Wednesday, September 28, 2022

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Should We Tax Wealth?

Yves here. I’m surprised that Richard Murphy skips over a key shortcoming with the notion of taxing wealth: the difficulty of valuing non-actively-traded assets. What is that racehorse, or private business, or piece of lakeshore land worth? Having more than occasionally been asked to value private companies, I have seen instances of huge differences between a buyer’s and a seller’s valuation, in one case 10x. And in the 10x case, the difference wasn’t due to aggressive v. conservative assumptions about the business but the different situations of the buyer and seller (seller not pricing in FX risk, tax considerations the buyer faced, greater buyer constraints in dealing with unions, etc.).

That problem is made worse in the US by the fact that the IRS regularly loses tax case against the super-rich and would be therefore not inclined to dispute dodgy valuation.

Our Clive raised an additional issue: wealth taxes are (one assumes) meant to reduce inequality but there are retirees who are asset rich (often due to having been very lucky as to when and where they bought their house) but don’t have large incomes:

Yes, the big problem is definitely “define wealth”.

A few case-studies shows this is fraught with complications.

One of my relatives is by some measures wealthy. Let’s look at her balance sheet though and see what this means in practice.

Fixed Assets:

Residential Real Estate £700,000
Vehicle £20,000


Pension Fund £500,000 (cash equivalent value)
Exchange Traded Securities £100,000
Cash at Bank £50,000

Total Net Worth: £1.37M

So, most people would consider that makes her a candidate for the Global Wealth Tax.

The snag is, her income is “only” (I know this is a relative judgment) £24,000 p.a. of which £18,000 is from the private pension on which she pays about £2,000 tax. The rest includes a state pension component of £6,000 (which is also taxable). Property taxes run to £3,000 a year. So the tax take is already £5,000, or around 20% of income — but this tax take equates, of course, to around 0.5% of “wealth”.

She ends up with around £1,700 free cash per month, which is enough to live comfortably but she lives in an expensive part of a very expensive country. Utilities are £300 a month (mainly natural gas for heating, although the climate is mild, cold-ish winters can generate high energy consumption as the house is 50+ years old and while energy saving retrofitting has been done, it has reached diminishing returns point to do any more, water charges are high here too). Food is another £300 a month, insurances are nearly £200 a month (pet cover is £50 a month alone), transport costs (car), modest clothing, makeup and haircare budgets are another £100 a month.

Of the £800 or thereabouts left over, this has to cover the cost of replacing the car every four or five years, property maintenance (a new furnace cost nearly £2,500 a couple of years ago), she has to have someone help with the garden, that’s £4-500 a year. And so on. The “wealth tax” would eat up a lot, if not all, of her disposable income. She does not live extravagantly. You’d be forcing her to make awful choices such as eating an inferior diet, not keeping the house that warm in winter, or not having a pet. Or not running a private car (public transport where she lives is patchy, at best).

No bank would lend to her at her age without security. The pension fund gets cancelled in her death so isn’t a realisable asset. So the proposal to use a bank loan to cover the costs of the wealth tax is, in effect, a mortgage. This sounds fine, but what if she needs to go into long term care? A decent facility (one I’d be happy to see her in) is £3,500 a month (call it £40,000 a year) without nursing, if nursing is needed, this is £5,000 a month. If neurological care (e.g. dementia) is called for, you’re looking at £6,000 a month. The house would have to be sold to pay for it, but worse-case, her entire fixed assets and investments would be gone in ten years. The income from her pension fund would need to be supplemented by a state-funded contribution to her care. The more mortgage was against the house, the less this would raise in any sale and the quicker the burn rate for any long term residential assisted living. So the sooner the state would have to step in, the assistance would run for longer and the quality of what care would be provided would almost inevitably be worse.

Of course, if my she didn’t need to go into a nursing home, her estate would be larger (worth more). So the beneficiaries get more of a free lunch. This is, to me, the real inequality. Random, capricious, unearned financial lottery winning through wealth inheritance is unjustified and is unfair. But the wealth tax might not prevent that (it would only chip away at it over a long, long period).

