Wealth tax academic paper

[dealtn]

The taxman might have to wait rather longer than when the house was sold if such a person had gone into care as I think the Care Home or Local
Authority would have first claim on the proceeds, don't you? And I daresay that might mean the taxman would, like the heirs, get nothing since the govt. has done nothing so far as I am aware to spread the cost of care home fees more fairly. Wealth of £500k could disappear rapidly if you had to fund all your care for a long time because you had the bad luck to have a long illness before dying rather than snuff it instantly due to a heart attack or other quick demise.

Why would a care home/Local Authority have a "first claim" over a charge on the property, similar to a bank mortgage? Is that actually the case?

[scrumpyjack]

I see two of the dictionary definitions of 'Academic' are

3. Having little practical use or value, as by being overly detailed, unengaging, or theoretical: dismissed the article as a dry, academic exercise.
4. Having no important consequence or relevancy: The debate about who is to blame has become academic because the business has left town.

These both seem to apply in the case of this paper?

[Bouleversee]

The taxman might have to wait rather longer than when the house was sold if such a person had gone into care as I think the Care Home or Local
Authority would have first claim on the proceeds, don't you? And I daresay that might mean the taxman would, like the heirs, get nothing since the govt. has done nothing so far as I am aware to spread the cost of care home fees more fairly. Wealth of £500k could disappear rapidly if you had to fund all your care for a long time because you had the bad luck to have a long illness before dying rather than snuff it instantly due to a heart attack or other quick demise.

Why would a care home/Local Authority have a "first claim" over a charge on the property, similar to a bank mortgage? Is that actually the case?

I don't know all the details but if someone is in a Care Home and has insufficient income or runs out of money to pay the fees, a charge is placed on the house until sold. I gather this happened in my late sister-in-law's case and it was the Local Authority who had it in that case. However, maybe HMRC would take priority over that. The only thing I am sure of is that by then the individual is no longer wealthy and even without a wealth tax, care fees for a long number of years, particularly if both spouses are in care, can wipe out an estate. My parents were considered quite wealthy (no university grants for us and they were the only ones in the care home paying for their care (at a higher rate than the local authority was paying for the others) but in the end left very little indeed. It preyed on my father's mind that he might run out of money for the fees and didn't seem to understand that the Council would then pick up the bill. Their house had been sold when they went into the first of many homes.

I think there would be so many complications arising from a wealth tax that it might cost an awful lot to assess it in the first place (who would bear that cost?) and HMRC might have to wait such a long time for much of it that it would not solve immediate problems. I'd like to think that any government would have more sense than to introduce it and will find a better/quicker way to recoup the deficit. Pent-up spending once the pandemic is over will bring in a large sum immediately without even raising VAT. Pretty well everything in my house and garden needs renewing/redecorating and I might even take a holiday or two for the first time for about 10 years, which will reduce my personal wealth quite a bit.

[Lootman]

Having now watched about half of the presentation cited above, I can already see several holes in their arguments. Just three examples:

1) They claim that the wealth tax can simply be "deferred" if you are asset-rich but cash-poor. But in such a case there is no revenue now, which is surely the point of a tax that targets the alleged Covid deficit? And such a deferral gives the taxpayer many years to liquidate and finesse.

Not having watched the presentation, but having skimmed most of the paper and read in detail the bits I was particularly interested in (which incidentally I usually find to be a much quicker and more informative way of learning about proposals than watching presentations), I think they're only proposing deferring payment of the tax, not assessment of it. E.g. elderly people living in a £1m house but with only just enough income to live in it (including paying the council tax on it) would still have wealth tax of £25k+ assessed on it plus the value of their other assets (assuming a £500k threshold and 5% rate), and that assessment would not be altered by what they subsequently did, but paying that wealth tax could be deferred until the house was sold, by making it a charge on the house. That doesn't give any more time to "liquidate and finesse" - but there are of course potential problems with it if the asset concerned somehow has its value destroyed while the tax is still being deferred...

And as regards the point of a tax which targets the Covid deficit, if no revenue now in some cases were a fatal flaw in a proposed tax, no tax would ever get off the drawing board - there will always be some cases of people who are supposed to pay the tax, but don't and instead remove themselves and their assets from HMRC's reach before HMRC realise what is happening. And given the low level of current interest rates and the size of the Covid deficit, deferred payment is likely to be a lot better than no payment at all, and not all that much worse than payment now.

