A proper wealth tax – bring it on!

JVL Introduction

Labour has backpedalled on its £28bn p.a.  “green prosperity plan” well in advance of the general election, as we reported recently in Labour slammed for ditching climate pledge.

“Fiscal responsibility”, narrowly interpreted, is given as the reason – in broad outline, we can’t spend more than we can raise in taxes.

But even on these terms there is no serious problem in raising the amount required and more.

It is called a wealth tax and Britain is rotten ripe for one.

Research prepared by the University of Greenwich’s Institute of Political Economy in 2021 suggest it is both feasible and politically practicable and could raise eye-watering amounts of money for a programme of social transformation.

This is of course possible because of the disparities of wealth in British society have been widening since the eighties and have further escalated under austerity.

We repost here the abstract of the article and the introduction to the analysis.

You can download the full article  here.

The case for a progressive annual wealth tax in the UK

Ben Tippet, Rafael Wildauer, Özlem Onaran, Institute of Political Economy, University of Greenwich, 2021

The bottom line is summed up in the abstract of the paper, viz:

This paper analyses the revenue potential of a progressive annual net wealth tax in the UK. A progressive net wealth tax is a tax on the stock of net wealth that is designed to raise revenues primarily from the wealthiest households. We present a baseline progressive net wealth tax that only taxes the top 1% wealthiest households. Households with net wealth above £3.4 million (the top 1%) are taxed at a marginal rate of 1%; above £5.7 million (the top 0.5%) at a marginal rate of 5% and above £18.2 million (the top 0.1%) at a marginal rate of 10%. We estimate that this tax would raise roughly £70-130 billion a year after administration costs and tax avoidance/evasion: £70 billion if 50% of the tax is evaded and £130 billion if 15% of the tax is evaded. This is equivalent to roughly 9-16% of total tax revenues taken by the UK government each year.

Introduction

Progressive net wealth taxes are an idea that have, over the last decade, moved from the margins of economic debate to becoming serious policy proposals. In 2018, the OECD put forward a case for a net wealth tax “only levied on the very wealthy” (OECD, 2018: 3). The following year, progressive wealth taxes became central to the campaigns of two of the Democratic primary candidates in the USA. Moreover, the unprecedented fiscal stimulus following COVID-19 has intensified interest in the question of paying for the pandemic, of which wealth taxes are just one answer.

Following these proposals, this paper defines a progressive net wealth tax as a tax on the stock of net wealth (assets minus liabilities, henceforth referred to as wealth) that is designed to raise revenues primarily from the wealthiest households. This is achieved by either having high thresholds that make the tax liable only for wealthiest percentiles of the distribution, and/or progressive rates that are much higher for the wealthiest households. Despite a range of theoretical and empirical work discussing progressive wealth taxes in the USA (Saez and Zucman, 2019) and Europe (Krenek and Schratzenstaller, 2018; Wildauer, Kapeller and Leitch, 2021), there has not been a similar analysis of the feasibility or revenue potential of a progressive wealth tax in the UK. The closest analysis was put forward by The Wealth Tax Commission (WTC) in 2020, who produced a final report, 13 core papers and 23 background papers discussing the feasibility and revenue potential of a wealth tax in the UK. Their analysis however does not outline progressive wealth taxes as defined above – with high thresholds and high rates (5% or higher) on the very wealthy. The WTC recommend a one-off wealth tax to be paid over five years. While they don’t recommend specific rates or thresholds, the baseline results they present has tended to be one of two designs. The first is a 1% marginal tax rate on net wealth for individuals who own £500,000 or more. This tax would include 8.2 million (top 16% of UK adults) and raise £250 billion over the five years. The second is a 1% marginal tax rate on the wealth of individuals who own more than £2 million. This tax would only include 626,000 people (top 1% of UK adults) and raise £80 billion over the five years.

A progressive wealth tax would differ from these proposals by increasing both the thresholds and rates for wealthiest households. The baseline progressive tax model estimated in this paper is a one potential proposal. It only taxes the top 1% wealthiest households who make up 259,177 households in total. Households with wealth above £3.4 million (the top 1% threshold) are taxed at a marginal rate of 1%; above £5.7 million (the top 0.5% threshold) at a marginal rate of 5% and above £18.2 million (the top 0.1% threshold) at a rate of 10%. The bottom 99% do not pay any tax. This baseline model aims to capture the revenue potential of a progressive wealth tax in the UK.

