Can a wealth tax cure our Covid fiscal ills?

Will a wealth tax be the remedy for Britain’s post-pandemic debt mountain, or should we be looking to reform of the taxes we already raise?

These topics were debated as CIOT returned to Labour conference in Brighton for the first of our party conference events, held in partnership with the Institute for Fiscal Studies (IFS).

^{(Pictured L-R: Arun Advani (Wealth Tax Commission), Dame Angela Eagle MP, John Cullinane and Helen Miller).}

Titled A Wealth tax to help pay for Covid? and chaired by CIOT Director of Public Policy John Cullinane, our guest speakers were:

• Dame Angela Eagle MP, member of the House of Commons Treasury Select Committee (who served as Exchequer Secretary to the Treasury from 2007 to 2009)
• Helen Miller, Head of Tax, IFS
• Arun Advani, University of Warwick and a member of the Wealth Tax Commission

In opening remarks, Helen Miller observed that the pandemic in Britain had led to ‘unprecedented’ levels of public spending, and a need to look at how we pay for the costs of coronavirus.

She said the UK should aim to grow its way out of debt, but noted that a myriad of public spending pressures – both pandemic and non-pandemic related – had left the country facing some tough tax choices in the years to come.

Turning to the specifics of the wealth tax debate, Miller told the audience that she remained unconvinced of the benefits of an annual levy. There are many considerations for policymakers when thinking about the design of a wealth tax. For example:

• Three-quarters of wealth is stored in housing and pensions, meaning that a broad wealth tax has the potential to sweep a wide range of people into its scope, depending on its design
• Wealth distribution in the UK is highly unequal and has been exacerbated by the pandemic
• The wealth lifecycle. Captured at any fixed point in time, a person’s wealth may not reflect their path to further wealth. This leaves economists concerned that we’d end up taxing people for saving and growing their wealth as they progress through life

Miller also argued that rather than a new tax, government should look to use the existing tax regime, citing the capital gains and inheritance tax regime as options for targeted reforms.

But if government was to introduce new taxes on wealth, it would need to be clear about its objectives so that it can be designed and implemented appropriately.

As a member of the Wealth Tax Commission, Arun Advani set out three findings from the commission’s work, which reported late last year.

It had:

1. Ruled out an annual wealth tax (although Advani did acknowledge there were those who may see it as a tool for tackling inequality) ;
2. Identified the merits of a one-off wealth tax, including its ease of implementation and the potential revenues it could generate, and;
3. Recommended actions to reduce wealth inequality

On the prospects for an annual wealth tax, Advani, like Miller, pointed to reforms of existing taxes as a better proposition, citing capital gains tax, dividend tax, inheritance tax and council tax as all being ripe for reform. He suggested that aligning dividend and corporation tax rates with income tax and National Insurance could raise between £8 billion and £10 billion, and would be a better use of the tax regime than the government’s plan for a new Health and Social Care Levy.

Turning to the idea of a one-off wealth tax, Advani outlined the potential revenues that could be raised. Indicative examples were:

• A 1% levy over 5 years on wealth of £500,000 would raise £260 billion
• On wealth over £2 million, this would raise £80 billion and, for £10 million, between £8 and £9 billion.

In comparison, the government’s reforms to National Insurance would raise £10.5 billion.

Lastly, Advani stated that to reduce wealth inequalities would require a combination of reforms to existing taxes (as outlined above) and the implementation of an annual wealth tax.

In opening remarks, John Cullinane had reflected on the Treasury Select Committee’s Tax after Coronavirus inquiry, which had – to the surprise of many – not ruled out the idea of a tax on wealth.

Dame Angela Eagle said that this reflected the shifting debate in British politics (the committee is cross-party but contains a majority of Conservative MPs) around the need to rebuild the public finances after the pandemic.

It was because of the scale of borrowing to meet the challenge of the pandemic that MPs on the committee didn’t want to rule out a one-off wealth tax. She told the audience that it was time to ‘start thinking about the unthinkable’ in order to balance the books and rebuild society to make it more equal.

Eagle said that the UK’s tax base has been threatened by tax avoidance and evasion, by structural change in the UK economy, the rise of technology and the online market place, offshore financial institutions and distortions around the way employment income is taxed (the ‘three person problem’).

Eagle said that these challenges mean that the tax system has to be designed so that it is fit for the twenty-first century, rather than limping along and becoming more complicated and convoluted.

And she argued that some of these could be achieved in the absence of a wealth tax, with inheritance tax and capital gains tax ‘an obvious place to look for distortions’.

Despite the Prime Minister’s protestations that he is a low tax politician, ‘that era is over’, said Eagle. She told the audience that the next 20 to 30 years of politics in the UK will be defined by the need to build a more prosperous and equal society.

Questions

Questions from the audience (online and in person) were wide and varied. Some of the topics covered included:

Inheritance tax – one audience member suggested the UK needed to ‘desperately’ reform IHT along with agricultural and business property relief to prevent abuses of the system and to prevent tax avoidance.

Advani said reform was possible, but that it wouldn’t be the silver bullet that funds our pandemic recovery. Helen Miller said that there would be political barriers to reforming IHT because of its perception as a tax on aspiration.

Equalising National Insurance and taxes on income and gains – Arun Advani said that adding National Insurance to all forms of income could generate £15 billion and negate the need for next year’s planned increases. “There’s quite a lot of money there”, he said.

Advani also said that equalising taxes on income and capital gains represented a straightforward option, noting that it was a policy pursued by Nigel Lawson in his 1988 Budget. Angela Eagle said removing distortions in the tax system would be beneficial. Miller said that reform should encompass all forms of income.

Property tax reform – has the time come for the abolition of Council Tax and is replacement with a progressive property tax? Both Advani and Miller agreed that Council Tax was outdated and in need of reform.

Miller also noted that Stamp Duty Land Tax (SDLT) was ‘one of the worst taxes’ and that it was a ‘no brainer’ that it should be reformed. She said that if the government was serious about levelling up, then it had to reform Council Tax too.

Eagle noted the challenges faced by many trying to get on the property ladder and suggested that tax reform, alongside coordinated investment in housing, was essential.

Tax evasion – two questions from the audience focused on the use of offshore tax havens and Britain’s black economy. Eagle said that extra investment in HMRC to tackle tax avoidance was needed, but that it was impossible to quantify the true value of the hidden economy. Action against offshore tax havens was needed, because these were ‘bad for the planet’.

Advani argued that every £1 invested in audit and enforcement generated a return of £6. This was why extra investment in HMRC’s enforcement capabilities was essential.

Measuring wealth – Is HMRC able to identify the value of assets? Arun Advani said it was possible, but that some assets would be more complicated to value than others. Property and pensions were relatively straightforward; actuaries are able identify the value of pensions and, 10 years ago, HMRC had been working on a Zoopla-like system to allow them to capture the value of homes.

Capital flight – One audience member expressed concern that a wealth tax could lead to capital flight. Eagle said that one off levies, like the windfall tax on North Sea oil and gas, had been shown to work. Advani said that a tax on banking deposits introduced by the Thatcher government in 1982 had not led to capital flight. He said, in conclusion, that a one-off wealth tax was a sensible way to tackle inequality.

You can watch a video recording of the event here.

Our next debate, at the Conservative Party conference in Manchester this Sunday, will consider these issues again.

To find out more about how the event, and how to register to receive a recording of the event, please click here.

Chris Young, CIOT External Relations.