The introduction of an annual wealth tax, alongside the existing taxes on income and capital, would redress the glaring inequality in the distribution of wealth in Britain today. It would improve the fairness and efficiency of the tax system, and make it more progressive. The design considerations include whether the tax should be levied on individuals or households, the treatment of wealth held in pension funds and property, and the treatment of discretionary trusts. The only government elected on an election manifesto promise to introduce a wealth tax abandoned it owing to a lack of political will, rather than administrative feasibility.
"Let me tell you about the very rich. They are different from you and me." F. Scott Fitzgerald
We need an annual wealth tax to mitigate the economic, social and political risks posed by wealth inequality in Britain today. The distribution of wealth in Britain has become glaringly unequal. The wealthiest 10% of the population own nearly half the nation’s wealth. If the misdistribution of wealth is left unchecked, it could breed social resentment and lead to political instability. It is invidious that means tested benefits in the welfare system are subject to a harsh ‘wealth tax’ in the sense that the ownership of capital above a certain level can make one ineligible to claim essential benefits. But there is no reciprocal tax on the possession of wealth, no matter how vast. Social justice requires a redistribution of wealth as well as income.
Governments have, with varying degrees of success, sought to use the tax system to promote greater social and economic equality since the beginning of the last century. They have attempted to promote greater equality mainly through a progressive income tax system. But there has been a substantial reduction in marginal income tax rates since the 1980s. The investment income surcharge previously levied on income derived from investment in capital assets was abolished in 1984. In any case, income is not an adequate measure of taxable capacity. The existing income tax, inheritance tax, stamp duty and capital gains tax regimes are inadequate policy tools for curbing wealth inequality. It is opportune to re-examine the case for an annual wealth tax and how it could be implemented, and to see what lessons can be learned account from the previous attempt to introduce the tax.
A wealth tax is a tax based on wealth. Namely, the total value of all the net assets held by an individual at a particular point in time, less any liabilities. Wealth taxation is one of the oldest forms of taxation in the world. For example, the ancient Athenians levied a general property tax on land, houses, slaves, cattle, furniture and money. A wealth tax does not distinguish between wealth derived from inheritance, or a combination of personal effort, enterprise, saving, or from capital appreciation. It is payable annually on net wealth, subject to any threshold and any specific exemptions.
A wealth tax may be paid out of current income or from a disposal of assets. Unlike inheritance tax and capital gains tax, it is not associated with a change of ownership or economic transactions. Wealth taxation necessitates the periodic valuation of assets, and some of those who incur the liability may suffer from a lack of liquidity to pay the liability. The 1974 Labour governments (there were two elections in that year) made a manifesto commitment to introduce an annual wealth tax but abandoned it before it was enacted.
The possession of wealth confers many advantages, including freedom from the need to earn a living, independence, and security. Wealth gives one security, more and better choices, power, prestige and the ability to provide the best housing, medical care, education and opportunities to one’s family. The ownership of capital enables one to reap far-reaching cumulative ripple benefits, known as ‘Matthew effects’. ‘For unto everyone that hath shall be given, and, and he shall have abundance: but from him that hath not shall be taken away even that which he hath’ (The Gospel of St. Matthew, 25:29). Wealth can help clear many everyday difficulties from one’s path and open doors to make life easier. Wealth determines and enhances one’s life chances.
The tax system doesn’t take account of the fact that the possession of wealth enhances the economic power of its owner. The wealthy can command considerable political access and influence government policy. As President Franklin Roosevelt, himself a millionaire many times over, remarked: ‘Great accumulations of wealth […can] amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others’.
The tax system is an important mechanism for achieving a fairer distribution of income and wealth. The introduction of an annual wealth tax alongside the existing capital taxes (inheritance tax (IHT), capital gains tax and stamp duties) would help to reduce the concentration of substantial wealth, and promote social and political benefits from reduced wealth inequality. It would also raise additional tax revenues for public services.
Wealth inequality can be reduced by levying taxes on the transfer of wealth e.g. through lifetime gifts or bequests, or by the imposition of an annual wealth tax (sometimes called capital levies). Taxes on the appreciation of wealth e.g. capital gains tax also tend to reduce wealth inequality. Capital transfer wealth taxes are typically based on the value of the net assets transferred, and are assessed on the donor or the recipient of the assets. In contrast, annual wealth taxes are assessed on the net value of the assets possessed by a taxpayer.
Death or estates duties are the most common form of transfer taxation e.g. inheritance tax. The systematic taxation of wealth on the donor’s death began in 1894. In introducing it, the chancellor William Harcourt reminded parliament that there is no natural right to inherit wealth. ’The state has the first title to the estate….Nature gives a man no power over his worldly goods beyond the term of his life’.
Income and wealth inequality tend to go hand in hand. A person who has wealth as well as income of a given level has a greater potential taxable capacity than someone who only has income of that size. It is possible to have a high income and little or no wealth and vice-versa. The wealthy can decide whether, and if so, in what form and where they derive income from their capital. High earners live off the return on their personal human capital. One can accumulate wealth by reducing current consumption and saving one’s income. High consumption can reflect high wealth. As Archbishop Morton, Henry’s VII’s formidably efficient tax collector declared, ‘If they spend openly, they have wealth; if they don’t spend, they have hidden it away’!
Government policy changes since 2010 have accentuated income inequality at a time when there has been an increase in the number of top earners and in the levels of their income. Top earners have the ability to increase their consumption and to accumulate wealth, unlike those on average or low incomes who may need to spend all their earnings on their necessities. They have been able to achieve higher disposable incomes because of the growth in their incomes and the reduction in income tax rates since the 1980s and 1990s.
Governments can restrict the accumulation of wealth by the highest earners by increasing the progressivity of income tax or increasing VAT on the kind of goods and services that only they can afford to purchase or both. Instead, there has been a widening of the gap between the effective rates of income tax paid by high and low earners because of the rapid increase in personal allowances. The higher-paid have been the biggest beneficiaries of personal allowances, because they have higher marginal rates of tax. (Personal allowances are tapered out for those with earnings over £100,000.) The increases in personal allowances have coincided with substantial cuts to working-age benefits. Once National Insurance contributions and VAT are also taken into account, government policies have had a regressive effect.
In the latest ONS Wealth and Asset Survey of net total wealth (for the period to 30 June 2016) published earlier this year, household wealth was defined as including property, private pensions, savings, cars, art net of mortgages and credit card debt. The Survey highlighted that since the financial crisis a decade ago, the number of millionaire households has increased four-fold to 3.56 million. The richest 10% of the population held over 44% of total wealth (the top 5% own nearly 20%) and around five times more than poorest half of families.
Britain’s wealth comprised:
The Sunday Times Rich List 2018 revealed that the richest thousand people in the UK have a combined wealth of some £724 billion, an increase of 10% over the total in 2017. For the first time in the thirty years that the Rich List has been published ‘the self-made rich triumph[ed] over old money’. The list highlights the rapid growth of personal wealth, and how it is spread unevenly between the regions and generations. Whereas a fortune of £30 million was enough to justify inclusion in the first edition of the list, in 2018, it was necessary to have wealth of £700 million to be included in the top 200 in the Rich List 2018.
