Taxing the Wealthy Is Always Popular
(Bloomberg Opinion) -- Long before Covid-19 hit, there had been a fierce debate in the U.K. and elsewhere about how to fight growing economic inequality. One idea that got a lot of attention was whether to tax assets and, more generally, wealth. The pandemic has brought this back to the fore.
The issues with wealth taxes are many and varied, but they often circle back to the difficulty of targeting people who are very mobile and adept at employing both legal and illegal means of hiding their prosperity. As a result, wealth tax revenue invariably falls far short of projections. According to the OECD, 13 member states have imposed a wealth levy on individuals since the 1970s. Only three still do so today.
Nevertheless, in a recently published proposal, the U.K.’s Wealth Tax Commission claimed that people favored wealth taxes over all other forms of taxation. The Commission cited a survey conducted in May this year indicating that 63% of respondents supported a one-off wealth tax on households with assets over 2 million pounds ($2.7 million), excluding homes and pensions. Only 11% were opposed.
For many people, however, the attraction of a wealth tax is likely tied to the belief that they will not have to pay it themselves. Yet one of the few wealth taxes that has been deemed a success — in that it has managed to raise sufficient revenue without proving too costly to administer — is the Swiss version, which places the greatest burden on the middle class. In Switzerland, tax rates vary by canton, but typically range between 0.1% and 1%; in some cantons, any amount of wealth will attract at least some tax.
The U.K. Wealth Tax Commission proposal actually pitches a one-off tax on assets of more than 1 million pounds per couple, and unlike the opinion polls it cites, it includes the value of the family home and accumulated pension entitlements. The tax would be levied at 1% per year for five years and is forecast to raise 260 billion pounds to help close the fiscal gap created by the pandemic.
What would that actually mean for taxpayers in terms of pounds, shillings and pence?
According to property portal Zoopla, there are roughly 750,000 homes in the U.K. worth 1 million pounds or more. Let us look at a home at the bottom of that range and further assume the owners have a combined pension pot of 1 million pounds. If they have no other substantive assets, their wealth tax liability would be 10,000 pounds per year or 50,000 pounds in total. And this would be on top of all other taxes they’d have to pay. Mortgages would be deductible from the wealth levy, but other savings, cars, second homes and investments would be included. Pension payouts would be especially hard hit, since they are also subject to income tax.
It’s hard to believe that the U.K. will actually impose this sort of one-off tax. The Wealth Tax Commission is not a government entity, and this is not an official proposal. The foreword on the report even quotes Chancellor Rishi Sunak as saying in July 2020, “No, I do not believe that now is the time, or ever would be the time, for a wealth tax.” The last time the U.K. considered such a tax was in 1974, and it ended up getting rejected.
Still, if public support for a wealth tax has you worried, is there anything you can do?
We know such concerns drive many wealthy people, such as top sports stars, celebrities and entrepreneurs, to pack up and move to tax havens. Another obvious path would be to give one’s wealth away to the extent that circumstances allow. There are many schemes that can make charitable gifts tax efficient, for example. You could also consider spreading your wealth to loved ones and family, keeping in mind the rules of the U.K.’s existing inheritance tax. Another option would be to alter how you hold your assets. Perhaps you’d consider leasing your car to reduce your taxable wealth.
For the rest of us, it is probably best not to let the wealth tax tail wag the dog, as they say. The cost of avoidance measures for those with more modest means could easily outweigh any savings.
It would also be wise to think more broadly about taxes, as U.K. government bodies consider other options for raising revenue such as changing the capital gains tax. You can hope for the best while preparing for the worst. If there’s one thing we can be sure of, it’s that tax rates aren’t coming down.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.
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