Wealth inequality in the UK is extreme. Between 2016 and 2018 the wealth of the richest 10% in the UK increased at 4 times the rate of the poorest 10% in the UK, and the UK’s 6 richest people have more wealth than the 13 million least wealthy Britons. This, alongside the need for increased tax revenue in order to fund the fiscal stimulus being pursued by the government has led some politicians to call for a direct tax on wealth in the UK. Is this a good idea? Could it be implemented effectively in practice?
The first thing to note is that there is broad public support in the UK for a wealth tax. A recent YouGov poll found that 61% of Britons support a tax on wealth above £750,000 (excluding main home and pensions), and a poll last year found that 51% believe that no one deserves to have a billion pounds in personal wealth under any circumstances. The appetite for government intervention to reduce the extreme wealth inequality that exists in the UK is there.
However, the levying of a wealth tax is not necessarily as easy in practice as it may appear in theory. There are two core difficulties in the implementation of such a tax:
Firstly, wealth is more difficult to value than income. How are ‘priceless’ artifacts valued in order to be taxed for example. The reality is that the solution to this is not simple and brings about sizable administrative costs. Art and other ‘priceless’ artefacts could be valued by a panel of experts similar to the Art Advisory Panel (AAP) used by the Internal Revenue Service (IRS) in the United States. HMRC already has methods to determine the market value of assets for the collection of capital gains tax, so it is certainly not inconceivable that the net wealth of an individual could be determined with a reasonable degree of accuracy.
The second difficulty is the issue of tax avoidance. This can be addressed by having a wealth tax that minimises exemptions. The more exemptions there are, the easier it becomes for the ultra-wealthy to find loopholes and exploit them to minimise the amount of tax they have to pay. Also, if there are a large number of exemptions, then the tax becomes complicated and much more expensive to administer. With regards to personal wealth being underreported by individuals, there is no reason why this cannot be investigated by specialists at HMRC just like any other kind of tax evasion.
The issue of tax avoidance is not confined only to wealth taxes, as the Panama Papers and Paradise Papers exposed widespread avoidance of income taxes. The almost non-existent policy response to these revelations should not be used as evidence that tax avoidance is impossible to stop. Increasing international cooperation and the sharing of information regarding an individual’s financial interests between tax jurisdictions is one of a number of policies that could be implemented to reduce tax avoidance across the board, including that of a wealth tax. Ultimately, the enforcement of a wealth tax and the prevention of avoidance comes down to political will, and is certainly not an impossible feat.
Instances of wealth taxes around the world have been seen to raise revenue for governments. In Norway, the tax on net wealth constituted 1.1% of total tax revenue in 2017, which is around 14 billion Norwegian Krone (£1.2 billion). Also, Bernie Sander’s 2019 proposal for a tax on net wealth starting at $32 million for a married couple (with the lowest marginal rate being 1% and then progressively increasing to 8% for wealth over $10 billion) was estimated to raise $4.35 trillion (£3.46 trillion) over a ten year period.
Even aside from the revenue-raising potential of a tax on extreme wealth, reduction of wealth inequality is an inherent good. In political systems across the world, including the UK, wealth breeds political power and influence which is manifested through funding of political campaigns for instance. The existence of an incredibly wealthy elite acts as a barrier to democracy in the sense that changes to the status quo which are popular with the population as a whole (such as a wealth tax) are prevented from being implemented due to fear of the response from the super-rich. If the government is reluctant to implement a tax on extreme wealth out of fear that the ultra-wealthy will evade it or leave the country, then they have accumulated too much political power. The value of democracy in this country is eroded by the existence of extreme wealth inequality, so in addition to its revenue raising possibilities, a wealth tax is a mechanism by which greater equality of political power can be brought about.
Ultimately, the implementation of a wealth tax may have administrative challenges with regards to the measurement of wealth and preventing evasion, but it is a necessary step to reduce wealth inequality in the UK which is a dangerous threat to political stability and the democratic process.