I have noted concerns on growing wealth inequality this morning, here and here. Over the weekend I also published references to the call I made for a peaceful revolution in the way risks and rewards are shared in our society at the Tax Justice Network conference.
Calls for reform though are not enough. What we need are programmes for immediate and long term reform to tackle the massive problems wealth inequality is creating here in the UK and then around the world. I wrote a paper on the short term aspects of this last that I share again now. The summary says:
This brief report looks at the financial wealth of the UK, its distribution and its taxation and suggests reforms to:
- Create a fairer tax system;
- Reduce inequality;
- Release funds for use to benefit those who have lost out under Conservative and Coalition governments;
- Boost investment;
- Encourage greater tax compliance.
It does this by:
- Suggesting an investment income surcharge be included in the income tax system that would increase the tax rate on the savings and investment income of higher rate taxpayers by 15%. This might raise £6.5 billion of new revenues per annum;
- Reforming capital gains tax to:
- Halve the annual allowance
- Have the tax paid at income tax rates
- Abolish entrepreneurs' relief
- Improve tax compliance
These reforms might raise £9 billion a year;
- Restrict some inheritance tax reliefs in advance of more thorough-going reform to raise £0.5 billion a year;
- Review the long term possibility of a wealth tax.
These changes raise a total of £16 billion a year.
The report also looks at the interaction of tax reliefs and pension contributions given that 40% of UK wealth is in private pension funds. It suggests:
- Restricting all higher rate pensions contribution reliefs, raising maybe £8 billion of tax a year;
- Requiring that 20% of all pension contributions be invested in employment creating opportunities in exchange for the tax reliefs available to pension funds. This might direct £20 billion towards new employment creating opportunities a year.
In total then this report suggests the source of £24 billion of tax revenues and £20 billion of investment funds a year as a result of a review of the relationship between wealth and taxation in the UK.
I would stress that all this was before looking at land taxation reforms, which were not counted in totals as the benefits would go to local authorities. It was also just a working document and not the only solution I might suggest. Critically, it avoids the issues of wealth taxation. What follows is what I wrote on this in chapter 9 of The Joy of Tax (which was written as if I was presenting a budget) where I first presented necessary changes to capital gains tax that would permit inheritance tax to be eliminated and then suggested a wealth tax:
Back in 1965 when capital gains tax was created it made sense to exempt a person's home from charge to this tax. This country was not then the home-owning nation the government of the day wished it to be, and there was a need to build new houses. We wanted to provide that opportunity and an incentive to take it. Property wealth was surprisingly limited. There was a desire to spread it more widely. Times have changed. This country has become one where property represents a significant part of private wealth, but precisely because of the tax relief provided in 1965 that wealth is now hugely concentrated in an ageing minority who can still afford to own their own home. Many of the young now have no chance of owning a house precisely because, after fifty years of tax-free gains having accumulated in the property market, house prices have moved way beyond their reach. What was once a good idea is now a bad idea that is creating social and inter-generational stress in the UK. As a result gains arising from today on UK housing will be taxable. But, because I know that people need to move for many reasons during their lives, we will only collect the tax due when a person dies or when they do not reinvest the proceeds of the sale of their house in another home. No one will be denied the chance to live in a house to the value they have been accustomed to owning because of this tax charge.
Capital gains will also apply to the sale of all agricultural land and businesses in future, and upon the gift of all assets whether during life or on death. In the case of owner-managed businesses and family-run farms we recognize that continuity of management is important, and that businesses should not be denuded of capital as a result of tax owing. Consequently we will make special arrangements in these cases to accept part-ownership of the assets sold or gifted in lieu of taxes, but do make clear that such ownership will be actively managed to ensure that the state receives its share of future profits, and special rights shall be attached to any shares accepted as part of such an arrangement to ensure that these rights can be enforced.
With these changes to capital gains tax there will be little reason for inheritance tax in the future and as a result I confirm that this tax, which has been the cause of much vexation, will be abolished.