The long period of low interest rates because of the Bank of England’s policy of ‘quantitative easing’ (QE) to sustain economic activity in the wake of the financial crisis has made those who had assets even wealthier (an example of the Matthew Effect). QE has driven up the values of their bonds, shares and property to high levels. It could be argued that loose monetary policy has resulted in unannounced tax cuts for the wealthy and tax rises for the poor and the young (their rents have increased with the rise in house prices). Cheap money has also made large public companies look more profitable because they have been able cut the cost of their debts. Wealthy investors have been keen to invest in equities, even when companies offer tiny dividends. They know that the reversal of quantitative easing will result in an adjustment phase in which asset prices and, consequently, their wealth would fall. Increasing their holdings in equities can help the wealthy engage in strategies to hedge their market risk and exposure asset price volatility to protect their QE windfall-enhanced wealth.
The rapidly expanding growth of an artificial intelligence-infused digital economy with robots increasingly replacing workers is likely to create a two-tier economy. Industries like technology and finance are likely to adopt AI more quickly and thereby become more productive and profitable, along with the companies that are developing these new technologies. The owners of the industries in the vanguard of adopting and utilising the phenomenal capacity that is being made available will increasingly take a larger share of wealth. They will benefit the expense of the owners of the industries and sectors of the economy that are being slow in to taking advantage of the opportunities. The industries and sectors in the slow lane include manufacturing, retailing, transport, farming, education and the wider public sector.
The buoyant industries will have fewer but better paid workers. The less dynamic sectors will continue to employ large numbers of workers and tend to lag behind in attracting resources. The share of the national cake currently attributable to those who rely on their human capital and earnings will decline. The increase in the share of national income accruing to capital, principally to the owners of the firms that develop, market and and deploy the new technology, and the value of these businesses will rise, exacerbating income and wealth inequality.
According to recently published OECD data, the concentration of wealth (including inherited wealth) in Britain and the other industrialised economies has increased quite markedly in recent years after decades of equalisation. Paradoxically, over the same period, annual wealth taxes have been abandoned, for a variety of reasons, by several countries, including Austria, Denmark, Spain and Germany. France introduced transfers of wealth and inheritances in 1791. In 2017, the French parliament scrapped its wealth levy from 2018 on everything except property, but coupled it with the introduction of flat rate tax of 30% on capital gains and dividends. Thomas Piketty, the French economist, whose book Capital in the Twenty-First Century (2014) revived interest in the direct taxation of wealth as a policy tool for redressing inequality, described the enfeeblement of French wealth tax as a ‘historic error’. (Piketty’s proposals are discussed below.)
They are discussed in greater detail below, but in summary they include:
It is often argued that:
Abstracting from the administrative problems associated with implementing it, an annual wealth tax tends to get high marks from some economists. Income is generally regarded as the best single criterion of an individual’s taxable ability to pay tax. Wealth and income are interchangeable in terms of their command over potential consumption. But income can be a misleading yardstick, because it does not always arise in a form subject to income taxation. On the other hand, wealth confers advantages beyond any taxable income it generates.
As the Meade Report (1978) noted ‘capital produces an income which, unlike earning capacity does not decline with age and is not gained at the expense of leisure’. A wealth tax can be regarded as an efficient proxy for a tax on the income from capital. If it were possible to tax this income, in whatever form it arises, there would be no need to impose taxes on the possession or transfers of wealth. Also, broadly speaking, it is preferable to tax wealth than to tax earnings, because high marginal income tax rates discourage the incentive to work.
An annual wealth tax does not distinguish between wealth which results from the taxpayer’s own efforts, initiative and saving and wealth that is inherited by accident of birth. It is often argued that this approach would reduce the incentive to work and save in order to accumulate wealth. Levying wealth taxes on the transfer of capital, rather than its possession, would ensure that the tax would fall on the inherited wealth and shelter the accumulation of wealth by the taxpayer him or herself.
Conceptually, ‘wealth is wealth’. No matter how the possessor comes by it, it confers exactly the same advantages. People invest, engage in enterprise or save from their post-tax incomes to accumulate wealth for a variety of reasons, including the desire to leave a bequest to their heirs. It is not possible to conclude a priori that the imposition of a wealth tax would automatically inhibit them from continuing to do so: it is possible that they might redouble their efforts after a tax was imposed in order to attain their ‘target’ level of wealth.
A fair tax must take account of people’s capacity to pay. Economists argue that taxes on income and realised capital gains alone do not take adequate account of an individual’s taxable capacity i.e. the ability to command economic resources. Wealth is an independent tax base because ‘capital and income constitute two distinct though mutually incomparable sources of spending power…a separate tax on each [would] provide jointly a better yardstick of taxable capacity than either form of taxation by itself’ (Kaldor, 1955). The assessment of the taxable capacity inherent in the possession or transfer of wealth would make the tax system more equitable and increase tax revenues.
Another justification for annual wealth taxation is that assets often generate returns that are not always monetary in nature, and therefore not automatically within the scope of income tax (unless they are specifically exempt). For example, owner-occupiers of residential property receive an implicit return on their property equivalent to the rental that it would fetch on the open market. Annual wealth taxation provides a mechanism for taxing implicit returns on capital, including the ‘psychic’ enjoyment derived from the possession of works of art, sculptures, antiques, jewellery and vintage motorcars.
The absence of a tax on implicit income encourages the wealthy to purchase assets that yield non-monetary returns, rather than investing in economically productive activities that produce taxable income. The yield from wealth taxation could theoretically allow a government to reduce marginal rates of income tax or to increase the progressivity of income tax without raising the marginal rate of income tax, which would adversely affect the incentive to work. Redressing the under-taxation of implicit returns to wealth would enhance the efficiency of the tax system.
The likelihood of IHT having any significant impact on the redistribution of wealth can be judged by comparing the forecast yield from IHT in 2017/18 (£5.2 billion, 0.7% of all tax receipts) to total UK household wealth (£12.8 trillion). More graphically, a fortune of £30 million was enough to justify an individual’s inclusion in the first edition of the Sunday Times Rich List which was published 30 years ago. But, it was necessary to have a wealth of £700 million to be included among the top 200 in the Rich List 2018. This represents an increase in the wealth of the top 200 of more than 2,200%. The cumulative level of inflation over the same period was a comparably modest 137%. Given the exponential growth in personal wealth, there would have to be a very much greater increase in the yield from IHT than is expected before it has any significant impact on wealth inequality. (It is expected to rise by a third to £6.5 billion by 2023.)
Inheritance tax combines features of the capital transfer tax and estate duty that preceded it. IHT retains all the exemptions and reliefs introduced with the former, and suffers from the problems with the latter. IHT is ‘a tax that favours the healthy, wealthy and well-advised’ (Kay and King, 1990). The former chancellor, Roy Jenkins wittily described estate duty, the precursor to IHT, as ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Revenue’.
It would be possible to curtail the anomalies and exemptions in IHT to make it more effective but there is currently little political will to do so. There may be some cosmetic changes to IHT following the review currently being undertaken by the Office of Tax Simplification. But there are unlikely to be any fundamental changes to the regime: there are no votes in it! Ministers are all too aware that opinion polls show that voters in all parties regard inheritance taxes as unfair.
There is no shortage of other options. They range from the heroic suggestion that Council Tax be reformed (a parlous course, as Mrs. Thatcher discovered with the ill-fated Community Charge in 1989/90) to the introduction of a capital gains tax charge on death, re-integrating capital gains tax with income tax, a wholesale reform of inheritance tax by introducing a comprehensive donee-based accessions tax instead, the introduction of an income tax charge on the imputed return from owner-occupation of private residential property, taxing land site values, removing tax relief at the higher rates on pension contributions and making direct transfers of wealth through schemes like the Child Trust Fund to the offspring of those in long-term receipt of working-age benefits. It would be impossible to implement any changes that would survive a change in government without at least some degree of political consensus.
