As the UK economy struggles through the next stage of the COVID-19 pandemic, questions about how we financially rebalance ourselves must be considered. The Wealth Tax Commission was specifically set up to consider the impact of a Wealth Tax (both on the individuals liable to pay it and on the economy as a whole).
But how is a Wealth Tax defined and how would it affect you?
Who are the Wealth Tax Commission?
The Wealth Tax Commission are a group comprising policy makers, economists, legal experts and tax specialists who are working with Warwick University and the London School of Economics.
Their job? To research and report on one question: ‘Should the UK have a wealth tax?’
As the introduction to their report ‘A Wealth Tax for the UK’ says: “We drew heavily on international experience, commissioning detailed studies of the operation of wealth taxes in seven different countries, written by local experts.”
Their conclusions are based on extensive global research and represent the opinion of the Wealth Commission. This report is written with the aim of informing government, so that they can make a decision using their accumulated knowledge. It’s not a guarantee that their Wealth Tax proposal will become policy.
What is a Wealth Tax?
The Wealth Tax Commission recommend a windfall Wealth Tax in order to generate substantial funds for the country, to help our economic recovery from COVID-19. This means that it’s a one off tax, in response to the crisis situation we’re currently facing.
The question of whether or not it would affect you directly entirely depends on if you fit into their criteria.
The Wealth Tax Commission conclude:
- Wealth Tax to apply to every UK resident with assets worth over £500,000, or households (of two people) worth over £1million.
- Wealth Tax rate to be 1% of those total assets
- Lasts for 5 years only
They predict that this would generate an additional £260 billion for the Treasury.
To be absolutely clear, the report gives a definition of what they mean by ‘net wealth’ in these circumstances: “A wealth tax is a broad based tax on the ownership of net wealth. By ‘broad-based’, we mean a tax on most (or all) types of asset, not only a specific type such as property. By ‘net wealth’, we mean a person’s assets minus their debts.”
By this definition, mortgages on main residences wouldn’t be included in the calculation.
So, if this isn’t you, then you don’t need to worry about paying a new Wealth Tax, should it become policy is the question.
The report also presents alternative criteria, with higher thresholds of £4million per household. This would see a couple with £2million each in assets, taxed at 1% per year for five years. This alternative would only raise £80billion over the five year period.
Is a Wealth Tax better than raising other types of taxation?
There are a few reasons why the Wealth Tax Commission conclude that this is a better option than other tax increases.
Public support: More people would see this as a fair way to get more income for the country. Raising Income tax, National Insurance Contributions or VAT would be substantially less popular as that would directly affect more taxpayers.
Increasing other taxes
Following the suggestion of 1% over five years Wealth Tax would raise the same amount of money as 9p on the Basic Rate of income tax and increasing VAT by 6p, over the same time period. And it would be paid by far fewer taxpayers.
Obviously, increasing other types of tax will dampen economic activity, as people have less money to spend (income tax and NICs), or goods and services cost more (VAT). And that’s the last thing our post coronavirus economy needs.
Difficult to avoid for the wealthy
Understandably, there is a lot of scepticism around the tax arrangements of the very wealthy even when their decisions are completely legal. Such a simple, one off tax would be really difficult for anyone to avoid with the standard tactics of moving money offshore or emigrating to another country. This makes it a more successful tax collection exercise.
Are the government likely to adopt a Wealth Tax as policy?
This is a wait and see situation. There are previous cases of government’s introducing a windfall tax in response to different situations and, as the report says, it also feels fairer to the majority of the population.
“Governments have made radical changes to taxes when there has been public understanding that change is needed. A one-off tax on banks was introduced by the Conservatives under Prime Minister Thatcher. A one-off tax on privatised utilities was implemented by Labour under Prime Minister Blair. In both cases they were motivated by the specific circumstances of the time, so neither had wider economic repercussions. A one off wealth tax could be seen in a similar light now, sharing the burden of paying for the crisis across those with the broadest shoulders.”
But many members of the government and their supporters would be eligible to pay a Wealth Tax that follows these criteria.
Assistant Professor at the University of Warwick and one of the leaders of the Commission, Dr Arun Advani, 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.”
