Any attempt by Rachel Reeves to plug the gap in the UK’s public finances through a wealth tax would be “naive”, with very few success stories from other nations, experts have warned.
The chancellor may need to find as much as £30bn in savings through either cutting costs or raising taxes ahead of her Budget, with Keir Starmer’s government under pressure to find ways of raising funds for the public purse.
But leading tax lawyer Dan Neidle, now of Tax Policy Associates, claims a wealth tax would actually have a detrimental effect on the UK’s tax take – and that the government would be “arrogant” to think it would work in this country.
“What’s being proposed is radically different from every other existing wealth tax. Current real world wealth taxes are either full of loopholes so the mega wealthy don’t pay (such as Spain), apply to the middle class (Norway), or both (Switzerland),” Mr Neidle told The Independent.
“The idea that we can do something different is naive. It’s arrogant to think that we in the UK can achieve a holy grail everyone else has been too stupid to find.”
A wealth tax is essentially a way of taxing the total value of an individual’s assets, rather than just their income, Deutsche Bank’s chief UK economist Sanjay Raja explained.
That can be on assets such as property or shares, but also luxury goods, cash, bonds or other valuables.
Mr Raja warned that a wealth tax is not only difficult to implement but also costly and requires close monitoring, including regularly valuing assets.
“From an economics view, the advantage of a wealth tax is that it reflects someone’s long-term ability to pay or contribute to government finances, as opposed to being taxed solely on their income tax,” he told The Independent.
“In theory, the aim would be to reduce economic inequality, since wealth tends to be more concentrated than income.
“In reality, it’s very difficult to implement wealth taxes. Issues around asset valuation on businesses or real estate makes it difficult, complex, and costly to do across an entire country. It requires significant upskilling, infrastructure capacity and personnel to implement effectively and fairly.
“There is also a big problem of liquidity. On paper, some people may be classified as ‘wealthy’ or meet the threshold for a wealth tax – however, in practice, they may lack the cash to pay the tax given illiquidity of some assets.”
When it comes to taxing the wealthy, plenty of nations have taken a similar approach.
There are not, however, too many nations who would say their method has been an unmitigated success.
Stuart Adam, a senior economist at IFS, pointed out that plans in other countries have been ditched along the way, with other changes to taxation offering more realistic and successful long-term outcomes.
“International experience of annual wealth taxes is not encouraging – they have been abandoned in most of the developed countries that previously had them,” Mr Adam said.
“There are strong reasons to radically reform how we currently tax the sources and uses of wealth; this includes reforming capital income taxes in order to properly tax high returns. An annual wealth tax would be a poor substitute for doing that.”
Chris Etherington, private client tax partner at RSM UK, added that people affected by any change in tax rulings could be more likely to simply reallocate assets accordingly – if they could even be properly assigned a taxable value in the first place.
“There are huge practical challenges with introducing a wealth tax, in particular the need to regularly value assets and agree these with HMRC,” he said. “Those affected are likely to change their behaviour and circumstances in response to a wealth tax. It might result in a redistribution of wealth amongst someone’s family, rather than benefitting the wider UK population.
“A number of countries have experimented with wealth taxes over the years, but there are few success stories, and many have repealed them. There are simply easier ways of generating additional tax receipts.”
Mr Neidle explained the process wealthy individuals would take in determining whether the approach being considered for the UK would be prohibitive for them – and why the idea of the super rich fleeing the UK is not exactly what it seems.
Generally speaking, it’s accepted that investors may look to achieve long-term average returns of eight per cent or so.
While that may differ wildly between different types of investment, it gives a starting point for working out how much a tax may impact when it’s on more than just income.
“A 2 per cent wealth tax doesn’t sound like much, but for someone earning an 8 per cent return on their assets, that plus existing dividend tax creates an effective rate of 60 per cent – and on a year when assets decline, an effective rate of over 100 per cent,” Mr Neidle explained.
“That creates an incentive to avoid the tax out of all proportion.
“The tax would apply to just a few thousand people but these are some of the most mobile people in the world. Often they live in several countries, spending a few months a year in each. Asking whether they will ‘leave’ the UK is the wrong question; it’s whether they spend a bit less time in the UK and become non-resident.”
The final argument may, perhaps, come down to whether such a move to bring in a wealth tax – or any other type of tax – raises more money, or sees more money leave the country.
One report by the Centre for Economics and Business Research think tank estimated that if more than 25 per cent of non-doms departed the UK, the overall change would be a net cost to the Treasury.
In terms of what has been seen elsewhere already, the answer is clear, insisted Mr Neidle.
“Conventional wealth taxes have been estimated to retard an economy by 1 per cent. The uber-wealth taxes being proposed would be more dramatic still,” he said.
“The wealth tax is the ultimate in the fantasy view we can get something for nothing, tax other pdaneople and raise lots of money with no consequence. There are always trade-offs, and the downsides of the wealth tax are particularly severe.”