Actually I missed the part (perhaps it was in the document but not in the half of the presentation I watched) where it was stated that HMRC would take a charge against your home for the assessed taxes in those cases where it must be deferred. I did see a reference to deferral until the taxpayer was drawing his pension for those cases where the "wealth" being taxed is a pension, which makes sense I suppose. And there was talk of a deferral until a later time in other "asset rich; cash poor" cases. So I had assumed that the deferred tax due was annotated as a tax debt, but not that charges were placed against assets which, more generally, only happens when a tax payer is delinquent rather than merely deferring the tax by mutual consent.

So if you are correct about the idea of putting some kind of lien or charge against a home then, yes, it would be harder for a taxpayer to avoid the eventual tax. But there are still problems, one being the care home issue raised by others, where the central government and local government might be squabbling over the same asset. Another being any mortgage outstanding on the property.

And of course a person whose equity in their home is potentially reduced or even obliterated by mortgages and liens might be less motivated to care for maintenance and other things that preserve and enhance its value. They might even in that case decide it is not worth paying for adequate insurance, unless the government forced them to in the way that mortgage lenders do.

I don't really need any more evidence for that than the fact that they seem to believe a government could spring such a wealth tax on the population without word that they were planning such a move leaking widely, especially among the wealthy.

Agreed, but what I have seen attempted is that a tax change is made retrospective to the date it was first introduced.

So for instance a government announces a tax rise on January 1st that becomes law on March 1st. The higher tax rate is backdated to January 1st, the argument being that that is when people knew about it or should have done.

PS: Although this will not happen during the term of this government, it is useful to study ideas like this, as it gives one an idea of how a wealth tax might happen in the future. It can help us to plan how to mitigate its potential impact much like it was interesting to see Corbyn's taxation plans in his manifesto of a year ago. Keep your enemies close.

[JohnB]

I see two of the dictionary definitions of 'Academic' are

3. Having little practical use or value, as by being overly detailed, unengaging, or theoretical: dismissed the article as a dry, academic exercise.
4. Having no important consequence or relevancy: The debate about who is to blame has become academic because the business has left town.

These both seem to apply in the case of this paper?

If we are being sarky, I note that words change meaning over time, and "conservative" seems to currently mean foolish, spendthrift and irresponsible. I put academic in the thread title to emphasise it was a proposal not currently adopted by a particular party. Indeed its focus on a one-off Covid tax would mean it would not really be relevant to the Labour party, as any changes they might wish to make to taxation could be in a very different economic landscape.

[Lootman]

I put academic in the thread title to emphasise it was a proposal not currently adopted by a particular party. Indeed its focus on a one-off Covid tax would mean it would not really be relevant to the Labour party, as any changes they might wish to make to taxation could be in a very different economic landscape.

The academics put a lot of emphasis on this being one-off. They mention that over and over again, using "one-off wealth tax" as the name throughout the document. They clearly see that as being a very important aspect and justification since it gets around a lot of the criticisms that might otherwise be made against it.

But of course there is nothing in their proposal that mandates that it is one-off and will end after 5 years. And there is nothing that could be put in the legislation that would prevent it being extended or repeated, because Parliament can always just change the law.

The authors make a big deal at one point of saying that this is a unique time because it is the largest GDP drop in 300 years. (I have no idea if that is true or not). But you only have to go back a few decades to see various wars, depressions, financial crises and other events that also had a profound impact on the country's finances. The idea that a wealth tax like this will not happen again in another 300 years, or even 50 years, is quite impossible to legislate for, unless it was somehow enshrined into (what passes for) the UK constitution in the way that the US constitution does not allow a tax on wealth. "Just this one time and I'll never do it again ever, honest" is not persuasive at all. Indeed, come the next crisis someone might say: "Let's have another one-off wealth tax because the last one worked so well".

I would be more comfortable with, say, a 0.1% annual wealth tax that is indefinite, rather than using "one off" as a justification for a much higher rate. It is quite obvious from the tone and content of what is in the report, that these academics are in love with higher taxes in general. You can almost see the glee in their hearts as they discuss how this would work. They give themselves away by their choice of phrasing again and again.