The Meade Committee (1978) and Mirrlees Review (Mirrlees et al 2011) both agreed that wealth, especially unearned wealth, was a suitable target for taxation. They argued that it would be better to tax the transfer of wealth on those who received it, rather than the possession of wealth.
The Meade Committee proposed that a Progressive Annual Wealth Accessions Tax be levied on the transfer of wealth on the recipient rather than the donor. And that it should be progressive and related to the length of time for which the wealth would be enjoyed in the context of its main recommendation of a direct expenditure tax. (The 1974 Labour government introduced a Capital Transfer Tax on large gifts where the liability was collected from the donor. The Conservative government elected in 1979 repealed the tax.)
The Mirrlees Review also looked favorably on wealth transfer taxes. Its recommendation of a rate of return allowance on capital including for owner housing, would have substantially addressed disparities in the tax treatment of asset incomes discussed above. But neither the Meade Committee nor the Mirrlees Review’s recommendations achieved any significant or lasting influence over tax policy.
Thomas Piketty (2014) argued that because the rate of return on capital has tended to exceed the rate of growth of output and income, as it did in the nineteenth century and seemed likely to do so again in the twenty-first, capitalism would generate arbitrary and unsustainable inequalities that would undermine the meritocratic values on which democratic societies are based. In particular, with lower economic demographic growth as the wealth owned by the owners of capital was transferred between generations, inheritance would begin to matter as much in determining a person’s life chances, as it did in ancient societies.
Inheritances have more than doubled in past 20 years, and will more than double again over the next two decades. The beneficiaries of such intergenerational transfers of wealth don’t earn their wealth; they simply receive it by accident of birth. Past wealth would tend to dominate new wealth, and those who inherit wealth would tend to dominate the majority who continued to rely on their earnings from their personal labour. The introduction of a wealth tax would give those with inherited wealth a greater incentive to work, or give those already in productive activity an incentive to accumulate wealth though their own efforts
Acknowledging it as a ‘utopian idea’, Piketty advocated a coordinated global wealth tax of the wealthiest at two percent as part of an ideal tax system alongside income and inheritance taxes. Some commentators have described his proposals as impracticable, because they require international consensus. Others have applauded his insights e.g. the failures of existing wealth taxes are due to politics – they are riddled with exemptions. There has been little discussion among governments about the comprehensive international agreements necessary to implement such a tax.
Ministers would need to address a range of issues, including:
It would be advisable to minimize the exemption of certain categories of assets to avoid the erosion of the tax base. The exemption of assets like woodlands, paintings, sculptures, antique furniture, jewelry and other objet d’art for cultural reasons would result in increased investment in such assets primarily for tax avoidance; it would allow the wealthy to enjoy their possession of valuable property whose value would continue to appreciate because of their limited supply and to avoid liability;
It would be difficult to identify and attribute the ownership of the underlying wealth held in discretionary trusts. Control over the trust’s assets is vested in the trustees, but the equitable title gives the beneficiaries rights to the benefit of the property. Some discretionary trusts allow trustees to decide the nature, timing and the extent of any payment of benefits to the beneficiaries. This would make it difficult to identify to whom the underlying value of the assets should be attributed and how their relative share should be determined. Particular care would need to be taken in drafting the treatment of charitable family foundations since they can involve continued family control over wealth even though the benefits are ostensibly restricted to charitable purposes;
If owner-occupied housing were to be removed from the scope of the wealth tax, it would allow wealthy individuals to continue over-investing in their residences to enjoy the very lightly taxed implicit returns from owner-occupation. (The annual taxation of the imputed income from living in one’s own house was abolished in 1963, partly to encourage home ownership.) They would also continue to benefit from the exemption from capital gains tax of the profit they make on the disposal of their expensive principal private residence.
None of these benefits are available to those who have to rent where they live. The Labour and Liberal Democrat parties proposed a ‘mansion tax’ (i.e. a wealth tax) based on the owners of residential property worth more than £2m in the run-up to the 2015 general election. There was considerable opposition to the policy from those living in expensive properties (or aspiring to do so), mostly in London and the southeast. The inclusion of the value of private homes in the scope of a wealth tax would attract similar opposition. For example, it would be argued that it would impoverish those who are asset rich but cash poor. To defuse widespread opposition to a wealth tax solely because of the inclusion of personal residential housing, it might be advisable to exclude principal private residences worth less than £2m from the valuation of personal wealth.
It is often claimed that the valuation of wealth for tax purposes would is fraught with practical difficulties. But it is easy to overstate these difficulties; after all, property regularly has to be valued for capital gains and inheritance taxation purposes and other reasons e.g. sharing assets. It would be advisable to have exactly the same rules and procedures for valuing assets for the purposes of the wealth tax as are used for other taxes, including any processes for resolving disputes over approaches to or the quantum of valuations.
The fact that a commercial entity such as The Sunday Times has been able to publish increasing authoritative estimates of private wealth without access to the vastly larger and richer sources of data available to HMRC demonstrates that the valuation of wealth is far from being an insurmountable obstacle to implementing an annual wealth tax. (Some of those included in the Rich List have reportedly been so pleased by the celebrity conferred upon them by their inclusion that they have provided list’s authors with private information to enhance their relative ranking. Maybe the government should consult on whether the list of those liable to the wealth tax should be published!)
Countries administering wealth taxes have not found them particularly difficult to administer, although they have found it difficult to implement them. For example, in some jurisdictions the tax authorities have found it particularly difficult to identify those who should be liable to the tax because of widespread evasion. In contrast, H.M. Revenue & Customs (HMRC) already possesses considerable information about wealthy taxpayers. It has access to private data provided by taxpayers themselves in connection with their liability to income tax, inheritance tax, capital gains tax, and stamp duties.
HMRC has already drawn on this information, cross-checked against information contained in commercial publications such as The Sunday Times Rich List, to identify the taxpayers that should be within the scope of its High Net Worth Unit (those with a net wealth of £10m or more) and Affluent Unit (those with incomes over £150,000 and a net worth of over £1m). Some taxpayers have volunteered confidential information to HMRC to demonstrate that they are eligible for membership of these exclusive ‘clubs’. If an annual wealth tax were to be introduced, it should ideally be self assessed, and net tax wealth returns should have to be filed by those liable alongside their income tax returns to integrate their compliance.
HMRC would deploy its Connect analytical software data mining computer system to undertake compliance on the annual wealth tax. Connect systematically collates and analyses data that has to be made available to the department on a statutory basis, disclosures from overseas tax authorities, publicly available information and social networks.
When the Labour Party mooted an annual wealth tax in 1974 (see below) it was claimed that the announcement of its introduction would result in result in ‘capital flight’ and that wealthy individuals would leave the UK to avoid the tax. Empirical work (Young, 2017) based on US data suggests that, contrary to popular opinion, while the rich have the resources and capacity to flee high-tax jurisdictions, they don’t often tend to do so, because tax is only one of the considerations that influences where they choose to live.
If ‘millionaire flight’ were felt to be a serious risk, it would be possible to impose a higher charge for the year of the change of residence, namely an exit charge on those seeking to change their residence status primarily for tax purposes.
