Assets are easier to tax than some more nebulous targets

Big ideas of 2015: asset taxes

Assets are easier to identify than profits and in the last decade they have increased hugely in value
December 10, 2014
Read the rest of our big ideas of 2015

The decline in UK tax receipts illustrates how hard it is for modern democracies in a globalised world to collect taxes. The decline in corporation tax paid by Britain’s largest companies gives stark evidence of this—in 2007, it constituted half of the tax paid by Britain’s largest companies. Now it represents only a quarter.

As well as companies, governments worldwide have failed to find effective ways to tax assets. In his book Capital in the Twenty-First Century, the most unlikely bestseller of 2014, the French economist Thomas Piketty made the case for a broad increase in tax, concluding that only a tax on wealth could stop the continued increase in social inequality in developed nations. The EU intends to introduce a financial transactions tax on share and derivatives trades; 11 of the 28 EU countries, including France and Germany, favour this tax on buying and selling financial assets. The European Commission thinks the proposed 0.1 per cent tax on bond and share trades and 0.01 per cent tax on derivatives trades could raise €30bn or more a year. A tax on assets is attractive for governments as, unlike profits—a nebulous accounting term—assets are easier to identify and more challenging to hide. In the Autumn Statement, Osborne proposed a tax on profits made by large corporations that are then moved offshore. The very name of this proposed tax—the “diverted profits tax”—gives a clear indication of how hard it will be to implement.

Assets are easier to identify and in the last decade they have increased hugely in value. The low interest rates of the late 1990s and early 2000s allowed easy access to credit, which boosted asset prices. After the 2008 crash, quantitative easing in the US and UK meant that credit was still easily available, and asset prices rose further.

They are still rising. London house prices jumped by 26 per cent in the year to July, their biggest rise since 1987 (even if they have now slowed), causing Mark Carney, Governor of the Bank of England, to call house prices “the biggest domestic threat to financial stability” in Britain. Osborne’s change to stamp duty on the purchase price of houses, announced in the Autumn Statement, is intended to cool the housing market at the high end (although it may boost it lower down). The prices of high-end art, classic cars and wine have all spiked. A crash and recession have, paradoxically, led to conditions in which the value of objects has soared. Governments, looking for politically acceptable ways to increase their revenues, will pay this close attention in 2015.