Taxing the rich?

Robin Williamson MBE CTA (Fellow)

July 29, 2020

In this article I consider what options the government has for using tax reform to help restore the public finances following the coronavirus pandemic, in particular in relation to the taxation of wealth. With declining GDP and tax revenues and soaring public sector debt, it is more than likely that tax rises will play a major role in filling the resulting gap, assuming that the public will not tolerate a return to the austerity of the past decade.

It is often observed that, in comparison with earnings, wealth is inadequately taxed in the UK. Total household wealth in the UK is estimated by the Office for National Statistics at £14.6 trillion in the period April 2016 to March 2018, while the two main wealth taxes in force at present, inheritance tax and capital gains tax, raise £5.2 billion and £8.8 billion respectively, a tiny percentage of the potential tax base. A government with a substantial majority is in a good position to make radical changes if it wants to; and as the economy slowly emerges from the crisis brought on by the coronavirus pandemic, there is growing curiosity about what the longer-term intentions of the Chancellor of the Exchequer might be in relation to tax reform.

As if on cue, the House of Commons Treasury Select Committee has begun an inquiry into tax after coronavirus which will look, among other things, at the scope for tax reform, including “what is the right balance between taxation of work, savings/pensions and wealth?”

Capital gains tax

Within government, the Chancellor has asked the Office of Tax Simplification to undertake a review of capital gains tax and the taxation of chargeable gains in relation to individuals and smaller businesses. The third paragraph of the Chancellor’s short letter appears to give the OTS free rein to be radical in its thinking:

“This review should identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent. In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”

The OTS includes in its call for evidence a series of questions about how rates, thresholds, exemptions and reliefs might be made simpler or clearer. Much has already been written about the possibility that the review might be a trigger for CGT rates to be increased or reliefs, particularly the private residence relief, to be curtailed. After all, the Chancellor has already shown an appetite for reform in cutting back entrepreneurs’ relief in March, after finding that it had a limited impact on behaviour, with three-quarters of the cost of £2 billion a year benefiting only 5,000 individuals.   

Wealth tax

The former head of the civil service, Lord Gus O’Donnell, observed in a recent IFS seminar that while tax reform is never easy, we shall need to raise a lot more revenue in the aftermath of a pandemic the economic effects of which have been particularly harsh on the young, women, and those on low incomes.

For several decades there has been a gradual increase in the concentration of wealth in the top percentiles, while the freezing of working age benefits has caused a fall in household incomes at the lower end of the scale, resulting in greater inequality. One of the main arguments in favour of a wealth tax (or at least more tax on wealth) is general fairness. As my friend and colleague Sam Mitha CBE presciently stated in a recent article:

“We need an annual wealth tax to mitigate the economic, social and political risks posed by wealth inequality in Britain today. The distribution of wealth in Britain has become glaringly unequal. The wealthiest 10% of the population own nearly half the nation’s wealth. If the misdistribution of wealth is left unchecked, it could breed social resentment and lead to political instability.”

A point sometimes raised against such a tax is the flight risk – that those subject to the tax will find it easy to change their residence – but tax is only one of the reasons why people choose to live where they do. Switzerland is one of only three European countries that still operates a wealth tax, and there is no sign of rich people deserting Switzerland – quite the reverse.

A more powerful argument is that raised by Denis Healey, who when Chancellor of the Exchequer in the 1970s first proposed, then abandoned, such a tax:

“In five years I found it impossible to draft [a wealth tax] which would yield enough revenue to be worth the administrative cost and political hassle.”

Whether that would still hold good in today’s very different environment is something that will doubtless occupy the time and expertise of a project team, funded by the LSE and the University of Warwick, dedicated to considering and reporting on whether the UK should now have a wealth tax.

Tax reliefs

Another, and perhaps more immediately feasible, option for raising revenue would be to examine the place of various tax reliefs – what was their policy objective and do they still fulfil it? Is taxpayer money being spent on reliefs for a few that have long since outlived their usefulness?

Again, as if on cue, the House of Commons Public Accounts Committee (PAC) has just published a report entitled Management of Tax Reliefs which focuses on the £117 billion spent annually on the ten largest tax reliefs. Pension tax relief costs £38 billion a year (by way of comparison, public sector net borrowing for May 2020 is £100 billion) and the Committee observes that “the Government has not made any assessment of whether that huge cost encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more.”

On a lesser but still significant scale, VAT relief on new dwellings costs £15 billion, of which how much is spent on luxury properties and how much on affordable homes is not known. R&D reliefs cost £2 billion in 2017/18 as against a £1 billion forecast when first introduced; part at least of the increase is due to what the PAC sees as abuse of the relief by companies with a minimal UK presence. The clear message from the PAC is that government might find scope for substantial savings if only it better understood what tax reliefs were actually being used for, and monitored them more carefully.

Conclusion

If tax is to play a major part in getting the public finances back on their feet, reform of capital gains tax and direct taxation of accumulated household wealth could yield some extra revenue in time. But a more immediate and possibly more lucrative means of raising more tax now might well be for the Government to heed the advice of the PAC and take a close, and clinical, look at how much of the UK’s tax reliefs really serve the purpose they were originally intended to, and how much of that revenue forgone could be put to better use.


Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018 and a part-time senior policy adviser at the Office of Tax Simplification from 2018 to 2019.