Variants of the phrase ‘Extreme times call for extreme solutions’ reputedly date back to the era of Hippocrates.
The economic situation the nation finds itself in as a result of measures taken by the Government to fight Covid-19 has raised the prospect that tax solutions which would usually be considered extreme may be required to plug financial holes.
The possibility of a wealth tax has not been seriously examined for almost 50 years but, in Spring 2020, the London School of Economics established a Wealth Tax Commission with that purpose in mind.
The WTC published its final report on the prospect of a wealth tax on 9 December 2020, with the paper subject to a significant level of scrutiny ever since.
In this article we will take a look at what the WTC recommended, as well as clarifying a few items which have been reported as recommendations, but were not; we will touch on the issues with implementing a wealth tax; and we will consider the prospects that a wealth tax sees the light of day.
The Commission’s starting point was that any wealth tax needed to meet four key principles, with each principle formed from research with the general public regarding the priorities around any such tax. The principles were to:
- Raise substantial revenue - given the size of the hole in the public finances.
- Be fair – with this defined as raising more tax from those with a greater ability to pay.
- Be administratively efficient – so the cost of collecting should not be too high.
- Be difficult to avoid and not encourage avoidance.
Before looking at the report’s recommendations it is worth confirming a few points which have been described as recommendations but were in fact not. For example, the WTC did not recommend a specific wealth threshold at which a tax should apply, or the rate of tax which should be used.
The revenue which could be raised using several options was modelled with most attention focused on, but not to the extent of a recommendation, the option of the wealth tax applying on net assets worth more than £500,000.
The tax would be assessed on individuals rather than households, with the rate of tax being 5 per cent - albeit with a standard payment period of five years, so allowing a tax rate of 1 per cent to be paid in each of those five years.
Arguably the key, and most controversial, recommendation of the WTC was that the value of an individual’s main residence (net of any mortgage), their private pensions, and the value of business assets should be considered when working out whether the threshold for liability was crossed.
Based on that model it was estimated that £260bn in tax would be raised. To achieve the same level of revenue from increases to other taxes over five years it was estimated that basic rate income tax would need to increase by 9p, or all income taxes by 6p.