As the government raises taxes on working people and plans the biggest benefit cut in the history of the welfare state, many are calling for rich people to pay their fair share. A new net wealth tax could redistribute wealth, galvanise public support and generate huge revenues for the government. At the University of Greenwich, we estimate that such a tax on just the top 1% of wealthiest households in the UK could raise £70bn to £130bn a year – more than enough to pay for a high-quality universal care service, the NHS and more.
When it comes to taxation, we often hear the slogan that those with the broadest shoulders should bear the heaviest burden. A net wealth tax on the top 1% turns this slogan into a feasible policy. Net wealth encapsulates someone’s control over economic resources: this combines financial, property, pension and business assets, minus debts. Like a tailor, it measures the size of one’s shoulders in clear mathematical terms. A tax on this combined wealth of the top 1% has the power to generate billions of pounds each year.
With our proposal, wealthier households would face increasing marginal rates, with only the top 1% (ie, those with accumulated wealth of more than £3.4m) paying anything at all. Household wealth between £3.4m and £5.7m would be taxed at 1%; between £5.7m and £18.2m at 5%; and above £18.2m at 10%. For example, this means that a household that owns £4m would only pay £6,000 a year – 1% of the £600,000 they own above the £3.4m cut off. Anyone below the £3.4m mark, would not pay an extra penny.
Wealth taxes are popular because they can raise revenues while tackling inequality. Before the pandemic, the top 1% had more wealth than the bottom 69% of the population. As the number of both billionaires and those using food banks soar, such a large “gap between the rich and the poor” is cited as the main reason the British public supports wealth taxes over any other tax rise. Yet despite the public support and the vast revenues to be made, the mere mention of wealth taxes generates huge criticism.
Won’t rich people just get up and leave? The argument on the face of it seems devastating for any proposed wealth tax. In our hyper-globalised world, money doesn’t just talk, it walks. Rich people already hide their assets abroad, give up British residency or fragment their wealth between family members. Add in a wealth tax and assets will surely fly out of the country. As the saying should go, there are two brutal facts about life: death and tax avoidance by the rich.
But tax avoidance isn’t inevitable – it is a policy choice. Compiling a global wealth registry, properly funding HM Revenue and Customs, and sanctioning financial institutions that allow tax evasion (as the US currently does) will limit the offshoring of assets. To discourage people from simply packing up their bags and flying off to Monaco, a hefty exit tax on vacating wealthy individuals could be imposed – again this is in practice in the US. Even if we assume that enforcement is weak and 50% of the revenues of the new wealth tax is evaded, a tax on the top 1% would still bring in an annual £70bn for the exchequer – five times the revenue from the national insurance rise outlined by the government last week.
The second argument against a wealth tax concerns those who are asset-rich but cash-poor. Whether it involves farms, family businesses or aristocratic estates, there will be many in the top 1% who will argue that they cannot afford to pay a tax because they have no liquid assets. The last time a UK wealth tax was seriously considered by a government, in the 1970s, a campaign led by aristocrats and farmers stoked fears that the tax would lead to a sell-off of Britain’s heritage estates. After more than a million people signed a petition “in defence of the English country house”, the tax was shelved. (A Danish wealth tax was abolished in the 1997 in part due to similar protests from owners of historic castles.)
Using liquidity concerns, wealthy people have often lobbied to exempt particular assets from wealth taxes. However, the graveyards of history are littered with wealth taxes that gave in to such demands. As soon as a heritage site, a family business or a primary residence becomes exempt, the wealthy flock to it to avoid the tax. For example, after Spain exempted business assets from its wealth tax in 1994, the wealthiest 0.01% shiftily increased their portfolio share of business assets from 15% to 77% in just a few years. If one particular area is exempted from a wealth tax, it should come as no surprise that very wealthy people will suddenly, somehow, find a way to move many of their assets into that bracket.
Claims that the top 1% do not have enough to pay should therefore be taken with a pinch of salt. For those who do have real liquidity concerns, households could borrow against their wealth, and the government could even offer lines of credit. People could also be given the option to pay with shares of their assets, which the government could sell on or keep if it wants to protect a particular heritage or environmental asset.
As graduates face 50% marginal tax rates and benefit cuts plunge 500,000 families into poverty, the call for a new progressive wealth tax will become even more popular than it currently is. With the potential to raise £70bn a year – 8% of total tax revenues taken by the government – the financial benefits do add up, while the criticisms of wealth taxes simply don’t.