A wealth tax had been on the Labour Party’s ‘to do’ list of policies since the 1950s. It was seen as a way of redressing inequality and promoting equity, and as a way of encouraging wealth owners to put their wealth to work to boost the economy and employment. It was felt that those living on inherited wealth were contributing to the stagnation of the economy by preferring low-yielding but secure investments to riskier investments that might promote industrial growth and employment.
The wealth tax was included in the Labour Party’s election manifesto for the two general elections in 1974. Party leaders agreed its inclusion without any significant internal debate in order to secure trade union and party activists’ support for wage restraint to curb inflation. There was little public discussion about the proposed tax during the two 1974 election campaigns held in the wake of a national miner’s strike, ‘Three Day Week’ and Britain’s worst inflationary and industrial crisis. (Prices were to increase by more than 20% and wages by 25% in 1974/75.)
In the face of growing trades union militancy and industrial and political crisis, the campaigns were dominated by the question of ‘Who governs Britain?’ rather than the detailed policies contained in the party manifestos. Little thought was given to whether, and if so, how the annual wealth tax could be implemented, particularly the administrative costs and difficulty of measuring a taxpayer’s wealth annually for tax purposes.
As Professor Howard Glennerster of the LSE has graphically described in a series of brilliant articles (2011, 2013, 2015), the Inland Revenue provided the new chancellor of the exchequer Denis Healey with detailed advice on the implementation of its new wealth tax literally within weeks of his appointment. It included details of the staffing and new offices likely to be required, and a timetable for the publication of a Green Paper and the suggestion that the tax should be enacted in Finance Act 1975. Denis Healey was delighted with the advice and congratulated the department.
The Inland Revenue advised him that the first valuations of wealth should take place at the end of 1975, and that the first wealth tax returns should be filed after April 1976. It reported the academic criticism of the Labour party’s proposal that a tax on receipts would be preferable. The Revenue acknowledged that the changes suggested by academic commentators would ‘go a long way’ to achieve the policy objective of reducing inequality by removing major concentrations of wealth. But it recommended against changing the approach that had been published by the government on the grounds that focusing on receipts would produce less revenue. As a tax authority, the Revenue obviously wanted to maximize the government’s tax revenues.
The Revenue’s advice had been prepared without any significant contribution from Treasury officials. The Treasury began taking a more sceptical look at the proposals when it started receiving representations against the proposed tax from the National Farmers’ Union, the City, the Bank of England, and the owners of historic houses. A public campaign attracted a million signatures in the defence of country houses and other heritage sites that would allegedly be ‘threatened’ by the wealth tax.
The government published its Green Paper on a Wealth Tax in August 1974. It stated: ‘The government is committed to use the taxation system to promote greater social and economic equality. This requires a redistribution of wealth as well as income. Thoroughgoing reforms are needed in the taxation of capital’. The government proposed a low-rate annual wealth tax with fairly high exemption limits alongside existing taxes.
But by this time, the Treasury had became concerned that the wealth tax, along with the government’s other manifesto proposals for the nationalization of the shipbuilding and aerospace industries, the government taking a ‘large stake’ in the top 100 firms and public spending commitments could trigger of capital flight and a crisis of confidence in the business world.
The Treasury was already reeling from dealing with rising inflation, price controls, and a fall in asset values. Harold (later Lord) Lever, one of prime minister’ Harold Wilson’s closest political advisers, was also concerned about the impact of a wealth tax in the economic circumstances prevailing at the time. He described the Green Paper as ‘political dynamite’ in a note to the prime minister. Ministers were alarmed. They decided to seize upon a ‘politically naïve’ suggestion in earlier advice from the Inland Revenue that they might wish to consider the possibility of having ‘the structure of the tax (as opposed to the desirability of introducing it) examined by a Select Committee’.
The government did not have a majority on the committee because of relative strength of the parties in house of commons. ‘The Conservative members opposed, obstructed and delayed the proceedings. They mounted a formidable attack on the very idea of a wealth tax.’ The academic commentators who had opposed the approach to taxing wealth proposed by the government and the lobby groups who opposed it in principle dominated discussion and the presentation of evidence. The select committee was unable to agree on a majority report (despite publishing five drafts).
The fear of a political backlash replaced the government’s original optimism that the wealth tax would be speedily implemented. It led Denis Healey to announce in December 1975, after consulting the prime minister, that he was postponing the introduction of a wealth tax. He had in fact made the decision some time before then (private information) and communicated it a handful of senior officials in the Inland Revenue and the Treasury. In the meantime, the Inland Revenue team comprising over 200 staff that had been appointed to undertake preparatory work on the basis of the original timetable for the enactment carried on its activities unaware that the tax was going to be abandoned.
Some have argued that the appointment of the select committee was a subterfuge to impede the introduction of a tax that was foisted on to the government by party activists. Others saw it as proof, as Ralph Miliband (1969) had suggested that ‘the dominant economic interests in a capitalist society can count on the active good will and support of those in whose hands state power lies’ to support the status quo. It is rare for any government of whatever persuasion to allow a policy of such totemic significance to the party in power to be taken hostage by a bipartisan parliamentary committee.
The decision to have the wealth tax examined by a parliamentary select committee was odd. Many ministers, and most party activists, were keen on its implementation. The Inland Revenue had told the chancellor that ‘although there will of course be many problems to be resolved we see no reason why a wealth tax should not be introduced reasonably’. The previous Labour government had not appointed a select committee to consider the introduction of corporation tax and capital gains tax in 1965.
Denis Healey said in his highly readable memoirs that ‘‘you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle’ (Healey, 1989). But on the basis of the evidence, it is hard to resist drawing the conclusion that it was a lack of conviction rather than concerns about the administrative feasibility of implementing the tax that led to its abandonment.
The imposition of a new tax is above all a matter of political will; economic, financial and social considerations are a secondary consideration. As the New Labour government demonstrated in 1997, it perfectly possible for an opposition party to undertake considerable policy work on sensitive measures before it comes into power e.g. operational independence for the Bank of England, the so-called Windfall Tax. No tax is perfect, no matter how much time is spent on its design before its introduction. The 1974 Labour government should arguably have used the majority in its early years to introduce the tax.
The Revenue would have found pragmatic solutions to deal with the practical and administrative problems with the tax that Denis Healey said caused him such great concern (Professor Glennerster didn’t appear to have found any documentary evidence). Even if the newly introduced tax had had teething troubles (all new taxes do) the Inland Revenue and tax practitioners would undoubtedly have muddled through and made it work, and, if necessary, suggested legislative improvements.
The Labour shadow chancellor John McDonnell has made no secret of his wish to develop policies to shift the tax burden from income to those holding wealth if he was at the Treasury. There was no reference to a possible tax on wealth in Labour’s manifesto for the 2017 general election. It did, however, propose increases in income and corporation tax, and the reversal of the Conservative Party’s changes to inheritance tax and capital gains tax. It remains to be seen if higher taxes on wealth or property are included in a future Labour manifesto. Parties are free to introduce new ideas when they come into government: they don’t need to have been a manifesto commitment. A future Labour government might regard the introduction of an annual wealth tax as ‘unfinished business’.