In place of this tax I am instead proposing a wealth tax. This is now possible for the first time because of the information- sharing agreements that we now have with so many of the world's tax havens. We will pursue such deals with those that have still not signed them. In the meantime any professional adviser who in any way assists a person to avoid tax by exploiting the remaining states who have not cooperated with us will under new arrangements become personally liable for all tax not paid as a consequence, without limit.
The wealth tax will not be charged on main residences, family farms and private businesses that will now be subject to capital gains tax in life, whether gifted or sold, and on death. Nor will it be charged on pension wealth.
This charge will then be on let property portfolios, financial investment portfolios, personal property and other assets of similar type primarily used to generate unearned income, unless they are otherwise exempted by law using the new principles for writing tax law that I have already outlined. The charge will be introduced on all such portfolios worth more than £1 million at the rate of 1 per cent per annum, although the rate will increase with the scale of declared wealth. All wealth will be subject to self-declaration. Any assets not declared will become the property of the state. Any asset undervalued will be subject to sale to the state at the under-declared price if the Department of Taxation decides to exercise that option. Wealth will be calculated on a worldwide basis.
The consequence was a proposal for a wealth tax targeted at financial wealth, or the savings of a very small but immensely rich part of society, to put it another way. And this, I suggest, is exactly what we now need.
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Why not just tax all capital gains like income payable when you receive the income? If you make a gain on a house sale, you pay, if you inherit from a relative you pay.
I cannot see any argument for income from capital to be treated differently from income from labour. In fact I would argue that income from labour should be treated more favourably because the benefits to society are greater than those of associated with wealth transfers.
I see reason why we do not want to reduce labour mobility, hence my suggestion.
But I am suggesting rates be equalised and much of the nonsense on businesses, including the absurd entrepreneur’s relief be abolished
“the way risks and rewards are shared in our society”
Excellent.
You are advocating some form of underwriting for entrepreneurs? So if a business fails, the government will recompense the businessman? What % do you recommend? Perhaps the same as the tax for the same profit? Someone loses £0.5m so the government will repay £225k? Seems fair.
What are you talking about?
I think he might be referring to sharing risks as you are advocating in the quote you use.
Seems sensible. If the state taxes success it should underwrite failure.
It does
It permits the offset of tax losses
Next?
Richard
Please consider the following and consider it as part of the little exercise you ran about how to create an alternative narrative to the feudal economic yolk we live under.
When I talk to folk here at work (which I set out to do some while back in order to help me cope with the frustration created by economic orthodoxy), as soon as I use the word ‘unequal’ – they just do not get it. They turn off. I don’t know why. But when I ask the more self aware people they say that do not expect to be equal to others for a variety of reasons (class, education, professional position). They accept that things can be unequal. They also associate the word ‘inequality’ word strongly with racial issues – not economic ones.
But when I use the word ‘fairness’ and I use the same economic facts and ideas etc., they get it. It’s just an observation I’ve made but it may be worth something?
I don’t know – it’s not proper research but there you go.
I think you’re right
Some language resonates. In economics fairness does and inequality confuses, even though inequality is the big issue
Thank you Richard.
What do you think of Greg Philo’s idea for a one-off wealth tax to pay down the debt: http://www.glasgowmediagroup.org/the-wealth-tax?
Unjust, too random and unenforcable. A contravention of human rights. Apart from that, why? We need to be systemic
I don’t think any of your criticisms hold water, Richard, I’m sorry to say.
The targetting of this tax is quite specific, the opposite of random, as it aims precisely at those with the highest wealth. Analysis reveals that specific legislative rules to be included in a Finance Bill would capture all it is aimed at by focussing on the wealthiest 5% of the population only. Which also makes it the opposite of unjust and unenforceable. They would remain the richest 5% of the population however the gap between us and them would reduce.
You may argue that HMRC resources would either need to be redirected or bolstered to make this tax effective but that’s what you’ve been arguing for for ages, isn’t it?