[scrumpyjack]

Well I'm pretty sure WW1 and WW2 had a much greater impact on the country's finances than Covid.

It is extremely inefficient to set up all the new administration and procedures required for a new tax such as this, only for it to be a one off.

IF, and it is quite a big IF, a large sudden increase in tax is needed, then as Lootman suggested increasing VAT to 25% for a few years would be far more efficient and effective. As most basics are either free of VAT or at a lower rate, it would fall more heavily on the better off but everyone would be paying something and the procedures and rules are already well established and not easily evaded.

But if Covid is a once in 100 years event, then it does not need a one off tax. It needs to be recovered over many decades by a modest increase in tax and by the usual route of inflation slowing devaluing the national debt and GDP growth reducing its relative size, as has always been done in the past.

So the basic premise of this proposal is IMO fundamentally flawed.

[GrahamPlatt]

"thousands of health staff set to refuse Covid vaccine"

More like "thousands of health staff set to be denied Covid vaccine" - being in the front line they were initially intended to be first IN line, but once again HMG has moved the posts.

What a mess it all is.

Quite

Anyway, back to topic. As to this being a one-off tax, I don't buy it. It's a case of proof-of-concept, thin end of the wedge and all that. If once established, it will continue. May be a one-off 5%, but then continue with 0.1-1% annually. Any fresh black swans and up it goes again.

[Gengulphus]

Having now watched about half of the presentation cited above, I can already see several holes in their arguments. Just three examples:

1) They claim that the wealth tax can simply be "deferred" if you are asset-rich but cash-poor. But in such a case there is no revenue now, which is surely the point of a tax that targets the alleged Covid deficit? And such a deferral gives the taxpayer many years to liquidate and finesse.

Not having watched the presentation, but having skimmed most of the paper and read in detail the bits I was particularly interested in (which incidentally I usually find to be a much quicker and more informative way of learning about proposals than watching presentations), I think they're only proposing deferring payment of the tax, not assessment of it. E.g. elderly people living in a £1m house but with only just enough income to live in it (including paying the council tax on it) would still have wealth tax of £25k+ assessed on it plus the value of their other assets (assuming a £500k threshold and 5% rate), and that assessment would not be altered by what they subsequently did, but paying that wealth tax could be deferred until the house was sold, by making it a charge on the house. That doesn't give any more time to "liquidate and finesse" - but there are of course potential problems with it if the asset concerned somehow has its value destroyed while the tax is still being deferred...
...

Actually I missed the part (perhaps it was in the document but not in the half of the presentation I watched) where it was stated that HMRC would take a charge against your home for the assessed taxes in those cases where it must be deferred. I did see a reference to deferral until the taxpayer was drawing his pension for those cases where the "wealth" being taxed is a pension, which makes sense I suppose. And there was talk of a deferral until a later time in other "asset rich; cash poor" cases. So I had assumed that the deferred tax due was annotated as a tax debt, but not that charges were placed against assets which, more generally, only happens when a tax payer is delinquent rather than merely deferring the tax by mutual consent.

I don't think they actually made a specific proposal that a charge would be taken against one's home - they left a lot of the details of how their Statutory Deferral Scheme would operate to be filled in. So the details of the example were mine - sorry not to have made that clearer. But the way that their minds are working seems pretty clear in the case of pensions - allow deferral until the taxpayer has access to the funds, and then collect it as automatically as possible, and charges on houses are the standard mechanism to collect payment automatically when a house is sold, so I don't think it's an unreasonable assumption on my part that they might be thinking of doing that. And while it would IMHO be unreasonable for a government to take up this idea, that won't necessarily prevent it doing so, and I don't think it at all unreasonable to assume that if a government were to do so, they would at least think of using a charge on the house to increase their certainty of collecting of the wealth tax due.

Also, they do mention the possibility for the asset-rich-but-income-poor of borrowing against the asset to pay the tax. In the case of a house, that would mean taking out a mortgage on the house - so at least when that's done (it won't always be desirable or even possible), they are thinking of a charge being taken against the house, it's just that the government has effectively outsourced the taking of the charge!

