Wealth Tax

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HM Revenue & Customs (this week) published an analysis of the income tax paid in the UK by salary band, region and gender. In total we paid £174bn income tax in 2016-17, (the latest year for which figures are available).

Of that top line, £52.5bn – nearly a third of all tax raised – was paid by the 381,000 taxpayers who earn more than £150,000 a year. The tax paid by those 381,000 individuals (overwhelmingly male) was more than all the income tax paid by the first 20 million taxpayers.

So how does all this tie up with the pervasive view that the rich are getting away with it, best encapsulated by New York billionaire Leona Helmsley, overheard saying: “Only the little people pay taxes”.

The answer lies in the fact that while as a country we tax the incomes of PAYE employees relatively heavily, we leave the enormous wealth of the truly rich, much of it accumulated through property gains, largely untouched.

The great triumph of the rich is that they have persuaded the average person to vote against taxes on wealth, such as inheritance tax, and taxes on property – such as a land valuation tax or even a properly progressive council tax.

A £17m mansion in Mayfair comes with a ludicrously low maximum council tax bill of £1,376. The phenomenal increases in its value are likely to be free from capital gains tax. Trust laws enable it to be passed through generations largely unfettered by the taxman.

Meanwhile, the only real wealth tax in the western world, France’s impôt de solidarité sur la fortune levied on fortunes greater than £1m and introduced by the French socialists in 1981, was abolished in 2017 by President Macron. It’s partly why he’s earned the moniker “president of the rich”.

Thomas Piketty, the French economist, painstakingly detailed how western societies have reverted to Victorian levels of inequality, with inheritance of wealth the main path to affluence, and he noted how the bigger the fortune is, the faster it grows. He also highlighted how wealth was far more heavily taxed in the years after the second world war – years when inequality narrowed dramatically, only to reverse when those taxes were cut.

There has always been income inequality.

Some people will make more than others, whether by talent, inclination, industry, or ruthlessness. And an economy needs inequality because someone must have money to invest in new ventures, innovation, and development.

However, inequality has become inequity as we’ve entered a new gilded age.

The problem is systemic, and that’s why a tax solution is the distraction of a magician, misdirecting attention to one hand while the real action occurs in the other.

Around 30 years ago, companies and their owners and investors realized that they could channel virtually all of the productivity gains into their own coffers. Workers would get what they were given.

Such factors as both parents working, taking on multiple jobs, and cheaper goods from overseas, as globalization allowed economies of scale and cost shifting that were previously unavailable, became coping factors. Then families dipped into the equity of their homes, which helped set off the housing bubble and its terrible consequences on so many.

The country saw a long national upward wealth transfer.

The birth of zero hours contracts, widespread casualisation in normally, ‘ring fenced’ professions (Higher Education), jobs were outsourced not just to lower labour costs — actually a far smaller impact on product prices than most people realize — but to get out from under many environmental and safety requirements. Median family income in constant terms actually dropped even as the economy grew, meaning that the wealthy became wealthier and everyone else became poorer.

Would increasing taxes on the wealthy at this point set things on a more even keel?

Any increase is minor compared to the decreases of the last 30 years. All it possibly does is regain some revenue for the government. But remember that over the same period the gains that formerly would have been directed to workers have been retained by companies and investors.

The workers don’t have the real increased income to tax, so, effectively, the national growth in wealth has effectively remained untaxed, as the wealthy can afford the help to take advantage of the tax codes to retain more of what they now have.

Middle- and lower-income people would have paid larger percentages of the money in taxes and also needed less in the way of services, helping to balance the budget (although let’s recognize that social services are a tiny portion of government spending).

With an end to the pandemic in sight, policymakers’ minds are turning to replenishing Covid-depleted government coffers. That will be no small undertaking. In the UK Budget this year, the government said its borrowing in 2020-21 would be £355bn — the highest since wartime.

So where is the money going to come from?

The rich have had a “good pandemic”. Many ultra-wealthy people saw their fortunes grow considerably in 2020 and the professional classes who have held on to their jobs have suffered comparatively little in financial terms (they may even have improved their own balance sheets because they are spending less).

Talk of tax rises is common — and there is ‘more’ appetite for taxing the wealthy, which has been out of favour since the 1980s. But this raises a wider question — what level of tax of is “right”?

