Whatever form Brexit takes, and whatever the results of the next general election, significant changes to the UK tax system seem inevitable. Clearly, as we highlighted recently, more resources would help HMRC go a long way towards collecting the £14bn lost every year to tax evasion, the hidden economy and criminal attacks. There is no reasonable argument for levying large amounts of new taxes on honest and law-abiding taxpayers when so much is lost to tax crime in one way or another.
If more tax has to be raised, any Chancellor intent on increasing top rates of income tax will only be able to go so far. Beyond a certain point, higher income-tax rates become self-defeating for the broader economy. In earlier tax briefs, we've looked at the scope for reforming inheritance tax and for introducing a land value tax. What else might a cash-strapped Chancellor do?
One of the first rules of politics is never to commit to introducing a new tax until you are in power, but that hasn't deterred representatives of the Conservatives, Labour and the LibDems from voicing opinions which implicitly or explicitly support a wealth tax. With ONS data suggesting that wealth inequality in the UK is twice as bad as income equality, the case for a wealth tax has popular appeal. The electoral implications of this may explain why many parties are now quietly taking soundings on some form of wealth tax.
This latest ONS graph summarises wealth distribution in the UK:
Two things are immediately apparent. First, the huge disparity between the top and bottom deciles. Second, while the debate about a wealth tax often centres on property wealth, the largest asset class of the wealthiest in the UK is private pension wealth.
‘Not another pensions tax raid’, I hear you say. Perhaps. Perhaps not. But the wealth inequality itself will be sufficient incentive for any party in power, or a coalition, to take a long, hard look at introducing a wealth tax. And when it comes to designing the wealth tax this graph suggests that it might focus on total wealth, or on property and private pension wealth. These are easy targets for the taxman as they're quite easy to track down.
Beyond that, designing and implementing a new wealth tax will be fraught with difficulties. Who should pay? On what assets? What exemptions should be available? What rates of tax should apply? If the new tax includes property wealth, would it replace council tax? And how often will the wealth tax be payable?
History reminds us that in 1974 a Labour government took office in the UK with a commitment to introducing an annual wealth tax. After much deliberation that commitment was abandoned in November 1976. So will any party’s commitment to a wealth tax now be like déjà vu, all over again? Or is this an idea whose time might have come? We will know soon enough.