Outlining the design and revenue potential of a UK progressive wealth taxes is important for three reasons. Firstly, a progressive wealth tax is likely to be an effective policy tool to reduce wealth inequality. The UK public currently shows strong support for a new wealth tax with the explicit aim to reduce wealth inequality (Rowlingson, Sood and Tu, 2020). Polling shows that a new wealth tax is more popular than raising income tax, VAT, council tax or capital gains tax, if the government had to raise revenue (Rowlingson, Sood and Tu, 2020: 11). Furthermore, the number one reason for supporting a wealth tax was to reduce inequality. In a choice between several reasons for supporting a wealth tax, “the gap between the rich and the poor is too large”, came first, followed by “the Rich have got richer in recent years”. (Rowlingson, Sood and Tu, 2020: 15).

Since the 1980s, there has been a clear increase in wealth inequality with the share of top 1% in total wealth reaching 19.8% in the UK. The top 1% currently own as much wealth as the bottom 69% of the population. During this period, inheritance, top marginal income and capital gains taxes have also declined. A progressive wealth tax would have a big impact on the wealth distribution as it directly affects the stock of wealth rather than the income that flows from it. According to Saez and Zucman (2020), very high wealth households rearrange their financial affairs in order to avoid taxable capital income, thereby limiting the impact capital income taxes have on the wealth of the very richest. A progressive wealth tax is designed to directly deal with this problem, by taxing the stock of wealth explicitly rather than the income flows from wealth. Moreover, Tippet, Onaran and Wildauer, (2020) argue how the rise in the top 1% share of total wealth is largely determined by the fall in the bargaining power of workers. Given that union density and collective bargaining coverage remains at historically low levels in the UK, wealth taxes remain alternative option to decrease wealth inequality.

Secondly, the international context is increasingly in favour of higher and better enforced taxation. The political salience of international tax enforcement was demonstrated by the agreement on 1st July 2021 of 130 countries to commit to a minimum corporate tax rate of at least 15% at the OECD (OECD, 2021). Thirdly, a progressive wealth tax deals with the criticisms and pitfalls of why wealth taxes have failed in the past. For example, the number of OECD countries with a wealth tax has declined from 12 in 1990 to only 3 in 2020 – Norway, Spain and Switzerland (Perret, 2012). There are several reasons for the decline but as Advani, Chamberlain and Summers (2020: 82) note the story is quite similar:

“Administrative challenges made it difficult to maintain a comprehensive tax base valued at open market valuation. This left the tax exposed to lobbying for exemptions and reliefs. In turn, narrowing the tax base mostly benefited the wealthiest, leading to the impression that only the middle classes paid. At that point, ‘any attempt to broaden the tax base would go against entrenched special interests and, in some cases, made it easier for policymakers to repeal them altogether than to reform them’ (Henrekson and Du Rietz, 2014).”

Most of the existing wealth taxes have low thresholds, include a high number of households to be valued, exempt certain assets, and fail to shut down avoidance and evasion loopholes. The progressive wealth tax proposal discussed below differs to these by having high thresholds, a small number of households to be valued and includes all assets to limit avoidance, exemptions, and reliefs. In this sense a progressive wealth tax is qualitatively different to the experience of wealth taxes in the past and aims to build on their experiences.

This paper presents simulated revenue projections for a simple progressive wealth tax, a flat rate tax (similar to the Wealth Tax Commission) and a hybrid design in line with Piketty (2020) with progressive tax rates but starting at a low threshold.

Our main finding is that the revenue potential of a progressive wealth tax is substantial. We estimate that our baseline model would raise roughly £70-130 billion a year after administration costs and tax avoidance and evasion: £70 billion if 50% of the tax is evaded and £130 if 15% of the tax is evaded. This is equivalent to roughly 9-16% of total tax revenues taken by the UK government each year.

The structure of the paper is as follows. The first section outlines the design features of the wealth tax, including rates and thresholds, who will be taxed, what will be taxed and valuation. The second section analyses the costs and problems generally associated with the tax, including liquidity concerns, administration costs and behavioural avoidance responses. The third section outlines the data. Section[s] four [and five] present the simulated revenue projections for the progressive wealth tax, the flat rate tax and the Piketty model, and section six concludes.

_________

You can download the full article The case for a progressive annual wealth tax in the UK here.