Using the normal legislative route to establishing taxation rules avoids any wild accusations of contravention of human rights or partisanship and the methods of enforcement rely solely on those in existence now, so don’t even need anything new to make them a reality.
I’d also argue that it is systemic in that the very wealthiest, those who have relied upon, exploited and abused all of the various aspects of the current system deficiencies or aberrations SHOULD be made aware that the 30-year chasm they have created distancing themselves from the rest of us will not be tolerated and will be squeezed as a normal part of the operation of keeping them a part of our whole society. They are not separate; they are not different; they are part of the whole even if they sometimes think they are above it. This is the system making a wholly necessary and simple adjustment to correct for historical dysfunction. One which can and will be made at any time when deemed necessary.
That looks like the system of taxation operating on behalf of society to me.
I have a real problem with one off charges
What date? Markets would be manipulated
On who? Families or individuals?
Would trusts be included? How?
It’s like Brexit: superficially appealing and nigh on impossible
We’d need to get it right and a long term charge and persistent charge is the way to do that not least because this tax was supposed to cancel the national debt and I do not wan to do that
“I have a real problem with one off charges”
What is the nature of that problem, please?
“What date? Markets would be manipulated”
This is a very real issue and one that can be overcome with flexible payment conditions; establish the date upon which tax liability is calculated, make it quick and make it ‘now’ so no distortion prior to the calculation is possible and make it non-negotiable so that the bill is clear.
However, once the tax liability has been established operate a once-off 5 year timescale for all payments to be performed within; this will allow an orderly and much smoother payment schedule to accommodate individual circumstances. If some parts of trust holdings or equity assets need to be sold to pay the tax liability this will allow individuals and their expert advisors to perform those actions when they deem best within the 5 year period. This will make the process of payment as easy as possible and far more defensible on our part.
“On who? Families or individuals?”
Individuals; this is why transparency of ownership and benefit are so crucial. Crystallising ownership at any point of time is the bedrock upon which the whole tax system rests.
“Would trusts be included?”
All assets and wealth as far as necessary would be included.
“How?”
I’m sure we have enough tax experts available to help us here …
“We’d need to get it right and a long term charge and persistent charge is the way to do that”
I couldn’t agree more; this scheme merely extends the current system to include a persistent charge on extraordinary wealth accumulation over time.
“not least because this tax was supposed to cancel the national debt and I do not wan to do that”
Nor do I. That raison d’etre was picked more as a convenient and noteworthy flag for the scale of the scheme rather than destination for the funds; it’s more impactful when discussing that Overton Window label of ‘National Debt’ to show that it COULD be eliminated by his method if required. As we all now appreciate, Green Investment schemes, state investment projects and new technology boosts (including returning to public hands the incompetent messes of PFI, for example) would be far more preferable uses for the funds generated.
So you don’t want to clear the national debt
So why do this form of a wealth tax that is profoundly problematic and, based on your answers, open to massive manipulation?
“So why do this form of a wealth tax that is profoundly problematic and, based on your answers, open to massive manipulation?”
Not manipulation, only scheduling. And not problematic at all, as I’ve indicated. The reason for doing it is to close the chasm between the runaway-wealthy and the rest of us that has grown so large in the last 30 years. That extraordinary wealth has distorted our politics, our media and our society. The results are another source of funds alongside QE for all the projects that your plan for QE is aimed at (as I outlined in my previous post).
I’ll dig out the link but I remember that a survey OF THE TARGETS OF THIS TAX was performed and resulted in 74% of them agreeing with the scale and nature of the charge. It’s not difficult to understand why; they know that the returns from their assets (whether that be trust fund income, equity value growth, corporate holdings performance or land and property valuation levels) will be improved by returning to a steadier and enhanced macroeconomic growth pattern compared to the last 9 years’ anaemic efforts. They’ll make this tax charge back over the next 10 years, in other words.
