Cornered by bleak growth forecasts, pressure to ease austerity and resistance to tax increases, Philip Hammond resorted to borrowing more in his budget. Despite praise among fellow Tories for his efforts on 22nd November the chancellor of the exchequer delivered a budget as fiscally feeble as the government is politically weak. Yet finance ministers are never really short of ingenious ways to raise more revenue. At a time of booming asset markets, one option open to a stronger chancellor would have been to plug some of the borrowing gap by introducing an annual wealth tax.
No doubt one drawback for Hammond even to contemplate such a notion is that Thomas Piketty, a left-wing French economist hailed by the Economist as “a modern Marx” for his unlikely international best-seller, Capital in the Twenty-First Century, backs a global wealth tax to combat the increasing concentration of wealth. Yet the Conservative Party once came close to adopting a British wealth tax when in opposition in the 1960s, recounts Martin Daunton, professor of economic history at Cambridge University, in Just Taxes, which traces the politics of taxation in Britain between 1914 and 1979. Proponents argued that it would encourage capital to be used more productively while the revenue raised could be used to lower excessively high income tax rates.
Before the budget, Roger Farmer, research director of the National Institute of Economic and Social Research, proposed an annual tax on net wealth (assets less liabilities) above £700,000 (including residential property) while also abolishing three existing capital taxes—inheritance tax, capital gains and dividends. According to his calculations such a tax set at 1.2 per cent would in itself produce £43 billion (around 2 per cent of GDP). If it were set at 2 per cent the chancellor would rake in £72 billion. As well as making the tax system more equitable, Farmer argued that such a wealth tax would encourage property owners to switch some of their housing wealth into productive capital. At a stroke the policy would make homes more affordable thanks to the downward pressure on house prices while boosting labour productivity owing to the increase in investment.
However, the case for a wealth tax is disputed. Much financial wealth is accumulated retirement saving. This is particularly important in Britain where the state provides what is by international standards a modest pension benefit. As a result the government encourages workers to build up nest eggs, both through tax reliefs and “nudge” policies such as automatic enrolment into workplace pension plans. It would be perverse on the one hand to encourage retirement saving and then on the other hand to discourage it through a wealth tax. This would bite not least since the amounts of saving required to get a pension have ballooned owing to low annuity rates. A sum of £100,000 currently delivers only around £3,000 of inflation-protected income a year to a single person aged 65.
One guide to the feasibility of any tax is international experience. The general trend has been away from net wealth taxes. Within the OECD club of mainly rich economies, 12 levied such taxes in the early 1990s. Now only four do so: France, Norway, Spain and Switzerland. The revenue generated is unimpressive, suggesting it will be hard to reap a rich harvest in Britain. On 2015 figures, Switzerland’s net wealth tax raised the most as a share of GDP, amounting to 1 per cent. Norway’s yielded 0.4 per cent and revenues were even lower in France and Spain, at 0.2 and 0.1 per cent of GDP respectively. In France, Emmanuel Macron has just slashed the tax by removing all assets other than housing from the levy, whose threshold is €1.3 million (£1.15 million).
"The Conservative Party came close to adopting a wealth tax when in opposition in the 1960s"Despite the progressive credentials of a wealth tax, a comprehensive review of the British tax system in 2011 did not back it. Headed by James Mirrlees, joint winner of the Nobel economics prize in 1996 for his insights from information economics into optimal income tax theory, the report declared that “levying a tax on the stock of wealth is not appealing.” Many forms of wealth such as future pension rights were “difficult or impractical to value.” More fundamentally, taxing wealth would discourage saving.
What the Mirrlees review did advocate was the taxation of wealth transfers, typically through taxing bequests. Unlike most countries, which charge a tax on those inheriting wealth when people die, Britain’s misnamed inheritance tax is levied on the estate. An old tax dating back to 1694 but taking modern form in 1894, death duties reached as high as 80 per cent under the post-war Labour government. The current rate on inheritance tax is 40 per cent of the taxable amount after exemptions.
Although death duties are unpopular, they make economic sense. For one thing, some legacies are unintended, as people die earlier than expected. The behaviour of such donors should not be affected by the tax. Although the prospect of such a tax might in principle deter dynastic-minded entrepreneurs from making fortunes, there is little evidence to support this. By contrast research shows that receiving bequests tends to blunt enterprise among the inheritors, who are more likely to quit work. As Winston Churchill argued in 1924 the tax is “a certain corrective against the development of a race of idle rich.”
The Mirrlees review’s main rationale for taxing wealth transfers was to promote equality of opportunity, a policy goal frustrated by inequality in inheritance. The report backed a series of reforms such as widening the base by including for example agricultural land and switching the tax from the donor to the recipient. Its most radical suggestion was to tax lifetime receipts, which would prevent donors from avoiding the levy by passing on wealth well before they die.
The OECD is due to publish a report early next year on the case for and against net wealth taxes. Sarah Perret, one of the authors, points out that these should be considered in the broader context of all property taxes as well as personal taxes on capital income. Norway for example no longer has an inheritance tax following its abolition in 2014. Switzerland gets hardly any revenue from regular taxes on housing while capital gains are generally exempt from taxation.
By international standards Britain taxes housing heavily through the annual council tax and stamp duty charged on property purchases. The real priority should be to reform these taxes. Council tax does not raise enough from the more affluent. High stamp duties are undesirable because they clog up the housing market, impeding mobility and deterring downsizing as people stay put to avoid incurring the levy. Hammond’s tax break in last week’s budget for first-time buyers makes little sense on its own. Rather, residential stamp duties should be lowered across the board as part of an overall reform in which the lost revenues are made up by raising council tax on more valuable properties.
Unfortunately, such a strategy, which for council tax would involve a long overdue revaluation of property values put on hold for fear of the angry response of those paying more in such an overhaul, appears as unrealistic as a revamp of inheritance tax. Whatever the merits of redesigning wealth and property taxes the politics of such reforms is peculiarly unforgiving.
