Some form of Wealth Tax inevitable given economic black hole and manifesto commitment on income tax

21.12.2020
Natalie Miller
COVID-19, News, Tax

With a huge hole in the public finances caused by the Covid pandemic, and a manifesto promise not to raise income taxes, some form of wealth tax looks increasingly inevitable, says Natalie Miller .

It looks increasingly likely that a tax on wealth is coming – and if proposals published last week are adopted, it won’t just be the super-rich who end up paying.  With the black hole in the public finances caused by Covid, it seems likely that the middle classes – especially those with money tied up in property and pensions – could be in the Chancellor’s crosshairs. 

With an election won just 12 months ago on a manifesto not to raise income tax, national insurance or VAT for the lifetime of the current Parliament, Rishi Sunak’s options are extremely limited when it comes to finding a way to pay back the huge sums spent supporting the economy in 2020. 

Last week The Wealth Tax Commission – a body set up by academics at the London School of Economics and Warwick University – proposed a five-year long Wealth Tax of one per cent a year on all individual wealth over £500,000.  This may sound a lot – but with rising property prices, even in east Anglia there are many who will fall into this category. 

The proposal is made even more worrying for middle income Britain because it also suggests that pension pots and share holdings should be taken into account when calculating personal wealth.

The tax would be payable on the surplus over £500,000 after taking into account mortgages and other debts, and splitting the value of couples’ shared assets.  You wouldn’t have to sell assets to raise the payment, but it would still be due, with deferred payments, borrowing or taking lump sum payments from pension pots all options. 

The attractions of such a tax raid are obvious.  The Wealth Tax Commission calculates that it would raise £260 billion over five years (broadly equivalent to raising all income tax rates by 6p).  It would also be easy to collect and difficult to avoid - it’s not so easy to move your house to an offshore tax haven.  That said, the French experience is that wealth taxes tend to result in more mobile capital moving quickly abroad. 

Of course, this isn’t the first time a Wealth Tax has been mooted. It was considered by the Labour government in the 1970s, and the so-called ‘mansion tax’ was pushed by the Lib Dems in coalition and adopted by Labour in opposition.

A wealth tax might be considered anathema to a Conservative government, but these are far from ordinary times.  The coronavirus crisis has largely seen the traditional economic rulebook torn up, and with his hands tied by that manifesto commitment not to raise income taxes, the Chancellor’s options are limited. 

Any tax on wealth may not end up looking exactly like the Wealth Tax Commission’s proposals – but it’s difficult to see how else Rishi Sunak is going to raise enough cash to fill that economic hole, so some form of raid on accumulated wealth does seem inevitable.

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