The headlines may be dominated by just two issues, Brexit and Covid, but government still has to deal with the usual, perennial problems that beset all governments. None is more pressing than the country’s finances. And there has been no time in living memory when the figures have looked as scary as they do today, thanks to a combination of those two big issues. Covid has vastly increased the country’s debt burden. A no-deal Brexit will, according to the government’s own forecasters, shrink the size of the cake from which it takes its tax slice. But this week, a radical solution has been proposed that has the potential to pay off almost the entire bill for Covid. It is a one-off wealth tax. Is it a runner?
Economists and left-wing politicians have been talking about wealth taxes for years. Many argue that it is wrong to base so much of our revenue-raising system on taxing income (most of it from work) and taxing spending (much of it on goods and services that we cannot do without) when rich people are sitting on huge assets that barely get taxed directly. But for all the talk and campaigning, they haven’t got very far. We do have some wealth taxes, of course. The most obvious is inheritance tax. But the idea of extending the scope of wealth taxes has always come up against problems that are both practical and political.
One of the most obvious practical problems lies in what economists call the ‘liquidity’ issue. That’s to say, taxes have to be paid in cash, but much wealth can’t readily be turned into liquid cash. If you’re wanting to tax the actual asset value of a £2m house, for example, you can’t simply knock down an extension, sell the bricks and use the money to pay the tax. Assets, such as houses, aren’t ‘liquid’ and that goes for all forms of wealth that can’t easily be sold, even in part, to pay a wealth tax bill.
There are ways round this, of course. One is to excuse the holder of the asset from paying the wealth tax until they’re dead. The government would tot up every year what the wealthy asset holder should be paying and then present the tax bill to the relatives left behind the day after the funeral. A simpler way to do it would be just to ramp up inheritance tax. But whichever way a government sought to do it, it would come up against the political problem. Wealth taxes, unsurprisingly, are not too popular with the rich and the rich are quite good at political lobbying to protect their interests.
Perhaps one reason the proposal to impose new wealth taxes has never got off the ground is that they tend be suggested as annual taxes, just like our income taxes are. Having to ‘liquidate’ assets every year to pay the tax just compounds the practical and political problems. But now it’s being suggested that instead of an annual wealth tax, permanently levied, there should be just a one-off wealth tax, imposed simply to deal with the emergency that has arisen in the government’s finances because of Covid.
We’ve had ‘one-off’ taxes before. Margaret Thatcher imposed a one-off ‘windfall tax’ on the banks back in 1981 when she was first trying to balance the books, and Tony Blair imposed a one-off tax on the privatised utilities when he came to office in 1997. The new proposal is to apply the same principle to the taxing of wealthy individuals.
The idea comes from the Wealth Tax Commission, set up back in April. Its report was written by academics from Warwick University and the London School of Economics with inputs from fifty tax experts, think tanks, the OECD and a former head of HM Revenue and Customs. It was published on Tuesday and its basic idea is simple.
All those with wealth above £500,000 would have a one-off levy of 5% imposed on that wealth. Assets that would count as wealth would include housing, pensions, business, equity and savings. It’s estimated this would hit 8.25 million people living in Britain and would raise £260 billion, just £20 billion shy of the current bill for Covid. To help get over the liquidity problem, those liable for the tax would be allowed to pay over five years in five equal annual instalments. Andy Summers, associate professor at the LSE and one of the report’s three authors, said: ‘A one-off wealth tax would work, raise significant revenue, and be fairer and more efficient than the alternatives’.
As it happens, the report was published the same day as another report, from the Joseph Rowntree foundation. This cited evidence that destitution levels in Britain had been soaring even before the pandemic. In 2019, it said, more than one million households were unable to afford at some point in the year two of the five bare essentials regarded as vital: food, heating, lighting, clothing and keeping clean. To many the juxtaposition of these two reports will add moral weight to the case for a one-off wealth tax.
That does not mean, however, that it is likely to happen. Rishi Sunak, the Chancellor of the Exchequer, said back in July: ‘I do not believe that now is the time, or ever would be the time, for a wealth tax’. But Mr Sunak also knows he has a big problem getting the government’s books out of the deep read ink in which they are now written. Neither he nor the Prime Minister seems to believe that further massive cuts in government spending are the way to do so: Mr Johnson has ruled out more ‘austerity’. So the solution will have to be found in increased taxation
Mr Sunak is reported to be pressing the Prime Minister to abandon commitments made in the Conservative Party manifesto in the general election just a year ago. Those commitments included no rise in income tax, national insurance or VAT (which accounts for 60% of the sources of government revenue), and a re-commitment to the Tories’ ‘triple lock’ on pensions, obliging them to raise pensions in line with whichever is the highest of the rate of inflation, the rise in wages or 2.5%.
Lord O’Donnell, the former Cabinet Secretary, commented on these difficult options in the introduction he wrote to the Wealth Tax Commission’s report. He said: ‘It is broadly accepted that if the prime minister is to stand by his promise not to return to austerity then taxes will eventually have to rise. This will mean breaking another manifesto commitment. Or it means thinking seriously about new taxes.’ Cue: a one-off wealth tax.
It would certainly seem a bit of a stretch to imagine a Conservative government imposing a wealth tax, even a ‘one-off’ tax, for the obvious reason that it would risk alienating so much of the party’s electoral base. But that does not mean this week’s new idea will die a quick death. No one is seriously proposing that taxes of any sort should be raised in the next year or two when the economy will still be recovering from the shock of the Covid lockdowns. The time for tax rises, it’s agreed, is later – as we approach the next general election.
Keir Starmer would face the same massive financial problems if he becomes prime minister in a few years and he will want to find policies that would appeal to his own left-wing supporters. It’s entirely possible that he might take the Wealth Tax Commission’s report from the shelf where it has doubtless been gathering dust and give it some serious thought.
What’s your view? Is a one-off wealth tax a good idea or not?
Let us know what you think.