It is not surprising to see government ministers and their shadow counterparts eyeing these large pools of money. Even a tax which took a 0.5 per cent slice of this large pool of personal wealth would raise £35bn, cutting over a third off this year’s borrowing total. And the idea that the wealthy should be contributing more to the national cause of debt reduction is also politically appealing.
But there are some powerful counterarguments to this talk of new wealth taxes. And these arguments persuaded many European countries – including Germany, Austria, Denmark, Sweden, Finland and Spain – to abandon wealth taxes in the 1990s and 2000s. Within the EU, France is the only major country imposing a wealth tax and their “solidarity tax on wealth” raised just 4.3bn euros (£3.4bn) last year.
First of all, we already have a number of taxes levied on the value of property and wealth. Council tax is expected to raise £26bn this year and stamp duties should generate nearly £10bn in revenue. Inheritance tax is projected to bring in a further £3bn for the Exchequer. And these taxes are already structured so those with substantial wealth and property pay more. The top rate of council tax is three times the lowest level. The standard rate of stamp duty is now 7 per cent for properties valued over £2m, compared with a rate of 1 per cent on an average semi-detatched house costing around £200,000. And inheritance tax is payable at 40 per cent on estates worth more than £325,000.
Second, additional taxes on wealth are likely to encourage high net worth individuals to move their assets abroad. That would not only reduce the amount of revenue directly raised by a wealth tax. It would also erode other sources of government revenue. When assets are held in the UK, the income they generate is a potential source of revenue for the Treasury, which would be undermined if assets were moved abroad. Similarly, money held in the UK is a potential source of investment in UK businesses which contribute to our tax revenues by boosting employment, income and consumer spending.
The third key argument against new wealth taxes is the impact on the competitiveness of the UK as a location for doing business and generating wealth. Wealth is accumulated from income which is normally generated by productive activities – either as a result of employment or from the profits of successful enterprises. We already tax the income of wealthy people at high rates and an additional tax would run counter to the government’s policy of ensuring that the UK is seen as a highly competitive location within Europe and globally, open for business.
We have made some progress on this front with recent tax changes. The main corporation tax rate is being brought down and will drop to 23 per cent next year. The top rate of income tax is being reduced to 45 per cent next year. And the latest assessment from the World Economic Forum is that the UK has moved up the national competitiveness rankings to number 8 in the world (from number 10 last year.
The government should be thinking about is how to restructure the UK tax system to make it simpler and more efficient, and to reduce disincentives to wealth creation. An efficient and effective tax system will generally have low rates and few allowances and exemptions. It will also focus on taxing wealth when it is spent rather than when it is earned. Alongside his welcome reforms of corporation tax, George Osborne should be looking to restructure the income tax system, VAT and environmental taxation so they conform to these principles.
A thorough review of the UK tax system is much-need and long overdue.
Andrew Sentance is senior economic adviser for PwC and a former member of the Monetary Policy Committee.