On 14 December 2020 the Wealth Tax Commission issued a report outlining its conclusions on the design of a wealth tax for the UK. The report covers one-off and annual wealth taxes and makes recommendations on specific design of a tax in some cases. The report does not recommend any specific rates of wealth tax or thresholds, which would be a political judgment.
Wealth Tax Commission
The Wealth Tax Commission consists of academics, policymakers and tax practitioners and was commissioned to examine the evidence relating to the feasibility of a wealth tax. The need to explore various ways of raising more tax revenue has been made urgent by the additional borrowing during the pandemic. The UK is currently exploring ways of increasing tax revenue to restore public finances and reduce the national debt.
Although the UK’s Chancellor has previously rejected the idea of a wealth tax the report notes that public opinion would prefer any additional tax increases to fall on wealth rather than income. Responses by the public suggested that a wealth tax should raise substantial revenue, be efficient and fair, and should be difficult to avoid. The commission considers that to justify its introduction a wealth tax should achieve these objectives to a greater extent than any alternative tax increases.
One-off wealth tax
The report favours a one-off wealth tax rather than an annual tax. This would be an exceptional response to the current crisis, based on the wealth held by an individual on a particular date. There could be a provision to pay the tax over a period of years; but this would still be based on the wealth at the initial assessment date. The tax would apply to individuals not households, but with an option for joint assessment. The commission considers that a one-off wealth tax could raise considerable revenue. Assuming a threshold of GBP 500,000 and a rate of 1% for five years this could raise GBP 260 billion. If the threshold were raised to GBP 2 million the tax could still raise GBP 80 billion.
The report notes that a one-off wealth tax would be economically efficient if based on wealth at a past point in time, as it would not distort future behaviour. By contrast, changes to income tax rates on individuals could reduce incentives to work; changes to capital taxes could reduce investment; and changes to corporation tax could encourage profit shifting or other measures to reduce UK profits.
One-off taxes are difficult to avoid as they are based on past values and behaviour. A tax based on property values at the day it is announced, or shortly before, would not give taxpayers a chance to respond by moving wealth, although there could be a measure of legal avoidance and non-compliance.
All property held by an individual would be included in the tax base, including the private home, investment properties, cash savings and pension funds. This ensures that individual of similar wealth levels are not subject to different tax levels just because one holds wealth in one form rather than another. Assets would be valued on the basis of their open market value.
Annual wealth tax
The report notes that an annual wealth tax would require regular assessments of wealth and would be a permanent rather than temporary feature of the tax system. The report suggests that, rather than introducing an annual wealth tax, the government should reform the existing taxes on wealth, including the inheritance tax, capital gains tax and council tax, as all of these taxes have major structural flaws. An annual wealth tax would only be justified, if introduced in addition to such reforms, if the aim were to reduce inequality by redistributing wealth, which would be a political judgment.
