There are many good arguments in support of a wealth tax, and at this time more than ever, but a wealth tax that is applied bluntly and unfairly would be worse than none at all. Yet with its low threshold, lack of a link to income, proposal to raid pension pots, and requirement for people to sell their homes or take out a mortgage against them if necessary, the new wealth tax proposition from the Wealth Tax Commission (WTC) suggests the working party ended up unable to see the wood for the trees.
What the WTC has proposed is a one-off wealth tax of 5 per cent on an individual’s wealth in excess of £500,000. This would be based on the value of all their assets: home, business, investments, pensions, savings - everything they own or jointly own apart from low value items such as computers.
There would be no link to a person’s ability to pay, in contrast to other wealth taxes such as that on capital gains which is charged on realised gains not paper ones, or, in the case of a gift, at the timing of the individual. Pension pots would be up for grabs. But pensions are a key savings pot that require people to make sacrifices throughout their working life. They are already subject to limits on how much can be saved and how much they can grow before tax penalties kick in. A pot of £750,000 would yield an annual income of only £22,500 based on no lump sum being taken and a natural yield of 3 per cent. In the form proposed, the new tax would fall most heavily on older people. The WTC authors agree that this might be seen as unfair but say this group “has been lucky” during their lifetimes. They reject the argument that pension savers might have a legitimate expectation that their pension pot is safe: “Lots of tax reforms have effects that would disrupt people’s prior expectations”.
The authors report that a survey commissioned by the working party revealed overwhelming support for a tax on the assets of the rich. This isn't the full story however. When the 2,200 survey respondents were told homes and pensions would be included in the asset base, support for the proposal slumped. But, says the WTC, this was probably becasue the individuals were worried that “modest amounts of pension and housing wealth would be included”.
The WTC's tax would categorise an older couple on a low income who have paid off their mortgage on a £600,000 property as asset rich, but exclude a younger one with a vastly higher income and a mortgage on a much higher value property.
Would people have to sell their home? They might, say the report's authors, but after all, people’s attachment to their homes is merely “sentimental”, and they are sure there will be very few asset-rich, cash-poor cases. Business owners, claims the WTC, might appear to be cash poor as a result of their investment into the venture but as this behaviour can be “undoubtedly for tax reasons”, they are “deliberately illiquid”. In any case, people without cash savings would be given five years to pay the tax, or they could borrow against their equity.
There would be no mercy for someone whose circumstances changed significantly following a valuation of their assets - for example, where a job, a business or health was lost. The report insists there should be no exemption or review apart from in the narrowest of extreme situations.
In addition to the one-off wealth tax, the WTC urges the government to get on with major structural reforms of CGT and inheritance tax, and to consider an annual wealth tax with the aim of redistributing wealth. It was a relief to read that although the WTC believes there is an economic case for doing so, it has ruled out taxing individuals’ human capital.
The report’s claim that “far fewer than you think” might be forced to take drastic action to pay their wealth tax bill should not be taken as evidence that this would be an equitable tax. Frankly, if the State does not approve of people altering behaviour or taking steps to avoid tax, it should not be willing to push people into taking extreme actions in order to pay one.