How Would a Wealth Tax Work in the United Kingdom?

Politics and Economics

Photograph: FT Chiu

A wealth tax is imposed on the market value of a taxpayer’s assets which may include cash, bank deposits, shares, personal cars, and real property etc. Amongst OECD (Organisation for Economic Co-operation and Development) nations, only France, Spain, and a few others still tax wealth. Wealth taxes are usually aimed to reduce inequality present in society, but how exactly do they work?

Since wealth taxes are based on how much wealth an individual owns, and it is easier for high-income earners to accumulate wealth, wealth taxes can be seen as accurately capturing a taxpayer's ability to pay, with the exception of retirees who are out of work but possess a great deal of savings and/or assets. The additional tax revenue earned by the government could then be used to support low-income families, either through increasing benefits and reducing the rate of regressive taxes (like VAT) or by investing directly in deprived areas, improving public services like transport and schools. Both approaches will increase the incomes of low-income families, however the former method is more effective in the short-term and the latter is more likely to improve the competitiveness of a worker in the long run.

Although wealth taxes seem to help close the inequality gap, the practicality of collecting a wealth tax has not been considered yet. One major issue that arises from a wealth tax is tax evasion (concealing income information which is illegal) and tax avoidance (legally exploiting the system to reduce the amount of tax paid). A few common ways of avoiding taxes include investing into a pension scheme or claiming capital allowances on things used for business purposes. On top of that, a bigger impact may be caused by heavy taxpayers moving out of the country. Previously, they were taxed heavily by income and council taxes. But if they leave the country, large portions of tax revenue may be lost that the newly implemented wealth tax might not recover. It is estimated that about 7% to 17% of the initial tax base would be lost due to these responses. Consequently, these issues significantly hinder the effectiveness of a wealth tax in redistributing wealth.

Conversely, there are always solutions to problems, in the case of a wealth tax, this is a one-off wealth tax rather than a traditional annual tax system like most of the current progressive taxes. How does a one-off tax compare to an annual tax? First of all, since a one-off wealth tax is based on wealth at one point of time, it saves the huge administrative cost of the government in assessing the value of assets annually which effectively increases the tax revenue collected. Furthermore, as a one-off wealth tax can be implemented quite swiftly, it is likely that it can minimise the problems of tax evasion and tax avoidance by assessing the wealth of the individual before announcing the policy. It is estimated that this alternative method of taxing wealth could raise roughly £260 billion when wealth is taxed above £500,000 at 1%, equivalent to raising VAT by 6% or corporate tax by 5%. As these are long-term taxes, they are likely to reduce the incentive of consumers and firms to consume and invest in the UK, implying a one-off tax is a better system for raising an equal amount of revenue for capital redistribution.

With all things considered, since the traditional way of taxing (an annual wealth tax) has shown to have a limited effect in redistributing wealth due to reasons discussed, it seems most likely that a wealth tax in the UK would have to be a one-off payment that retains the aim of narrowing the nation-wide inequality gap, but more effectively raises revenue without excessive administrative costs and high risks of tax avoidance and evasion.