The introduction of an annual wealth tax, alongside the existing taxes on income and capital, would redress the glaring inequality in the distribution of wealth in Britain today. It would improve the fairness and efficiency of the tax system, and make it more progressive. The design considerations include whether the tax should be levied on individuals or households, the treatment of wealth held in pension funds and property, and the treatment of discretionary trusts. The only government elected on an election manifesto promise to introduce a wealth tax abandoned it owing to a lack of political will, rather than administrative feasibility.
"Let me tell you about the very rich. They are different from you and me." F. Scott Fitzgerald
We need an annual wealth tax to mitigate the economic, social and political risks posed by wealth inequality in Britain today. The distribution of wealth in Britain has become glaringly unequal. The wealthiest 10% of the population own nearly half the nation’s wealth. If the misdistribution of wealth is left unchecked, it could breed social resentment and lead to political instability. It is invidious that means tested benefits in the welfare system are subject to a harsh ‘wealth tax’ in the sense that the ownership of capital above a certain level can make one ineligible to claim essential benefits. But there is no reciprocal tax on the possession of wealth, no matter how vast. Social justice requires a redistribution of wealth as well as income.
Governments have, with varying degrees of success, sought to use the tax system to promote greater social and economic equality since the beginning of the last century. They have attempted to promote greater equality mainly through a progressive income tax system. But there has been a substantial reduction in marginal income tax rates since the 1980s. The investment income surcharge previously levied on income derived from investment in capital assets was abolished in 1984. In any case, income is not an adequate measure of taxable capacity. The existing income tax, inheritance tax, stamp duty and capital gains tax regimes are inadequate policy tools for curbing wealth inequality. It is opportune to re-examine the case for an annual wealth tax and how it could be implemented, and to see what lessons can be learned account from the previous attempt to introduce the tax.
A wealth tax is a tax based on wealth. Namely, the total value of all the net assets held by an individual at a particular point in time, less any liabilities. Wealth taxation is one of the oldest forms of taxation in the world. For example, the ancient Athenians levied a general property tax on land, houses, slaves, cattle, furniture and money. A wealth tax does not distinguish between wealth derived from inheritance, or a combination of personal effort, enterprise, saving, or from capital appreciation. It is payable annually on net wealth, subject to any threshold and any specific exemptions.
A wealth tax may be paid out of current income or from a disposal of assets. Unlike inheritance tax and capital gains tax, it is not associated with a change of ownership or economic transactions. Wealth taxation necessitates the periodic valuation of assets, and some of those who incur the liability may suffer from a lack of liquidity to pay the liability. The 1974 Labour governments (there were two elections in that year) made a manifesto commitment to introduce an annual wealth tax but abandoned it before it was enacted.
The possession of wealth confers many advantages, including freedom from the need to earn a living, independence, and security. Wealth gives one security, more and better choices, power, prestige and the ability to provide the best housing, medical care, education and opportunities to one’s family. The ownership of capital enables one to reap far-reaching cumulative ripple benefits, known as ‘Matthew effects’. ‘For unto everyone that hath shall be given, and, and he shall have abundance: but from him that hath not shall be taken away even that which he hath’ (The Gospel of St. Matthew, 25:29). Wealth can help clear many everyday difficulties from one’s path and open doors to make life easier. Wealth determines and enhances one’s life chances.
The tax system doesn’t take account of the fact that the possession of wealth enhances the economic power of its owner. The wealthy can command considerable political access and influence government policy. As President Franklin Roosevelt, himself a millionaire many times over, remarked: ‘Great accumulations of wealth […can] amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others’.
The tax system is an important mechanism for achieving a fairer distribution of income and wealth. The introduction of an annual wealth tax alongside the existing capital taxes (inheritance tax (IHT), capital gains tax and stamp duties) would help to reduce the concentration of substantial wealth, and promote social and political benefits from reduced wealth inequality. It would also raise additional tax revenues for public services.
Wealth inequality can be reduced by levying taxes on the transfer of wealth e.g. through lifetime gifts or bequests, or by the imposition of an annual wealth tax (sometimes called capital levies). Taxes on the appreciation of wealth e.g. capital gains tax also tend to reduce wealth inequality. Capital transfer wealth taxes are typically based on the value of the net assets transferred, and are assessed on the donor or the recipient of the assets. In contrast, annual wealth taxes are assessed on the net value of the assets possessed by a taxpayer.
Death or estates duties are the most common form of transfer taxation e.g. inheritance tax. The systematic taxation of wealth on the donor’s death began in 1894. In introducing it, the chancellor William Harcourt reminded parliament that there is no natural right to inherit wealth. ’The state has the first title to the estate….Nature gives a man no power over his worldly goods beyond the term of his life’.
Income and wealth inequality tend to go hand in hand. A person who has wealth as well as income of a given level has a greater potential taxable capacity than someone who only has income of that size. It is possible to have a high income and little or no wealth and vice-versa. The wealthy can decide whether, and if so, in what form and where they derive income from their capital. High earners live off the return on their personal human capital. One can accumulate wealth by reducing current consumption and saving one’s income. High consumption can reflect high wealth. As Archbishop Morton, Henry’s VII’s formidably efficient tax collector declared, ‘If they spend openly, they have wealth; if they don’t spend, they have hidden it away’!
Government policy changes since 2010 have accentuated income inequality at a time when there has been an increase in the number of top earners and in the levels of their income. Top earners have the ability to increase their consumption and to accumulate wealth, unlike those on average or low incomes who may need to spend all their earnings on their necessities. They have been able to achieve higher disposable incomes because of the growth in their incomes and the reduction in income tax rates since the 1980s and 1990s.
Governments can restrict the accumulation of wealth by the highest earners by increasing the progressivity of income tax or increasing VAT on the kind of goods and services that only they can afford to purchase or both. Instead, there has been a widening of the gap between the effective rates of income tax paid by high and low earners because of the rapid increase in personal allowances. The higher-paid have been the biggest beneficiaries of personal allowances, because they have higher marginal rates of tax. (Personal allowances are tapered out for those with earnings over £100,000.) The increases in personal allowances have coincided with substantial cuts to working-age benefits. Once National Insurance contributions and VAT are also taken into account, government policies have had a regressive effect.
In the latest ONS Wealth and Asset Survey of net total wealth (for the period to 30 June 2016) published earlier this year, household wealth was defined as including property, private pensions, savings, cars, art net of mortgages and credit card debt. The Survey highlighted that since the financial crisis a decade ago, the number of millionaire households has increased four-fold to 3.56 million. The richest 10% of the population held over 44% of total wealth (the top 5% own nearly 20%) and around five times more than poorest half of families.
Britain’s wealth comprised:
The Sunday Times Rich List 2018 revealed that the richest thousand people in the UK have a combined wealth of some £724 billion, an increase of 10% over the total in 2017. For the first time in the thirty years that the Rich List has been published ‘the self-made rich triumph[ed] over old money’. The list highlights the rapid growth of personal wealth, and how it is spread unevenly between the regions and generations. Whereas a fortune of £30 million was enough to justify inclusion in the first edition of the list, in 2018, it was necessary to have wealth of £700 million to be included in the top 200 in the Rich List 2018.
The long period of low interest rates because of the Bank of England’s policy of ‘quantitative easing’ (QE) to sustain economic activity in the wake of the financial crisis has made those who had assets even wealthier (an example of the Matthew Effect). QE has driven up the values of their bonds, shares and property to high levels. It could be argued that loose monetary policy has resulted in unannounced tax cuts for the wealthy and tax rises for the poor and the young (their rents have increased with the rise in house prices). Cheap money has also made large public companies look more profitable because they have been able cut the cost of their debts. Wealthy investors have been keen to invest in equities, even when companies offer tiny dividends. They know that the reversal of quantitative easing will result in an adjustment phase in which asset prices and, consequently, their wealth would fall. Increasing their holdings in equities can help the wealthy engage in strategies to hedge their market risk and exposure asset price volatility to protect their QE windfall-enhanced wealth.