And secondly, as all wealthy people are aware, this sort of charge either happens by rule of law in as safe and predictable manner as possible, as I’ve outlined, or it happens at the end of a pitchfork in an entirely unpredictable manner. They’ve all seen the Bezos talk and are hearing the sharpening of blades in their sleep; they KNOW about the inequality and it worries the hell out of most of them. An opportunity to draw a line under the last 30 years, to isolate and neutralise the accusations of inequality would be manna from heaven to most of them.
If they were as smart as they think they are they’d PROPOSE such a scheme and set their PR firms to work ‘selling’ it to the public as a magnanimous and socially-inspired public gift and get massive reputation benefits for the rest of their lives. They’d all rehabilitate their social standing like the Gates’ have done and appear to be social saviours.
Allan
I think I have said all I need to on this: it is not tax justice and I can’t go along with taxes that are arbitrary, unjust and based on a bit of consumer PR research, which is what this is
I am not wasting more of my time on a proposal that literally never made sense in tax, economics or human rights terms.
I want to tax wealth, and will argue relentlessly for it, but tax has to be seen to be fair or there is alienation throughout the tax system and the wholly arbitrary nature of this proposal looks like sequestration and not fairness and so I have no time for it
Richard
Thank you, Allan, for picking this up. I was too lazy to respond myself
I like the idea, which HMRC are disposed towards, of making taxes on the wealthier self-declaratory (like ATED). With random inspections and heavy non-compliance fines, it does not have to be too costly to manage. You have a very high threshold, say £100m, and a small rate, or number of rates. Those affected would have to pay out for any valuations of assets. KISS and I doubt the accountants/lawyers would welcome it.
£100 million of what?
Percentage of declared assets worth over £100k.
Richard
Can you tell me where I have gone wrong.
I am 63 and did have a free university education. I then spent 7 years in the employment of others and then all the years since I was a self employed chartered accountant until I retired aged 59.
I am married and my wife has never done paid work but has been a housewife, mum to our two kids and a volunteer at the local citizens advice bureau.
My children have been educated by the state and both have been to uni, one when the fees were £3000 pa and the other when they were £9000 pa.
Neither I nor my wife have received any state benefits other than child allowance for our two kids and during my working lifetime, I estimate I have paid some £1 million in tax, NI, etc
My wife and I have inherited assets from deceased parents of some £1 million and now have total net assets of about £5 million. These assets have been accumulated from savings. We have never invested in the stock market or the property market. We have simply kept our savings in bank and building society accounts earning interest.
I am appalled by the following :-
1. That unless we gift assets or buy farms, our estate will attract IHT of some £1.6 million. This is a horrible little tax that penalises the moderately sucess, whilst the truelly rich have their trusts, offshore accounts, farms and schemes and pay nothing. IHT brings in very little revenue. We should follow other countries including USA and charge it on assets above £5 million or abolish it.
2. Labours wealth tax. Why should I pay? My wife and I have gone without to accumulate these assets out of post tax income. And will your wealth tax seek to include future pensions entitlement or pensions currently being drawn, as if the wealth tax us to be fair it should include all forms of wealth including pensions wealth.
3. That my wife and I are termed rentiers, for the paltry interest our savings receive.
So having outlined the above, again I ask you, where have I gone wrong as I am obviously a nasty capitalist according to you and Labour?
Gareth,
Given you estimate you paid £1m in income tax and NICs and retired at 59, assuming you left university at 21, means you paid these taxes over 38 years. This is an average of £26.3k in tax per year. Assuming income tax and NICs was 30% of your actual income means you earned £87.7k per year on average putting you in at least the top 5% of earners making you incredibly successful. Why won’t the rich pay tax? You may not have invested in property but you have benefited from rising property wealth in your own property and undoubtedly from inheritance, which is probably the source of the majority of your vast fortune. To moan that some of it will be paid to look after the poor and disabled, despite that IHT will only touch the surface of your vast fortune, seems to be incredibly selfish. That you want your children to keep more of your fortune despite having already benefited from lives 90% of the country can only dream about is amazing! And I’m sure you haven’t scrimped and saved to end up with that fortune; a nice house, new cars and regular holidays were probably part of the deal. If not you’ve missed out! Earning such a high salary usually means you enjoyed all the luxuries of life that go with it.
