VAT rates rise by 6p. No matter what your persuasion – that is a striking comparison and perhaps a wealth tax should not be lightly dismissed.

In my view it would take a very brave government to consider a wealth tax as they would undoubtedly face powerful opposition. Whilst the idea of a wealth tax may garner widespread public support and grab headlines, any change would be unpopular among the politically influential and on that basis alone it is difficult to conclude that a wealth tax is imminent.  

However, what I think is clear from this is that tax changes are on the horizon and that the government are increasingly willing to cast the net wider than just income tax, capital gains tax and inheritance tax rises. Given the various tax reports released recently, the stage in being set to allow for this and wider ranging tax increases.

I think this is exemplified by Arun Advani, one of three commissioners behind the study, who 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.”

So could a wealth tax really be on the way?

In the paper’s forward, former permanent secretary to the Treasury Lord Gus O’Donnell said:

“[The researchers] conclude that an annual wealth tax is a non-starter in the UK and we should fix our existing taxes on wealth instead.

However, a one-off wealth tax is a very different proposition. They think it would work and could raise one-quarter of a trillion pounds over five years. This is a striking conclusion, and it comes at a crucial juncture.”

One-off taxes have been used before to raise substantial revenue, including in France, Germany and Japan after the second world war and in Ireland after the 2008 financial crisis. Indeed, they have been levied in the UK on the banks and on privatised utility companies. Although Rishi Sunak has previously dismissed calls for a wealth tax, the Wealth Tax Commission propose that the timing is right for a radical change due to the impact of Covid on the public finances and on inequality in Britain.

It is generally accepted that those towards the bottom of the economic pyramid have borne the brunt of the Covid economic shock more than those at the top, and so the idea of a wealth tax will appeal to many people, creating the perception of addressing the imbalance and serve as a political football.

However, a wealth tax will be equally unpopular amongst others. Before now the UK has not shown any appetite for it, generally considering it to be a retrograde step and points to countries that have stepped away from it.

As I see it, a wealth tax is unlikely to be an effective longer-term economic solution and we only must look to France where a wealth tax was largely ineffectual, generating a tiny proportion of tax.

A wealth tax would almost certainly have an impact on people’s behaviour and potentially stifle economic activity in the future. The mechanics to implement the tax would need to be engineered and much further thought would need to be given to how the asset rich and cash poor would be impacted for example, farmers, pensioners, business owners and property owners who may struggle to pay.

Unprecedented times may call for unprecedented measures. It is not clear whether a shorter-term, one-off wealth tax could offer a workable solution or perhaps it just points to the inevitability of tax rises. What is clear, in my opinion, is that the future of tax in the UK is increasingly open for debate and the recent Wealth Tax Report only serves to bolster my belief that tax rises are on the way, perhaps as early is that the budget in March 2021. As before our advice to clients remains that they should continue to prepare and plan for rises accordingly.

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