The rapidly expanding growth of an artificial intelligence-infused digital economy with robots increasingly replacing workers is likely to create a two-tier economy. Industries like technology and finance are likely to adopt AI more quickly and thereby become more productive and profitable, along with the companies that are developing these new technologies. The owners of the industries in the vanguard of adopting and utilising the phenomenal capacity that is being made available will increasingly take a larger share of wealth. They will benefit the expense of the owners of the industries and sectors of the economy that are being slow in to taking advantage of the opportunities. The industries and sectors in the slow lane include manufacturing, retailing, transport, farming, education and the wider public sector.
The buoyant industries will have fewer but better paid workers. The less dynamic sectors will continue to employ large numbers of workers and tend to lag behind in attracting resources. The share of the national cake currently attributable to those who rely on their human capital and earnings will decline. The increase in the share of national income accruing to capital, principally to the owners of the firms that develop, market and and deploy the new technology, and the value of these businesses will rise, exacerbating income and wealth inequality.
According to recently published OECD data, the concentration of wealth (including inherited wealth) in Britain and the other industrialised economies has increased quite markedly in recent years after decades of equalisation. Paradoxically, over the same period, annual wealth taxes have been abandoned, for a variety of reasons, by several countries, including Austria, Denmark, Spain and Germany. France introduced transfers of wealth and inheritances in 1791. In 2017, the French parliament scrapped its wealth levy from 2018 on everything except property, but coupled it with the introduction of flat rate tax of 30% on capital gains and dividends. Thomas Piketty, the French economist, whose book Capital in the Twenty-First Century (2014) revived interest in the direct taxation of wealth as a policy tool for redressing inequality, described the enfeeblement of French wealth tax as a ‘historic error’. (Piketty’s proposals are discussed below.)
They are discussed in greater detail below, but in summary they include:
It is often argued that:
Abstracting from the administrative problems associated with implementing it, an annual wealth tax tends to get high marks from some economists. Income is generally regarded as the best single criterion of an individual’s taxable ability to pay tax. Wealth and income are interchangeable in terms of their command over potential consumption. But income can be a misleading yardstick, because it does not always arise in a form subject to income taxation. On the other hand, wealth confers advantages beyond any taxable income it generates.
As the Meade Report (1978) noted ‘capital produces an income which, unlike earning capacity does not decline with age and is not gained at the expense of leisure’. A wealth tax can be regarded as an efficient proxy for a tax on the income from capital. If it were possible to tax this income, in whatever form it arises, there would be no need to impose taxes on the possession or transfers of wealth. Also, broadly speaking, it is preferable to tax wealth than to tax earnings, because high marginal income tax rates discourage the incentive to work.
An annual wealth tax does not distinguish between wealth which results from the taxpayer’s own efforts, initiative and saving and wealth that is inherited by accident of birth. It is often argued that this approach would reduce the incentive to work and save in order to accumulate wealth. Levying wealth taxes on the transfer of capital, rather than its possession, would ensure that the tax would fall on the inherited wealth and shelter the accumulation of wealth by the taxpayer him or herself.
Conceptually, ‘wealth is wealth’. No matter how the possessor comes by it, it confers exactly the same advantages. People invest, engage in enterprise or save from their post-tax incomes to accumulate wealth for a variety of reasons, including the desire to leave a bequest to their heirs. It is not possible to conclude a priori that the imposition of a wealth tax would automatically inhibit them from continuing to do so: it is possible that they might redouble their efforts after a tax was imposed in order to attain their ‘target’ level of wealth.
A fair tax must take account of people’s capacity to pay. Economists argue that taxes on income and realised capital gains alone do not take adequate account of an individual’s taxable capacity i.e. the ability to command economic resources. Wealth is an independent tax base because ‘capital and income constitute two distinct though mutually incomparable sources of spending power…a separate tax on each [would] provide jointly a better yardstick of taxable capacity than either form of taxation by itself’ (Kaldor, 1955). The assessment of the taxable capacity inherent in the possession or transfer of wealth would make the tax system more equitable and increase tax revenues.
Another justification for annual wealth taxation is that assets often generate returns that are not always monetary in nature, and therefore not automatically within the scope of income tax (unless they are specifically exempt). For example, owner-occupiers of residential property receive an implicit return on their property equivalent to the rental that it would fetch on the open market. Annual wealth taxation provides a mechanism for taxing implicit returns on capital, including the ‘psychic’ enjoyment derived from the possession of works of art, sculptures, antiques, jewellery and vintage motorcars.
The absence of a tax on implicit income encourages the wealthy to purchase assets that yield non-monetary returns, rather than investing in economically productive activities that produce taxable income. The yield from wealth taxation could theoretically allow a government to reduce marginal rates of income tax or to increase the progressivity of income tax without raising the marginal rate of income tax, which would adversely affect the incentive to work. Redressing the under-taxation of implicit returns to wealth would enhance the efficiency of the tax system.
The likelihood of IHT having any significant impact on the redistribution of wealth can be judged by comparing the forecast yield from IHT in 2017/18 (£5.2 billion, 0.7% of all tax receipts) to total UK household wealth (£12.8 trillion). More graphically, a fortune of £30 million was enough to justify an individual’s inclusion in the first edition of the Sunday Times Rich List which was published 30 years ago. But, it was necessary to have a wealth of £700 million to be included among the top 200 in the Rich List 2018. This represents an increase in the wealth of the top 200 of more than 2,200%. The cumulative level of inflation over the same period was a comparably modest 137%. Given the exponential growth in personal wealth, there would have to be a very much greater increase in the yield from IHT than is expected before it has any significant impact on wealth inequality. (It is expected to rise by a third to £6.5 billion by 2023.)
Inheritance tax combines features of the capital transfer tax and estate duty that preceded it. IHT retains all the exemptions and reliefs introduced with the former, and suffers from the problems with the latter. IHT is ‘a tax that favours the healthy, wealthy and well-advised’ (Kay and King, 1990). The former chancellor, Roy Jenkins wittily described estate duty, the precursor to IHT, as ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Revenue’.
It would be possible to curtail the anomalies and exemptions in IHT to make it more effective but there is currently little political will to do so. There may be some cosmetic changes to IHT following the review currently being undertaken by the Office of Tax Simplification. But there are unlikely to be any fundamental changes to the regime: there are no votes in it! Ministers are all too aware that opinion polls show that voters in all parties regard inheritance taxes as unfair.
There is no shortage of other options. They range from the heroic suggestion that Council Tax be reformed (a parlous course, as Mrs. Thatcher discovered with the ill-fated Community Charge in 1989/90) to the introduction of a capital gains tax charge on death, re-integrating capital gains tax with income tax, a wholesale reform of inheritance tax by introducing a comprehensive donee-based accessions tax instead, the introduction of an income tax charge on the imputed return from owner-occupation of private residential property, taxing land site values, removing tax relief at the higher rates on pension contributions and making direct transfers of wealth through schemes like the Child Trust Fund to the offspring of those in long-term receipt of working-age benefits. It would be impossible to implement any changes that would survive a change in government without at least some degree of political consensus.
