we hear calls for a wealth tax not just from Nick Clegg and Simon Hughes, but
also from Tim Montgomerie.
cannot go unchallenged. A wealth tax is a pernicious tax because it taxes the
same wealth year after year after year. It is double taxation and an attack on
property rights far greater than the attack on property rights that comes from
taxation in general. A wealth tax specifically targets only income that people
choose to save and invest and build up into a store of property and assets.
Earn £0.2m and spend it on a luxury cruise and some entertainment packages at
the Olympics and you avoid the tax; earn £0.2m and invest it in a business and
you pay the tax. It is as simple as that. The income out of which the taxed
wealth is accumulated has, of course, been taxed already.
Montgomerie wishes to tax all wealth, but he focuses on property:
people got wealthy during the boom years not because of great ingenuity on
their part or through hard work but because they invested in Britain's highly
state regulated property market. They benefited from state intervention and
that benefit should now be taxed by state intervention. I don't want to
confiscate all of their gain – or even most of it – but I think it's right that
the propertied wealthy make a bigger contribution to the Exchequer.”
This misses an important subtlety. Those of us who live in the
South East, and therefore own a valuable asset from no particular act of
ingenuity, have to pay more to live in the South East — we effectively rent the
house to ourselves. It is not as if we can move to the moon. And, of course,
additional property taxes would also damage those newcomers to the property
market who have to buy a house at high prices striving to save over a long
period (probably well into their thirties these days). And, when we die, that
house, in our estate will, of course, be taxed at 40 per cent.
Tim Montgomerie particularly wants transactions to be taxed
more. But, transaction taxes are generally regarded as the most damaging of all
taxes. We already have a top rate of stamp duty of an incredible seven per
cent. As the Institute for Fiscal Studies (not known for its Tea Party
leanings) said after the last budget increased stamp duty: “To
see another Chancellor increase again such a poorly designed and distorting tax
does not bode well for tax reformers.” Taxes on transactions are especially
poorly designed because they cause people to hoard the wrong assets for the
wrong reasons instead of putting their money to work.
But what about a wealth tax more generally? When considering
whether to invest or consume, potential investors would translate the wealth
tax into an equivalent tax on the returns to the assets they hold. So, for
example, a one per cent wealth tax if assets earned a five per cent return
would be like a 20 per cent income tax supplement on investment income, thus
raising the top rate of income tax on investment only to 65 per cent. This is a
tax on the nominal return, of course – it translates into a much bigger tax on
the real return to assets.
A one per cent tax is almost certainly not feasible, so what
might a 0.5 per cent wealth tax yield in practical terms for the Treasury?
There are about 300,000 millionaires in the
country owning £1 trillion between them. If you taxed them 0.5 per cent of that
wealth it would pay down about 0.5 per cent of the national debt or raise about
one per cent of the current tax take, assuming no second round effects at all.
About one third of this wealth is held in shares (so it would be a direct
transfer of private sector investments to public sector consumption). But,
within this group, we would be taxing some people who are not that well off.
Over half of millionaires have only between £1 million and £2 million excluding
their home and a huge number of millionaires will be people in the South East
with a three bed semi-detached house within 30 miles of London and a pension
pot that will buy them a pension of (say) £20K a year – do we really want to be
taxing these people on the basis of their wealth?
The fact is that, when appropriate exemptions
have been made, we would find ourselves imposing a damaging tax for very little
gain. This is what the French find. The revenue from their wealth tax is
trivial but it has led, it is estimated, to about $125 billion of capital
flight. In Sweden, the picture was similar.
As I have pointed out before, Tim
Montgomerie has a point, but his solution is surely wrong. There is a problem
with property tax in the UK and we should address that problem. We should
abolish stamp duty and council tax and, instead, levy a tax on the imputed
rental income from all property. That would remove the council tax banding
problem; the non-payment of council tax by some non-residents; and it would
rationally tax housing consumption for owner-occupied housing in the same way
as we tax let housing. It would achieve many of the aims that Tim Montgomerie
wishes to achieve. But it would achieve those aims coherently whilst improving
the tax system. This is far better than adding yet more taxes that people will
pay a fortune to avoid, will rightfully resent and which will explicitly attack
investment and property rights.