The possible introduction of a wealth tax has been discussed in the UK, USA, and internationally. The debate about its introduction has reached ‘fever pitch’ because of the coronavirus pandemic, which has put renewed focus on wealth inequality in both countries.
What is a wealth tax?
A wealth tax is a tax on the total net assets of an individual or family. Over the last 12 months, it has attracted a lot of attention off the back of the coronavirus pandemic.
While the specifics of a wealth tax may vary, it usually involves a one-off (or annual) tax on the collective value of an individual’s cash, real estate, shareholdings, pension funds, and other financial and businesses interests.
Different versions of a wealth tax are already in place in Argentina, Canada, France, Spain, Netherlands, Norway, Switzerland, and Italy.
The Wealth Tax Commission
In the UK, discussion about a new wealth tax was recently prompted again by the establishment of The Wealth Tax Commission.
Established in Spring 2020, the Commission was launched to investigate the potential viability of a wealth tax in the UK. The Commission was headed by economist Arun Advani, barrister Emma Chamberlain, and lawyer Andy Summers.
The final report was published in December 2020. The Commission recommended a one-off wealth tax, which would be applied to all assets above £500,000 per person or £1 million per couple.
The Commission suggested politicians investigate a rate between zero and 15 per cent, pointing out that a 5 per cent wealth tax would generate a windfall of £260 billion for the UK economy.
International examples of a wealth tax
Although the concept of a wealth tax has gathered steam globally over the last 12 months, the likelihood of its introduction differs from country to country.
United States
A number of left-leaning Democratic politicians in the US have proposed a wealth tax. In January 2019, Senator Elizabeth Warren proposed an annual wealth tax of 2 per cent for all household assets above $50 million and 3 per cent above $1 billion.
Senator Bernie Sanders has proposed a similar tax. Sanders proposed a 1 per cent wealth tax rate for assets above $32 million for married couples ($16 million for singles), increasing to 8 per cent for even wealthier households.
While the concept of a wealth tax has attracted some attention from parts of the Democratic Party in the US, there would be legal impediments to its introduction.
In particular, the US Constitution says that ‘direct taxes’ must be apportioned across the states by their population. There is a great deal of legal argument about whether a Wealth Tax would count as a ‘direct tax’ or not.
United Kingdom
While a wealth tax was actively considered by the UK Government between 1974 and 1976, it was never introduced. Since that time, it has not been widely discussed in UK political circles or the media.
The Wealth Tax Commission’s report briefly bought the concept back into British headlines, but it does not appear to have been given much consideration by the current Conservative Government.
In July 2020, Prime Minister Boris Johnson ruled out a wealth tax, saying that he was “amazed” at the suggestion.
This is despite the fact that the concept of the wealth tax has been attracting more public support over recent years.
In 2020, a YouGov poll found that more than 6 in 10 of the British public supported a tax on those with assets in excess of £750,000.
Elsewhere around the world
- Spain has a wealth tax of up to 3.75 per cent of net assets over €700,000.
- Norway has a wealth tax of 0.7 per cent on assets over approximately £125,000.
- Belgium has an annual wealth tax of 0.15 per cent on certain assets.
- In 2020, Argentina introduced a wealth tax of up to 3.5% on assets over $2.5 million.
Annual Wealth Tax vs. One-Off Wealth Tax
One of the key differences between separate versions of a wealth tax is whether it applies to the wealth of individuals on a one-off basis or annually.
In the annual version of the wealth tax, the tax applies every year to a wealthy individual’s net assets.
The alternative is a one-off wealth tax, which applies only on a one-off basis to generate a windfall income for a country.
Gini Coefficient and wealth inequality
Discussion about a wealth tax has been prompted by rising wealth inequality over recent decades as well as over the course of the coronavirus pandemic.
In 2020, a report from the UN found that income inequality has increased in most developed countries and even some middle-income ones, such as China.
One measure of inequality is the Gini coefficient, which summarises wealth inequality in a country by a single number, where 0 represents perfect equality across society and 1 represents perfect inequality.
Wealth inequality has risen particularly steeply in the UK and USA since the 1970s. In 1977, the Gini coefficient in the UK was 0.26 while it stands at 0.33 today.
Over the course of the coronavirus pandemic, there have been reports that the epidemic impacted the health and wealth of those at the bottom of society more than those at the top.
In particular, according to one report, the wealth of billionaires around the world rose by more than $10 trillion during the course of the pandemic.
Implications of a wealth tax
The implications of a Wealth Tax are subject to much debate and discussion, and it might be difficult to predict the ultimate impact on a country’s economy, its equality levels, and its social character.
- Capital flight. A number of economics and politicians have predicted that the introduction of a wealth tax would lead to a significant degree of capital flight, with wealthy individuals moving their assets to other countries.
- Dampen economic growth. A number of academic papers have shown that the introduction of wealth taxes correlate with lower economic growth.
- Lower levels of innovation. Several recent academic papers have shown that the introduction of wealth taxes lead to lower levels of entrepreneurialism and innovation.
For vs. against
Supporters of a wealth tax
United Nations Secretary-General Antonio Guterres: “I urge governments to consider a solidarity or wealth tax on those who have profited during the pandemic, to reduce extreme inequalities. We need a new social contract, based on solidarity and investments in education, decent and green jobs, social protection, and health systems. This is the foundation for sustainable and inclusive development.” (source)
IMF: “To help meet pandemic-related financing needs, policymakers could consider a temporary Covid-19 recovery contribution, levied on high incomes or wealth.” (source)
Institute for Policy Studies research Chuck Collins: “It makes total economic and moral sense to tax billionaire wealth windfalls to help pay for pandemic recovery. Our pain has been their gain. Even with the proposed wealth tax, they will be billions wealthier than prior to the pandemic.” (source)
Opponents of a wealth tax
Tax Foundation economist Erica York: “A wealth tax would have a negative impact on the economy. It would reduce national income, discourage saving and encourage consumption.” (source)
Spectator Economics Editor Kate Andrew: “Over the past few decades, the majority of European countries that implemented them have gone on to repeal them, as they found them an inefficient and ineffective way of raising revenue.” (source)
Reason Contributing Editor Veronique de Rugy: “These taxes don't rake in the revenue or solve the supposed problem of inequality. For starters, wealth taxes aren't paid by rich people who reduce their consumption as a consequence. They reduce their investments, which reduces capital formation, which slows productivity and wage growth.” (source)
Reputational recommendations
Growing calls for a wealth tax internationally demonstrate growing levels of dissatisfaction with wealthy individuals and entrepreneurs amongst the public, politicians, and other stakeholders.
Over the coming months and years, we should expect growing levels of focus amongst the public and the media on the level of tax that different individuals and companies pay.
While this has already been a central reputational risk for wealthy individuals, these stakes are only set to increase further over the coming months and years.
Wealthy individuals and families should put serious thought into the reputational implications of tax planning, and not simply make residency and financial decisions solely on fiscal grounds.
Individuals who are already paying substantial levels of tax may also want to take proactive steps to put this information on the public record, perhaps by highlighting their tax contributions in business accounts or family office records.
Regardless of the level of tax that individuals pay, this is unlikely to be sufficient for the public. Businesspeople and successful individuals need to put in place robust strategies to bolster their reputations as ethical corporate citizens.