The Meade Committee (1978) and Mirrlees Review (Mirrlees et al 2011) both agreed that wealth, especially unearned wealth, was a suitable target for taxation. They argued that it would be better to tax the transfer of wealth on those who received it, rather than the possession of wealth.
The Meade Committee proposed that a Progressive Annual Wealth Accessions Tax be levied on the transfer of wealth on the recipient rather than the donor. And that it should be progressive and related to the length of time for which the wealth would be enjoyed in the context of its main recommendation of a direct expenditure tax. (The 1974 Labour government introduced a Capital Transfer Tax on large gifts where the liability was collected from the donor. The Conservative government elected in 1979 repealed the tax.)
The Mirrlees Review also looked favorably on wealth transfer taxes. Its recommendation of a rate of return allowance on capital including for owner housing, would have substantially addressed disparities in the tax treatment of asset incomes discussed above. But neither the Meade Committee nor the Mirrlees Review’s recommendations achieved any significant or lasting influence over tax policy.
Thomas Piketty (2014) argued that because the rate of return on capital has tended to exceed the rate of growth of output and income, as it did in the nineteenth century and seemed likely to do so again in the twenty-first, capitalism would generate arbitrary and unsustainable inequalities that would undermine the meritocratic values on which democratic societies are based. In particular, with lower economic demographic growth as the wealth owned by the owners of capital was transferred between generations, inheritance would begin to matter as much in determining a person’s life chances, as it did in ancient societies.
Inheritances have more than doubled in past 20 years, and will more than double again over the next two decades. The beneficiaries of such intergenerational transfers of wealth don’t earn their wealth; they simply receive it by accident of birth. Past wealth would tend to dominate new wealth, and those who inherit wealth would tend to dominate the majority who continued to rely on their earnings from their personal labour. The introduction of a wealth tax would give those with inherited wealth a greater incentive to work, or give those already in productive activity an incentive to accumulate wealth though their own efforts
Acknowledging it as a ‘utopian idea’, Piketty advocated a coordinated global wealth tax of the wealthiest at two percent as part of an ideal tax system alongside income and inheritance taxes. Some commentators have described his proposals as impracticable, because they require international consensus. Others have applauded his insights e.g. the failures of existing wealth taxes are due to politics – they are riddled with exemptions. There has been little discussion among governments about the comprehensive international agreements necessary to implement such a tax.
Ministers would need to address a range of issues, including:
It would be advisable to minimize the exemption of certain categories of assets to avoid the erosion of the tax base. The exemption of assets like woodlands, paintings, sculptures, antique furniture, jewelry and other objet d’art for cultural reasons would result in increased investment in such assets primarily for tax avoidance; it would allow the wealthy to enjoy their possession of valuable property whose value would continue to appreciate because of their limited supply and to avoid liability;
It would be difficult to identify and attribute the ownership of the underlying wealth held in discretionary trusts. Control over the trust’s assets is vested in the trustees, but the equitable title gives the beneficiaries rights to the benefit of the property. Some discretionary trusts allow trustees to decide the nature, timing and the extent of any payment of benefits to the beneficiaries. This would make it difficult to identify to whom the underlying value of the assets should be attributed and how their relative share should be determined. Particular care would need to be taken in drafting the treatment of charitable family foundations since they can involve continued family control over wealth even though the benefits are ostensibly restricted to charitable purposes;
If owner-occupied housing were to be removed from the scope of the wealth tax, it would allow wealthy individuals to continue over-investing in their residences to enjoy the very lightly taxed implicit returns from owner-occupation. (The annual taxation of the imputed income from living in one’s own house was abolished in 1963, partly to encourage home ownership.) They would also continue to benefit from the exemption from capital gains tax of the profit they make on the disposal of their expensive principal private residence.
None of these benefits are available to those who have to rent where they live. The Labour and Liberal Democrat parties proposed a ‘mansion tax’ (i.e. a wealth tax) based on the owners of residential property worth more than £2m in the run-up to the 2015 general election. There was considerable opposition to the policy from those living in expensive properties (or aspiring to do so), mostly in London and the southeast. The inclusion of the value of private homes in the scope of a wealth tax would attract similar opposition. For example, it would be argued that it would impoverish those who are asset rich but cash poor. To defuse widespread opposition to a wealth tax solely because of the inclusion of personal residential housing, it might be advisable to exclude principal private residences worth less than £2m from the valuation of personal wealth.
It is often claimed that the valuation of wealth for tax purposes would is fraught with practical difficulties. But it is easy to overstate these difficulties; after all, property regularly has to be valued for capital gains and inheritance taxation purposes and other reasons e.g. sharing assets. It would be advisable to have exactly the same rules and procedures for valuing assets for the purposes of the wealth tax as are used for other taxes, including any processes for resolving disputes over approaches to or the quantum of valuations.
The fact that a commercial entity such as The Sunday Times has been able to publish increasing authoritative estimates of private wealth without access to the vastly larger and richer sources of data available to HMRC demonstrates that the valuation of wealth is far from being an insurmountable obstacle to implementing an annual wealth tax. (Some of those included in the Rich List have reportedly been so pleased by the celebrity conferred upon them by their inclusion that they have provided list’s authors with private information to enhance their relative ranking. Maybe the government should consult on whether the list of those liable to the wealth tax should be published!)
Countries administering wealth taxes have not found them particularly difficult to administer, although they have found it difficult to implement them. For example, in some jurisdictions the tax authorities have found it particularly difficult to identify those who should be liable to the tax because of widespread evasion. In contrast, H.M. Revenue & Customs (HMRC) already possesses considerable information about wealthy taxpayers. It has access to private data provided by taxpayers themselves in connection with their liability to income tax, inheritance tax, capital gains tax, and stamp duties.
HMRC has already drawn on this information, cross-checked against information contained in commercial publications such as The Sunday Times Rich List, to identify the taxpayers that should be within the scope of its High Net Worth Unit (those with a net wealth of £10m or more) and Affluent Unit (those with incomes over £150,000 and a net worth of over £1m). Some taxpayers have volunteered confidential information to HMRC to demonstrate that they are eligible for membership of these exclusive ‘clubs’. If an annual wealth tax were to be introduced, it should ideally be self assessed, and net tax wealth returns should have to be filed by those liable alongside their income tax returns to integrate their compliance.
HMRC would deploy its Connect analytical software data mining computer system to undertake compliance on the annual wealth tax. Connect systematically collates and analyses data that has to be made available to the department on a statutory basis, disclosures from overseas tax authorities, publicly available information and social networks.
When the Labour Party mooted an annual wealth tax in 1974 (see below) it was claimed that the announcement of its introduction would result in result in ‘capital flight’ and that wealthy individuals would leave the UK to avoid the tax. Empirical work (Young, 2017) based on US data suggests that, contrary to popular opinion, while the rich have the resources and capacity to flee high-tax jurisdictions, they don’t often tend to do so, because tax is only one of the considerations that influences where they choose to live.
If ‘millionaire flight’ were felt to be a serious risk, it would be possible to impose a higher charge for the year of the change of residence, namely an exit charge on those seeking to change their residence status primarily for tax purposes.
A wealth tax had been on the Labour Party’s ‘to do’ list of policies since the 1950s. It was seen as a way of redressing inequality and promoting equity, and as a way of encouraging wealth owners to put their wealth to work to boost the economy and employment. It was felt that those living on inherited wealth were contributing to the stagnation of the economy by preferring low-yielding but secure investments to riskier investments that might promote industrial growth and employment.