So if you are correct about the idea of putting some kind of lien or charge against a home then, yes, it would be harder for a taxpayer to avoid the eventual tax. But there are still problems, one being the care home issue raised by others, where the central government and local government might be squabbling over the same asset. Another being any mortgage outstanding on the property.

Agreed that there are still those problems - though they will tend to be alleviated by the netting-off of debt in their wealth calculation: if there are already large charges against the house, then for there to be wealth tax due at all, there need to be substantial other assets as well, making it more likely that the assessed wealth tax can be paid.

Just to make it clear, by the way, I am not arguing in favour of this proposed wealth tax. What I'm posting is in the spirit of "Know your enemy", "Anticipate your enemy's arguments" and "Avoid attacking your enemy with weak arguments - doing so just gives them an opportunity to score points".

I don't really need any more evidence for that than the fact that they seem to believe a government could spring such a wealth tax on the population without word that they were planning such a move leaking widely, especially among the wealthy.

Agreed, but what I have seen attempted is that a tax change is made retrospective to the date it was first introduced.

So have I - and not just attempted, but actually done. That's why I said "leaking" - it's easy to deal with the fact that Parliament will have to debate and approve a new tax after it has been announced publicly by making it retrospective to the announcement date, it's much harder to deal with insiders in the tax-policy-formation process leaking details of and/or hints about what is being planned to their friends...

Gengulphus

[Lootman]

IF, and it is quite a big IF, a large sudden increase in tax is needed, then as Lootman suggested increasing VAT to 25% for a few years would be far more efficient and effective. As most basics are either free of VAT or at a lower rate, it would fall more heavily on the better off but everyone would be paying something and the procedures and rules are already well established and not easily evaded.

Since parity with the EU is currently a theme in the Brexit deal talks it is worth pointing out that the following VAT rates prevail in Europe, if Wikipedia is correct anyway:

Denmark: 25%
Finland: 24%
Greece: 23%
Hungary: 27%
Iceland: 24%
Ireland: 23%
Italy: 22%
Norway: 25%
Poland: 23%
Portugal: 23%
Romania: 24%
Slovenia: 22%
Sweden: 25%

The article's authors claim that the revenue to be gained from this one-off wealth tax is equivalent to having VAT at 26% for 5 years.

[scrumpyjack]

Well put VAT up to 23% for ten years and that would raise the same amount as the Wealth tax and we would still have a lower VAT rate than most EU countries.

Let me guess, they didn't even talk about that option, they had probably made up their minds on this proposal before they started drawing it up.

[dealtn]

Well put VAT up to 23% for ten years and that would raise the same amount as the Wealth tax and we would still have a lower VAT rate than most EU countries.

Let me guess, they didn't even talk about that option, they had probably made up their minds on this proposal before they started drawing it up.

It's probable they didn't think about that option because "The Wealth Tax Commission was established in Spring 2020 to provide in-depth analysis of proposals for a UK wealth tax, for the first time in almost half a century..."

If they were "... established in Spring 2020 to provide an in-depth analysis of proposals for comparisons of options for all types of UK tax ..." then you might expect some traction on arguments about VAT etc. But they weren't.

[Bouleversee]

Well put VAT up to 23% for ten years and that would raise the same amount as the Wealth tax and we would still have a lower VAT rate than most EU countries.

Let me guess, they didn't even talk about that option, they had probably made up their minds on this proposal before they started drawing it up.

It's probable they didn't think about that option because "The Wealth Tax Commission was established in Spring 2020 to provide in-depth analysis of proposals for a UK wealth tax, for the first time in almost half a century..."

If they were "... established in Spring 2020 to provide an in-depth analysis of proposals for comparisons of options for all types of UK tax ..." then you might expect some traction on arguments about VAT etc. But they weren't.

But they concluded that a wealth tax was the fairest and most efficient option so they must have considered all the others despite what would appear to be a somewhat limited brief. However, it wasn't the Govt. which initiated the exercise and I don't know why we are wasting so much time over it. I'm out.

"The Wealth Tax Commission – a group of leading tax experts and economists brought together by the London School of Economics and Warwick University to examine the case for a levy on assets – said targeting the richest in society would be the fairest and most efficient way to raise taxes in response to the pandemic."