The bottom line is you’ve lived a privileged life, benefited from a free education, an upwardly mobile labour market, relatively low taxation and a house price boom fuelled by foreign nationals and tax dodgers that has earned you vast wealth without any effort. You’ve benefited from the economy and society, it is time to give something back, rather than cutting public services that the poor, elderly and young rely on (and I’m sure you have benefited from a free education and the NHS, and will benefit from a state pension) or forcing the poor to pay more tax when you admit you have far more than you need.
I personally take pride in paying tax – as I do in using my excess to donate to charity – to ensure the young are educated, families are housed and healthy, and the elderly are cared for. And I don’t believe I pay enough in tax, and consistently do not claim the tax relief I’m entitled to (which is probably anathema to an accountant!). If I had more I would willingly donate more. Why won’t you? Have you not seen the homeless increase in number, heard about the public sector pay freeze forcing nurses to use food banks, or zero hour contracts where staff don’t know much they’ll earn from one week to the next, or the gig economy where self-employed workers are regularly paid below the minimum wage, far below a true Living Wage? You’ve lived through the good times, benefited from a generous society when it invested in its youth, and grew rich. Now it’s time to think of others and pay your taxes!
The Conservatives erroneously believe that taxes must always be cut, while 13 million people live in poverty in the UK, far more than a million people visit food banks each year, the elderly portion of population (who rely on the NHS far more than the rest of the population) is increasing, and inequality has risen to levels where it is now strangling the economy forcing average earners to borrow more and more to make ends meet. It is time to use tax to redistribute wealth to pay good wages to public servants, to create a world-leading education service again, to give free higher education to at least the poorest students if not all students, to pay for the increasing demands on the NHS and adult social care, and to build council houses with affordable rents to not only alleviate poverty but to eradicate it completely in the UK.
Please don’t begrudge helping others, because others helped you.
I still need to read Joy of Tax before I fully understand this. Apologies if my points below are covered in the book or elsewhere on this website (or if I just don’t make cogent points in the first place!).
It occurs to me that there should be some minimum amount of capital and income that should not be taxed at all. Perhaps that minimum amount of capital should accrue to each citizen at adulthood and be something they cannot give up or have taken from them. Otherwise what does it even mean to say someone is a citizen? If a citizen can be compelled by circumstances, their own mistakes or the greed/malevolence of others to willingly give away so much of their capital that they cannot afford even enough land on which to stand the minimum sized home then they own no useful part of their own country and aren’t in any meaningful way a citizen.
Everyone needs a certain minimum amount of space for their home. Everyone needs a certain minimum amount of income for the essentials of a dignified existence. Taxing into either just takes spending power away from those who have to spend and creates insecurity that throws poor people into the hands of unscrupulous private sector employers. It turns citizens into wage slaves, entirely dependent on their employers. At the same time there has to be some tax otherwise the fist currency has no intrinsic value and the state loses an essential control over the economy – being able to remove money from circulation.
Still taxing into the minimum capital/income required for dignified existence potentially adds to the problem. For example if a private home cannot be passed on to the next generation free of tax then every generation is forced to take a mortgage and pay interest to private bankers or pay rent to land owners. This inflates land values and supports rent seeking thus perpetuating and expanding the problem.
A farm or business that produces income is different because any capital gains tax should theoretically be payable from extra income, assuming the capital gain is due to a real increase in productive capacity or profitability of the land due to nearby investments in infrastructure. Of course if the capital gain is the result of land value inflation due to increased mortgage lending and a speculative bubble then the income won’t increase proportionally to the land value and the capital gains tax is therefore unpayable without borrowing.
