In a fairly blatant attempt to placate the Lib Dem faithful before conference season, Nick Clegg floated (again) the idea of a wealth tax. Some Tories seem to think the idea has merit. It doesn't, it raises almost no money and would be a nightmare to administer.
Before I get on to my own objections, let's just look at two justifications put forward by its advocates:
1. Clegg's: to prevent social unrest. Really? Are the British people so violent that they would riot in the streets in protest at John Terry's wealth? And if they are, would they be placated by a 1% tax on large houses?
2. Some Tories': to shift the tax burden away from income and towards wealth, encouraging the aspirational. Ok, well, in order for this to enable a decrease in the income tax burden, the wealth tax would have to be substantial. The equivalent taxes in France raise a few billion Euros a year. You'd need at least a tenfold increase to make any impact on the £250billion in Income Tax and National Insurance* the government collects each year. Moreover, the aspirational middle classes are unlikely to distinguish between an income tax this year and a wealth tax next year, particularly given the latter continues after you've retired.
So what's the real problem with a wealth tax? Put simply, it would be incredibly expensive to administer. Astronomically so. Although, the Guardian naively believes it would be really simple:
The mechanism for collecting the tax could be straightforward though – higher rate taxpayers already file an annual tax return relating to their income, and pages could simply be added for a wealth statement. However, income tax is collected a year in arrears – if you were to try and do the same for wealth, you would be asking in January 2013 about assets held in 2011/12. People would need notice that they needed to keep the paperwork.**
This is nonsense. Most people have no idea what their net worth is. Why? Because unless it's cash held in a bank account, wealth doesn't really exist as a number. It's an estimate of the cash you would have if you sold everything. Why is that a problem? Because estimates are judgement calls and judgement calls can be argued about. Armies of tax accountants would make huge amounts of money arguing that assets were worth less than they at first appear. There would be huge incentives to invest in assets with opaque values. A new market in complex financial products would develop that returned income but appeared to have no taxable value would spring up (and that's definitely a route we want to go down). Worse still, many people would seek to hide assets altogether. The divorce courts already struggle to pin down the true net worth of rich individuals. Imagine doing that for everyone.
Here are just a few of the questions any substantial wealth tax would have to grapple with:
I’m sure there are many, many more issues thrown up by the vast complexities of everyone's finances. The
answers to the questions above are not trivial or easy to apply universally. It
would require an enormous government bureaucracy to manage that would
consistently be challenged in the courts. As a result, the system would be a nightmare to deal with and phenomenally expensive, rendering it a hugely inefficient way for the government to raise revenue.
Sources:
* HMRC: http://www.hmrc.gov.uk/stats/tax_receipts/tax-receipts-and-taxpayers.pdf
** The Guardian, 29 August: http://www.guardian.co.uk/money/2012/aug/29/clegg-emergency-wealth-tax?newsfeed=true
Before I get on to my own objections, let's just look at two justifications put forward by its advocates:
1. Clegg's: to prevent social unrest. Really? Are the British people so violent that they would riot in the streets in protest at John Terry's wealth? And if they are, would they be placated by a 1% tax on large houses?
2. Some Tories': to shift the tax burden away from income and towards wealth, encouraging the aspirational. Ok, well, in order for this to enable a decrease in the income tax burden, the wealth tax would have to be substantial. The equivalent taxes in France raise a few billion Euros a year. You'd need at least a tenfold increase to make any impact on the £250billion in Income Tax and National Insurance* the government collects each year. Moreover, the aspirational middle classes are unlikely to distinguish between an income tax this year and a wealth tax next year, particularly given the latter continues after you've retired.
So what's the real problem with a wealth tax? Put simply, it would be incredibly expensive to administer. Astronomically so. Although, the Guardian naively believes it would be really simple:
The mechanism for collecting the tax could be straightforward though – higher rate taxpayers already file an annual tax return relating to their income, and pages could simply be added for a wealth statement. However, income tax is collected a year in arrears – if you were to try and do the same for wealth, you would be asking in January 2013 about assets held in 2011/12. People would need notice that they needed to keep the paperwork.**
This is nonsense. Most people have no idea what their net worth is. Why? Because unless it's cash held in a bank account, wealth doesn't really exist as a number. It's an estimate of the cash you would have if you sold everything. Why is that a problem? Because estimates are judgement calls and judgement calls can be argued about. Armies of tax accountants would make huge amounts of money arguing that assets were worth less than they at first appear. There would be huge incentives to invest in assets with opaque values. A new market in complex financial products would develop that returned income but appeared to have no taxable value would spring up (and that's definitely a route we want to go down). Worse still, many people would seek to hide assets altogether. The divorce courts already struggle to pin down the true net worth of rich individuals. Imagine doing that for everyone.
Here are just a few of the questions any substantial wealth tax would have to grapple with:
- How do you value complex financial products? Particularly, how do you value hedging instruments, derivatives and other assets whose value is based on future events?
- How do you distinguish between houses that require repair and houses that don’t? Bear in mind that many buyers of high end houses intend to make substantial changes anyway, so it isn’t clear value is added by making repairs.
- How do you deal with deliberate actions that decrease asset values (e.g. bricking up windows, burning down unwanted outbuildings etc)? Where people have valuable property they use but don’t intend to sell, they may well take action to decrease the value of elements they don’t care about.
- How do you deal with unnoticed issues? I’ve just discovered my house has subsidence. This massively decreases its value but it also means all previous values were wildly optimistic. Can I have my tax back please?
- How do you value debt, and which types of debt do you include?
- How do you value shareholdings in unlisted companies? Do you add a premium for having control of those companies? Which valuation method do you use? If you use earnings, what multiple do you use?
- How do you value intangible assets?
- How do you account for depreciation?
- How do you value (or even identify) offshore assets?
- Do you include the costs of realising the value of an asset in calculating someone’s wealth? If so, how do you estimate these?
- How do you value assets held in bank vaults? Come to think of it, how do you make sure people aren’t stashing cash under the bed or in their basement?
There is one more issue I'd like to point out. When taxing wealth, you will very rarely be taxing a number
in a bank account. The vast majority of this tax will be raised on non
financial assets. As a result, you need a way to assess the values of said non
financial assets. This will almost always be done with reference to market
prices. The value of my house will be based on the selling prices of other,
similar houses in the same area. The problem with this is, I don’t control
those prices. The price of those houses is decided by an
agreement between two people I have no influence over or contact with. And yet, that price will decide the value the government puts on my house and therefore the tax I owe. As a result,
my tax burden is decided by an agreement between two people that is totally disassociated
from me. If the seller negotiates a particularly high price, good on them but I’m
screwed. Similarly, if the seller is desperate to offload said house, I end up
a winner.
I don’t know about you, but I have a massive problem with
that setup. It does not seem right, that someone's tax burden should be decided
by something completely out of their control. In all other areas of tax, I have
some level of control over it. I can choose not to accept a pay rise, or to spend
all my money on Jaffa Cakes and children’s clothing.
At the point where I am taxed based on the
actions of others in this way, the tax system ceases to be anything other
than the state taking money from me because it feels like it. I don’t like
that.
I'm sure proposing a wealth tax seems like really good politics to Nick Clegg. To the rest of us, though, it should just be a really, really bad idea.
Sources:
* HMRC: http://www.hmrc.gov.uk/stats/tax_receipts/tax-receipts-and-taxpayers.pdf
** The Guardian, 29 August: http://www.guardian.co.uk/money/2012/aug/29/clegg-emergency-wealth-tax?newsfeed=true