[Alaric]

I did see a reference to deferral until the taxpayer was drawing his pension for those cases where the "wealth" being taxed is a pension, which makes sense I suppose.

Is that any different from imposing a higher rate of tax on pension income? For unfunded public sector schemes a tax on the notional wealth represented by the entitlements is equivalent to a public spending cut.

[JohnB]

An interesting perspective from FIRE in London, who thinks that with wealth of £10m its a fairly crafted tax, but politically unacceptable.

https://firevlondon.com/2020/12/14/weal ... or-tories/

[Lootman]

An interesting perspective from FIRE in London, who thinks that with wealth of £10m its a fairly crafted tax, but politically unacceptable.

https://firevlondon.com/2020/12/14/weal ... or-tories/

"If I started screaming with anguish about paying a one-off £200k tax bill to the government I would come across as some sort of anti tax libertarian nutter. I am not that person."

I am that person. I would scream with anguish in that situation. That makes me a nutter?

I wonder if the author is so relaxed and positive about this idea only because, as he concludes, it will never happen and he wants to come across as "reasonable"?

[scrumpyjack]

Interesting to see the flood of the ultra rich leaving California for Texas and New York for Florida. I see Larry Ellison has just moved to Hawaii.

You don't need to lose 100% of the tax from many of those sort of guys to make excessive tax hikes completely unproductive. Hollande eventually realised this when he had to cancel his attempt at a 75% level of income tax. That looks positively modest though compared to the 83% and 98% rates we had in the 70's. It's a far more mobile world now than it was then.

[Lootman]

Interesting to see the flood of the ultra rich leaving California for Texas and New York for Florida. I see Larry Ellison has just moved to Hawaii.

You don't need to lose 100% of the tax from many of those sort of guys to make excessive tax hikes completely unproductive. Hollande eventually realised this when he had to cancel his attempt at a 75% level of income tax. That looks positively modest though compared to the 83% and 98% rates we had in the 70's. It's a far more mobile world now than it was then.

California has a top state income tax rate of 12.3%, the highest in the US. Add that to the top federal income tax rate of 37% and the effective tax rate is very close to 50%, worse than the UK.

Texas does not have a state income tax, along with Nevada, Florida, Tennessee, New Hampshire, Wyoming, Washington, Alaska and South Dakota, if memory serves. Naturally all of those are popular with the wealthy.

My wife plans on retiring when she turns 60, in 2024, which just happens to be the year of the next general election and the next time we risk a high-tax government. If that looks likely then we will be moving overseas then, and the UK will not get another penny in tax from us. But if we have the same tax regime after then, we will probably stay. It's really that simple, just as Laffer observed.

[firevlondon]

"If I started screaming with anguish about paying a one-off £200k tax bill to the government I would come across as some sort of anti tax libertarian nutter. I am not that person."

I am that person. I would scream with anguish in that situation. That makes me a nutter?

I wonder if the author is so relaxed and positive about this idea only because, as he concludes, it will never happen and he wants to come across as "reasonable"?

That is my blog post... the context of my argument is important. My portfolio can, and has several months this year alone, move by well over £200k in a single month, either up or down - just via market movements. So a £200k one-off tax bill would not change my life any more than a bad month in the markets would. If I screamed with anguish every time my net worth fell by £200k in a month, I shouldn't be invested in the markets.

[Spet0789]

"If I started screaming with anguish about paying a one-off £200k tax bill to the government I would come across as some sort of anti tax libertarian nutter. I am not that person."

I am that person. I would scream with anguish in that situation. That makes me a nutter?

I wonder if the author is so relaxed and positive about this idea only because, as he concludes, it will never happen and he wants to come across as "reasonable"?

That is my blog post... the context of my argument is important. My portfolio can, and has several months this year alone, move by well over £200k in a single month, either up or down - just via market movements. So a £200k one-off tax bill would not change my life any more than a bad month in the markets would. If I screamed with anguish every time my net worth fell by £200k in a month, I shouldn't be invested in the markets.

I enjoy reading your blog. It has a lot of resonance as I am also looking to FatFIRE (though close to but not in London).

Thanks for the time you take to write it.