Income tax rates in both the UK and the US are at historically low levels. The key period is the 1980s when, under Reagan and Thatcher, the top US and UK rates fell precipitously, although they have since increased. The average top income tax rate for OECD member countries fell from 62 per cent in 1981 to 35 per cent in 2015, according to an IMF blog.

Of course, higher-rate income tax is not the only tax that targets the rich.

There is also capital gains tax, some property taxes, luxury taxes and so on. Finally, there is talk of a wealth tax. In December a group of UK academics known as the “Wealth Tax Commission” proposed a one-off tax on total assets.

One figure bandied about was 5 per cent on everything over £500,000 for an individual (or £1m for a couple) to be paid over five years.

Rishi Sunak, the UK finance minister, has said repeatedly that this will not happen. But even if it does not, there is a good chance tax rises that affect the better-off will. The arguments against progressive taxes on wealthier people are well-known: tax people less and you incentivise wealth creation. You prevent wealthy people from becoming tax exiles and stop money fleeing offshore; if you give the rich more, they spend more and everyone is richer.

This thinking, as espoused by the economist Arthur Laffer, was popularised under Reagan and has proved remarkably persistent, despite considerable evidence that tax cuts do not work this way. The latest such evidence comes from the London School of Economics.

In December it released a study looking at 50 years of tax cuts across 18 OECD countries.

The conclusion was that cuts did not lead to significant increases in competitiveness or GDP. Rather, the main thing they led to was greater inequality because the top 1 per cent captured nearly all of the gains.

“Our research shows that the economic case for keeping taxes on the rich low is weak,” said one of the authors.

Those who advocate higher taxes note that countries such as Sweden do not seem to suffer from a lack of dynamism, and that the postwar decades were high-tax, high-growth.

When the UK briefly raised the top rate to 50 per cent a decade ago, some wealthy people, such as the financier Guy Hands moved. But many stayed put, perhaps deciding it was worth paying a bit extra to live in London rather than Guernsey.

In fact, the level at which marginal tax rates become an overall negative may be remarkably high. In 2012, two economists, Peter Diamond at MIT and Emmanuel Saez at Berkeley produced a paper arguing that the ideal top rate for society as a whole was 73 per cent.

As for the rest, the idea that cuts for the rich produce more economic activity than those for the poor (who almost certainly will spend them) is questionable at best. Here it is worth remembering that the term “trickle-down”, which is widely used to describe supply-side economics, was (probably) coined by the humourist Will Rogers in a 1932 newspaper column on the shortcomings of President Hoover.

A related issue is the idea, popular in conservative libertarian circles, that philanthropy from the (lightly taxed) rich can replace some of the work of taxation.

Exhibit A – here is often the Gates Foundation, which has given away more than $50bn since its inception. Yet, although many charities do fine work, philanthropy as a substitute for government spending brings problems of its own.

One is that billionaires can pick and choose their causes in a way that governments cannot.

You may be very happy with the Gates’s charity work. But you may be less keen on philanthropists who fund causes such as climate-change scepticism. More generally, philanthropy tends to benefit charismatic causes such as the arts and the environment over less charismatic ones such as alleviating poverty and poor health.

A further problem here is that allowing philanthropy to take over from taxation is another way of ceding power from the state to the wealthy whose influence is already cause for concern. The comedian Henning Wehn summed this up neatly in 2019 when he said:

“We don’t do charity in Germany. We pay taxes.”

Personally? I would be happy to pay more taxes, IF I was paying more into a system that guaranteed sufficient social and health care for all. If I was a billionaire, would i see it the same? Yes, the same rules apply, lets face it how many billions does anybody need?

A solution?

The sort of progressive tax on private wealth that France abandoned, although the chances of that happening in the UK are virtually zero.

Lifting the cap on council tax may be a more of a vote winner, while a land value tax – at the very least stopping the gains from planning permission going to developers rather than the public – could also be popular.

In the same year that those bottom 20 million taxpayers paid £50bn in income tax, the net wealth of the UK rose by nearly half a trillion pounds, yet almost none of that gain was taxed.

As the chancellor lines up the spring statement, and we are informed of increased NIS contributions, a tax that the lowest paid (tax payers) will feel the most, the debate should not be about income tax or personal allowances, but the reorientation of the tax system to fairly tax where the money really lies.

Thanks for Reading

Peace