Philip Booth: There’s no case for a wealth tax
Once again, we hear calls for a wealth tax not just from Nick Clegg and Simon Hughes, but also from Tim Montgomerie.
These calls 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.
“Many 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.