A Wealth Tax Wont Solve Britains Fiscal Problems

Mint

6 days ago

(Bloomberg Opinion) -- The finding by British lawmakers that His Majesty's Revenue and Customs doesn't know how much tax the country's billionaires pay has done little to enhance the UK collection agency's prestige. A side effect of the report by Parliament's Public Accounts Committee may be to stoke support for a more radical method of ensuring that society's richest pay their fair share – namely, a wealth tax.
Wealth taxes have a patchy record of success and have been abandoned by most countries that tried them. France is the most recent example, dropping its levy in favor of a real estate tax in 2018. Only four of the 38 countries in the OECD still impose one – Norway, Spain, Switzerland and Colombia. Yet the idea is gaining renewed global momentum, helped by the work of French economist Gabriel Zucman, whose blueprint for a 2% global minimum tax on billionaires was endorsed by the G-20 under Brazil's presidency last year.
In the UK, former Labour Party leader Neil Kinnock proposed a 2% tax on assets valued at more than £10 million ($13 million) earlier this month, saying it would bring in as much as £11 billion a year. The Labour government of Keir Starmer, which is facing a fiscal shortfall of as much as £30 billion this year, has declined to rule out the idea, while groups including Unite, the country's largest trade union, have backed the plan. Patriotic Millionaires UK, a group that advocates for the wealthy to pay higher taxes, said last month that a survey showed 80% of the country's millionaires support the proposal.
These concurrent events formed a suggestive backdrop for the cross-party committee's inquiry into whether Britain is collecting the right tax from its wealthiest individuals. HMRC might count itself a little unfortunate with the report's framing. It can point to successes: In 2023-2024, its compliance work brought in an additional £5.2 billion of revenue from the wealthy — which it defines as those with incomes of £200,000 or assets of at least £2 million in any of the previous three years — up from £2.2 billion in 2019-2020. The committee said the agency deserved 'great credit' for this, before immediately noting that its success meant either that non-compliance among the wealthy had got worse or that HMRC's previous estimates of the extent of avoidance were too low. Sometimes, you can't win.
HMRC is hardly a laggard in efficiency, scoring well in international comparisons. It has brought down the UK's estimated tax gap – the difference between what should be paid and what is actually paid – by close to a third in the past two decades.
The tax authority might question why the rich are getting so much attention when they're nowhere near the biggest evaders — that would be small businesses. And it has a defense to its lack of knowledge on what billionaires pay: As officials pointed out to the committee, it has no reason to collate this data because people aren't taxed on the basis of their wealth but on their income and gains.
Then again, other tax authorities often do collect this information even when they don't levy a wealth tax. And HMRC's estimate of the tax gap may be wrong — even wildly wrong. That looks highly likely in the case of the £849 billion that British residents hold in offshore accounts. The authority's (partial) estimate of tax evasion on that pot is a mere £300 million — described as 'implausibly low' by the committee.
Either way, the criticism of HMRC — by a cross-party committee with a Conservative chair — looks helpful to those who would like Britain to take a more robust approach to taxing the country's most affluent individuals.
The social justice case for a wealth tax is compelling. Inequality has widened since the 2008 global financial crisis as monetary easing and government stimulus inflated asset values while average incomes in many countries stagnated. Making the richest pay a percentage of their wealth would go some way to redress the balance and repair national finances weakened by the extraordinary support extended during the pandemic. Global sentiment appears to be moving in this direction. Brazil and Spain announced the creation of a coalition of the willing to work on the topic in Seville at the start of this month, and have been joined by South Africa and Spain, Zucman told me. France's National Assembly voted in favor of a minimum tax of 2% on centi-millionaires in February.
The practical objections are also weighty, though. The costs of evaluating and monitoring wealth and then collecting the levies are considerable. The biggest challenge is how to prevent capital flight. A level of 2% might not seem like much; low enough to ensure that net wealth keeps growing. But look at it as a share of the income stream that those assets might produce and it's much more significant. Assume a 5% annual return and 2% of the asset base equates to a 40% additional tax on that — unless other levies are simultaneously reduced or simplified. Britain already appears to have underestimated the behavioral response to other revenue measures targeted largely at the wealthy — such as the abolition of non-dom status and the imposition of value-added tax on private school fees.
There are also potentially more insidious second-order effects to consider, such as the impact on enterprise and innovation, and the fostering of a culture that looks to lean on one group of taxpayers. A wealth tax might start out with a low rate and a high cutoff point, but the temptation would be to expand it and move down the distribution. The UK had 22,000 taxpayers with at least £10 million and 626,000 with at least £2 million, according to a 2020 study by the Wealth Tax Commission, a research group.
It's difficult to see how a wealth tax will work except as part of a coordinated global program. That may be the direction of travel, but it's some way away from becoming a reality. Britain's fiscal challenges are a lot more urgent. There's no immediate solution here.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew Brooker is a Bloomberg Opinion columnist covering business and infrastructure. Formerly, he was an editor for Bloomberg News and the South China Morning Post.
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