Earlier this week a distinguished panel of experts outlined a proposal for a new tax that would raise £260 billion over five years from the wealthiest people in the country that would not discourage work or investment and be difficult for them to avoid. What’s not to like?
The proposal in question is of course the LSE/Warwick Wealth Tax Commission’s proposal for a one-off wealth tax. Their excellent report goes through the design and implementation questions such a levy would have in considerable detail. But it’s the rationale for introducing the tax post-Covid that seems to be lacking.
The Commission correctly point out that in order for a one-off wealth tax to not to affect people’s future behaviour, it must be credibly one-off. In that respect, it is not a free hit for policy makers. Linking the levy to the Covid pandemic, they argue, gives it this credibility. Yet there have been pandemics at various points in the past and no doubt there will be more in the future, and other events that have increased public debt such as major wars and even the Global Financial Crisis little more than a decade ago have also led to these taxes being introduced in some countries.
Introducing a one-off tax once would surely give people suspicion that the same thing would happen in similar situations in the future. But the Commission do not spell out exactly what it is about the pandemic that makes it so extraordinary, or give a set of criteria that would justify the use of such a move in the future, leaving this as a decision to be made by politicians.
If one were to try to come up with such criteria, two obvious ones would be that there needs to have been a large increase in public debt, and that this was caused by a major crisis over which the government had little control. But this is not enough, surely: recessions that increase debt happen relatively frequently, not only once in a lifetime. Other criteria might include that the servicing costs on this additional debt would cause a severe burden on future taxpayers, and that a one-off wealth tax would significantly ease this burden. These last two criteria are certainly not met at the moment. Despite a very large increase in debt during the pandemic – the debt-GDP ratio in the UK has increased from about 80% to 100% since last year – the burden of public debt is small as the government is able to borrow at very low interest rates. Indeed, total interest payments on government debt are forecast to fall as old debt is refinanced at these ultra-low rates. Similarly, then, although a one-off injection of £260 billion would reduce the headline debt level, the reduction in debt interest spending wouldn’t be enough to raise public service spending or reduce taxes on an ongoing basis by all that much. With average interest rates on government debt at around 1% and set to fall, the wealth tax would only reduce interest payments by a few billion pounds at most, the equivalent of raising the basic rate of income tax by about ½p.
That’s not to say that there won’t be a need for tax rises in the years to come to help fill any fiscal hole resulting from the economic damage caused by Covid and higher spending on health and pensions as the population ages. But when they do come, they will need to be permanent. These could equally involve taxing wealth more. The Commission also discusses potential reforms to existing taxes on wealth (including Capital Gains Tax, Inheritance Tax and Council Tax) that would similarly raise revenue from the wealthiest and correct problems with our existing tax system. Revising existing taxes would also be easier politically than introducing a new wealth tax. It is perhaps here, then, that policy makers could most usefully look for inspiration. And although hopefully there will not be a crisis that is so severe that a one-off wealth tax is required any time soon, if it does arise, they will be able to dust off the Commission’s blueprint from the shelf.