The wealth tax was included in the Labour Party’s election manifesto for the two general elections in 1974. Party leaders agreed its inclusion without any significant internal debate in order to secure trade union and party activists’ support for wage restraint to curb inflation. There was little public discussion about the proposed tax during the two 1974 election campaigns held in the wake of a national miner’s strike, ‘Three Day Week’ and Britain’s worst inflationary and industrial crisis. (Prices were to increase by more than 20% and wages by 25% in 1974/75.)
In the face of growing trades union militancy and industrial and political crisis, the campaigns were dominated by the question of ‘Who governs Britain?’ rather than the detailed policies contained in the party manifestos. Little thought was given to whether, and if so, how the annual wealth tax could be implemented, particularly the administrative costs and difficulty of measuring a taxpayer’s wealth annually for tax purposes.
As Professor Howard Glennerster of the LSE has graphically described in a series of brilliant articles (2011, 2013, 2015), the Inland Revenue provided the new chancellor of the exchequer Denis Healey with detailed advice on the implementation of its new wealth tax literally within weeks of his appointment. It included details of the staffing and new offices likely to be required, and a timetable for the publication of a Green Paper and the suggestion that the tax should be enacted in Finance Act 1975. Denis Healey was delighted with the advice and congratulated the department.
The Inland Revenue advised him that the first valuations of wealth should take place at the end of 1975, and that the first wealth tax returns should be filed after April 1976. It reported the academic criticism of the Labour party’s proposal that a tax on receipts would be preferable. The Revenue acknowledged that the changes suggested by academic commentators would ‘go a long way’ to achieve the policy objective of reducing inequality by removing major concentrations of wealth. But it recommended against changing the approach that had been published by the government on the grounds that focusing on receipts would produce less revenue. As a tax authority, the Revenue obviously wanted to maximize the government’s tax revenues.
The Revenue’s advice had been prepared without any significant contribution from Treasury officials. The Treasury began taking a more sceptical look at the proposals when it started receiving representations against the proposed tax from the National Farmers’ Union, the City, the Bank of England, and the owners of historic houses. A public campaign attracted a million signatures in the defence of country houses and other heritage sites that would allegedly be ‘threatened’ by the wealth tax.
The government published its Green Paper on a Wealth Tax in August 1974. It stated: ‘The government is committed to use the taxation system to promote greater social and economic equality. This requires a redistribution of wealth as well as income. Thoroughgoing reforms are needed in the taxation of capital’. The government proposed a low-rate annual wealth tax with fairly high exemption limits alongside existing taxes.
But by this time, the Treasury had became concerned that the wealth tax, along with the government’s other manifesto proposals for the nationalization of the shipbuilding and aerospace industries, the government taking a ‘large stake’ in the top 100 firms and public spending commitments could trigger of capital flight and a crisis of confidence in the business world.
The Treasury was already reeling from dealing with rising inflation, price controls, and a fall in asset values. Harold (later Lord) Lever, one of prime minister’ Harold Wilson’s closest political advisers, was also concerned about the impact of a wealth tax in the economic circumstances prevailing at the time. He described the Green Paper as ‘political dynamite’ in a note to the prime minister. Ministers were alarmed. They decided to seize upon a ‘politically naïve’ suggestion in earlier advice from the Inland Revenue that they might wish to consider the possibility of having ‘the structure of the tax (as opposed to the desirability of introducing it) examined by a Select Committee’.
The government did not have a majority on the committee because of relative strength of the parties in house of commons. ‘The Conservative members opposed, obstructed and delayed the proceedings. They mounted a formidable attack on the very idea of a wealth tax.’ The academic commentators who had opposed the approach to taxing wealth proposed by the government and the lobby groups who opposed it in principle dominated discussion and the presentation of evidence. The select committee was unable to agree on a majority report (despite publishing five drafts).
The fear of a political backlash replaced the government’s original optimism that the wealth tax would be speedily implemented. It led Denis Healey to announce in December 1975, after consulting the prime minister, that he was postponing the introduction of a wealth tax. He had in fact made the decision some time before then (private information) and communicated it a handful of senior officials in the Inland Revenue and the Treasury. In the meantime, the Inland Revenue team comprising over 200 staff that had been appointed to undertake preparatory work on the basis of the original timetable for the enactment carried on its activities unaware that the tax was going to be abandoned.
Some have argued that the appointment of the select committee was a subterfuge to impede the introduction of a tax that was foisted on to the government by party activists. Others saw it as proof, as Ralph Miliband (1969) had suggested that ‘the dominant economic interests in a capitalist society can count on the active good will and support of those in whose hands state power lies’ to support the status quo. It is rare for any government of whatever persuasion to allow a policy of such totemic significance to the party in power to be taken hostage by a bipartisan parliamentary committee.
The decision to have the wealth tax examined by a parliamentary select committee was odd. Many ministers, and most party activists, were keen on its implementation. The Inland Revenue had told the chancellor that ‘although there will of course be many problems to be resolved we see no reason why a wealth tax should not be introduced reasonably’. The previous Labour government had not appointed a select committee to consider the introduction of corporation tax and capital gains tax in 1965.
Denis Healey said in his highly readable memoirs that ‘‘you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle’ (Healey, 1989). But on the basis of the evidence, it is hard to resist drawing the conclusion that it was a lack of conviction rather than concerns about the administrative feasibility of implementing the tax that led to its abandonment.
The imposition of a new tax is above all a matter of political will; economic, financial and social considerations are a secondary consideration. As the New Labour government demonstrated in 1997, it perfectly possible for an opposition party to undertake considerable policy work on sensitive measures before it comes into power e.g. operational independence for the Bank of England, the so-called Windfall Tax. No tax is perfect, no matter how much time is spent on its design before its introduction. The 1974 Labour government should arguably have used the majority in its early years to introduce the tax.
The Revenue would have found pragmatic solutions to deal with the practical and administrative problems with the tax that Denis Healey said caused him such great concern (Professor Glennerster didn’t appear to have found any documentary evidence). Even if the newly introduced tax had had teething troubles (all new taxes do) the Inland Revenue and tax practitioners would undoubtedly have muddled through and made it work, and, if necessary, suggested legislative improvements.
The Labour shadow chancellor John McDonnell has made no secret of his wish to develop policies to shift the tax burden from income to those holding wealth if he was at the Treasury. There was no reference to a possible tax on wealth in Labour’s manifesto for the 2017 general election. It did, however, propose increases in income and corporation tax, and the reversal of the Conservative Party’s changes to inheritance tax and capital gains tax. It remains to be seen if higher taxes on wealth or property are included in a future Labour manifesto. Parties are free to introduce new ideas when they come into government: they don’t need to have been a manifesto commitment. A future Labour government might regard the introduction of an annual wealth tax as ‘unfinished business’.
The introduction of an annual wealth tax, alongside the existing taxes on income and capital, would redress the glaring inequality in the distribution of wealth in Britain today. It would improve the fairness and efficiency of the tax system, and make it more progressive. The design considerations include whether the tax should be levied on individuals or households, the treatment of wealth held in pension funds and property, and the treatment of discretionary trusts. The only government elected on an election manifesto promise to introduce a wealth tax abandoned it owing to a lack of political will, rather than administrative feasibility.
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