So why not — as Britain did in the early part of the twentieth century — strike a real blow against this pernicious problem (since sadly watered down through copious loopholes) by ramping up of death duties (inheritance tax)? If that was coordinated across tax jurisdictions, it would seem to me to be a far fairer (and easier) way of tacking the root causes of a lot of the inequality which arises through dynastic wealth.

However, vlade did have a clever solution to another objection often raised to a wealth tax, that people will simply hide assets:

If I were to do a global wealth tax, I’d design it on “tax as proof of ownership” basis. I.e. the asset is owned by the person who can prove they paid the asset tax on it. VAT is a proof of ownership for small things, income tax on your salary money, inheritance tax on anything you inherit etc..

No tax paid, no ownership – and the first person who pays the tax can claim it.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

his is a question raised at the Tax Justice Network conference yesterday, largely as it is an issue that is the focus of much of the work of Tax Justice UK. I am an adviser to Tax Justice UK.

The debate was in one part technical, focusing on whether we can tax wealth. The slightly frustrating element of the discussion on this issue was the failure to focus on why this is now possible, which is entirely down to the existence of automatic information exchange from the world’s tax havens to the world’s major countries. This process, which has only just begun, but which is already proving to have a real impact on tax collection rates from those using such places, is key to wealth taxation. Before automatic information exchange existed the possibility that wealth taxation could simply be evaded by relocating assets to tax havens was so significant that any proposal was undermined by it, and now it is not. Boltholes for wealth are now disappearing.

In that case the argument for or against wealth taxation is very much more about political will now. Helen Miller from the Institute for Fiscal Studies did, whether she intended it or not, present the case against that political will being created. I admit I found her arguments frustrating. To pretend that we cannot tax wealth is now wrong, for reasons I note above. And to suggest that it may be wrong in some instances to tax wealth because it is, as she suggested, just a second tax on labour where the benefit of consumption have simply been deferred is grossly inaccurate given the heavily skewed distribution of wealth within our society, plus the fact that the vast majority of the savings income of the vast majority of people in this country ( I use the term twice deliberately) has been exempted from any taxation by the simple expedient of exempting the first £1,000 of savings income from all tax liability in the UK, which should then have ended the need for ISAs, which did not happen.

So do we need a wealth tax? Some of the very wealthiest in the USA say that we do, although I am not sure that I agree with all their reasoning which certainly conflicts with modern monetary theory.

I also do so. I explained how this could be done through the income tax and NIC systems here, a while ago.

But we could also align income tax and CGT rates, as Nigel Lawson did in the 80s.

And we could substantially abolish the observed capital gains tax annual allowance which is a peculiar feature of the UK tax system in the sense that few other countries replicate it, but which provides those with wealth with the absurd entitlement to what is, in effect, a second personal allowance which is denied to those who have to work for a living. The injustice of the UK tax system and its inherent bias is obvious.

That is also the case when the absurdity of capital gains not being charged on death is considered: many of the problems with inheritance tax could be addressed if this exemption was removed, including on houses unless passed to a surviving partner or carer.

But so too is it by another simple fact. Over 80% of UK personal wealth is made up of tax incentivised assets, either in the form of people’s homes or pension funds or ISAs. That is a staggering fact that makes clear it is the UK tax system that does help create the wealth inequality that we suffer in this country. In that case to tax the resulting imbalances in society makes complete sense.

I am not saying we need start with a tax on wealth as such, although I see little reason why we should not on the wealth of the top 0.1%, with the sole justification being that they are exceptionally wealthy and that the imbalance this creates society requires redress for no other reason than that. We should start by addressing the issues I note in my paper, here, and those other obvious issues relating to capital gains tax noted above. We can have seriously big impact doing these things before ever getting near the politically charged case of inheritance tax.

The time for wealth tax reform has arrived.

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