There’s something darkly amusing about one of the richest men in the world using Twitter to poll his 60 million followers about whether he should pay tax.
It wasn’t just the flippant way Tesla’s Elon Musk (@edgeLorde) asked his followers to vote on whether he should sell $21bn of stock and in doing so pay billions in tax on his capital gains. It was the fact that for the tech baron, paying taxes is effectively something he can choose to do. Or not to do.
This is a direct consequence of a tax system in the US and the UK that taxes wealth badly. As another American billionaire, Warren Buffett, pointed out, the very richest often pay lower tax rates than their cleaners.
The pandemic has been kind to the very wealthy. Musk is part of a crop of US billionaires that have added an extra $1tn to their wealth since the start of the pandemic.
It’s partly in response to this that the US Treasury Secretary Janet Yellan tabled a plan to tax the unrealised wealth gains accumulated by the likes of Musk.
The new unrealised capital gains tax would be an annual levy on the increase in value of assets held by the richest Americans. It would apply to people who make more than US$100m a year for three years in a row or if one makes US$1bn in annual income.
The Yellan proposal is in part an acknowledgement that the status quo wasn’t sustainable. If the fabulously wealthy choose to take their income from their private stores, then they should be taxed just like everyone else.
Here in the UK the financial pain of Covid-19 has not been equally shared. Even before the pandemic wealth inequality was more than double income inequality.
During the pandemic the richest 10 per cent of households gained over £50,000 in additional wealth per adult on average, the poorest 30 per cent gained just £86.
A properly functioning economy shouldn’t be hardwired to make inequality worse when there is a downturn. Yet our approach to taxing income from wealth means that the average tax rate of someone on £10m a year is less than that of someone on the median income according to University of Warwick research.
It is intuitively unfair that someone who earns their income from wealth should pay lower tax rates than someone who has to earn their income through work. It’s also not right that for the very richest, taxation is often effectively voluntary.
In 1988 the then Chancellor, Nigel Lawson, said: “There is little difference between income and capital gains and many people effectively have the option of choosing which to receive… it is by no means clear why one should be taxed more heavily than the other.” He equalised the tax rates on capital gains and wealth.
The government’s estimates that doing the same now could raise up to £14bn a year. A recent poll found 61 per cent in favour of aligning CGT rates with Income Tax rates.
To keep public support for taxation, it is vital that the system is seen as fair, with similar things taxed in similar ways. HMRC – which has a hefty weight behind it to collect the tax on regular incomes – must have the muscle to do the same for billionaires skating the rules.
Elon Musk is one of the few tech billionaires who’s actually very funny to follow on Twitter. But his flippant approach to whether he should be paying tax reveals just how bad we are at reaping in the tax we’re owed.