The pandemic has only sharpened these concerns. The past nine months have involved the provision of vital support, and not a little waste, piling up an additional £400bn pounds of borrowing. Despite this, many people have lost their jobs and some companies have closed, as the extended economic deep freeze takes its toll. With this backdrop, raising taxes on incomes or spending in the near future looks like a tough ask.
With this in mind the Wealth Tax Commission, of which I was a commissioner, reported last month on how the government could square the circle. We proposed a one-off wealth tax, to be brought in only when government determined it needed the revenue, that would postpone the need for economically damaging rises in income tax or national insurance rates.
The tax would cover all types of wealth, including all pensions (defined benefit as well as defined contribution) and houses, after taking off any mortgage debt. This makes it fair – it doesn’t penalise the woman who has saved in her business relative to the one who works for the civil service, nor the man saving to buy a house relative to the one who has just bought.
Although it would be assessed at a single point in time, people would have five years to pay the tax. Tax due on pensions would be deferred until retirement. In cases where there is still hardship, longer periods of payment would be available, to ensure no one would be required to sell their home or business to pay the tax.
It would also be very hard to avoid. Our proposed design means that even emigration or moving money offshore can’t be used to reduce tax bills. The use of a ‘backwards tail’ ensures recent leavers would still pay.
The tax would only be paid on wealth above a threshold, like income tax being paid only on income above the personal allowance. Contrary to much reporting, we had no recommendation about what this threshold should be, nor the tax rate(s) that should be paid. We see these as political questions, not ones in which we have any special expertise. Indeed, we built a tax simulator so that people could try out their own wealth tax designs.
Crucially, for any design it is important to think about what the alternatives are. No one wants to pay more in tax. But the alternative to a one-off wealth tax is not the status quo, it is a rise in some other tax. A one-off wealth tax starting at £2m would tax the top 1 per cent of adults, and at 1 per cent a year over five years would bring in as much money as raising the basic rate of income tax from 20p to 23p. And unlike a tax based on existing wealth, a rise in income taxes would discourage work and discourage hiring at a time when unemployment is already high.
This trade-off is understood by the public: a survey by Ipsos Mori showed that if tax rises are to come in, introducing a wealth tax is the most popular option, twice as popular as the next alternative. And despite the beliefs of cynics, this can’t be explained purely as a desire to tax someone else – wealth taxes were three times as popular as raising top rates of income tax, even though less than one in 10 of those polled would pay either.
Major tax rises of any sort are unlikely in the coming months, as the next stage of the pandemic unfolds. But with the vaccine roll-out under way, there are hopes that ‘normality’ may return later this year. Whenever that does happen, there will need to be a serious conversation about the public finances. Before that time comes, it is important we all know what the choices are. A one-off wealth tax is not perfect. But it is better than the alternatives.