I see that shared ownership could prevent people being thrown off their land but surely, without a minimum non taxable amount of capital, eventually the state would own 100% of the farm or business if land values kept getting inflated by accelerating mortgage lending and speculation? Then if the state wants to get rid of that asset the only people who can afford it are the rich, those most responsible for the problem in the first place. So shared ownership potentially only puts off the day if reckoning when the rent seeking rich finally play their hands on all the real land and resources.
What I’m clumsily trying to say is: how do we get out of the current system of artificially inflated land values and rampant rent seeking to a system where capital gains taxes and land taxes could actually be a fair reflection of the capacity of the land to produce real value?
Basically until the average person is not forced to get heavily indebted to private banks the rich will always get richer and taxes will always be playing catch up in an attempt to rectify the situation rather than just maintaining an equitable distribution of land, resources and goods. Whilst ever taxes are playing catch up the rich will have the power to avoid those taxes or influence the tax regime to get rid of taxes they don’t like. It is much more difficult to imagine the transition from how it is now to a stable, more equitable and sustainable future than that future itself.
Fist currency should read fiat currency! Even if “currency of the fist” has a certain truth to it 😉
Active management by the state of millions of small companies and farms in lieu of taxes? By who? Where is the army of business savvy civil servants that would be needed?
Thank goodness that this little crackpot bonkers idea will never leave the bizarre confines of your imagination.
I think you very clearly have no idea how customs duties work
Like most who voted Brexit I suspect
I can understand that you’d want to forget what you wrote as soon as you can so I will have to remind you that you blathered on about CGT on businesses and taking equity in the business if the tax couldn’t be paid. And then actively managing that business. Painful as it will be, I suggest you re-read what you wrote.
And I voted remain.
I know exactly what I wrote
If you mean that the state woukd then share the risk of loss, so be it
But it would not subsidise it
As for your comment, I am utterly bemused as to how it flows from what I wrote
Addressing the inequality aspect of this blog & extracting from the very recent Resolution Foundation Report (on inequality)
Families on low and middle incomes had seen their living standards rise by 3% since 2002-03. Taking housing costs into account meant they were no better off than they were 15 years ago. 40% were unable to afford to save £10 per month,
42% say they could not afford a week away on holiday at least once a year, up from 37% before the financial crisis.
Putting this into context: my sister & I were brought up in the 1960s by my grandmother & mother (who was a nurse). We always had a holiday – for two weeks – at least. My mother bought her own house, learned to drive & bought a new car – in the 1960s & 1970s. This was not due to a fancy divorce settlement (just in case people think that was the case).
I don’t notice that the UK is poorer now than then (& to be honest society then seemed more stratified socially) – but it does seem to my untutored eye to be a very great deal more unequal – in financial terms. Perhaps a problem for our elected representatives to sort out – because I don’t think it unreasonbale for a family to have a holiday once per year & if 40% or so ain’t then we have quite a big problem.
I agree
Check this out – will be published by OECD economics dept soon
The Global Income Distribution for High-Income Countries
This paper presents the global income distribution between all individuals living in the developed world. Global inequality for the group of high-income countries, as measured by the Gini coefficient, stands at 37 in 2013 and has increased by almost 3 Gini points since the mid-1990s. This was mainly driven by top 10% incomes growing more than middle and lower incomes and the bottom 10% falling behind. Rising inequality within the United States drives almost half of the inequality increase among high-income countries, a combination of a sizeable rise in inequality and a population share around a third in the sample. The broad global middle in high-income countries, located from the 10th to the 90th percentile, experienced strikingly similar disposable income growth, but at a very slow annualised rate around 0.5%. Robustness analyses show that this low-growth result is sensitive to declining real incomes in Japan and that scaling micro-based incomes to national accounts means, to include in-kind transfers such as healthcare and educational services, lifts measured household income growth substantially. Finally, the paper delivers a methodological contribution by decomposing the global growth incidence curve into within- and between-country components, allowing for a more granular assessment of the development than is possible by decomposing inequality indices. The decomposition shows that between-country income differences contributed little to growing inequality in the group of high-income countries.
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