Pressure to go further on wealth taxes – by creating new modes of clawing at hoards of hard-to-reach cash – is mounting.
For starters, the fiscal picture is looking fairly bleak, with economists estimating that Rachel Reeves must raise £20bn – or even as much as £50bn – to meet her goal of balancing day-to-day spending against the revenue raised from taxation.
On the government backbenches, meanwhile, MPs want the chancellor to squeeze the richest in society harder. They even put forward an early day motion last month calling for a 2% annual tax on individual assets over £10m.
Yet introducing these kinds of taxes is often not straightforward, with the behaviour of the wealthy being hard to monitor and harder still to predict.
The first significant problem is working out where the assets are and who holds them.
That has always been difficult and has become even more challenging after one of the most important economic surveys, the household wealth data series, was suspended by the Office for National Statistics because of its low quality.
The upshot is that HMRC simply does not know how many millionaires or billionaires there are in the UK. Without reliable figures, it is extremely hard to write policies, cost them and administer them.
There is also a battle to be had with an “old guard with set views” in Whitehall.
Whitehall sources paint a picture of a Treasury led by figures influenced by economists whose thinking was prominent at Oxford University in the 1980s and 90s – such as James Mirrlees, Christophe Chamley and Tony Atkinson – leading to something of an orthodox view.
In a nutshell, that position is that if you tax capital too much, it will stop investment and hamper growth. Or, in Chamley’s words: “Tax rate on capital income tends to zero in the long run.”.
Since this era, the debate within economics has become more nuanced. A growing body of research suggests that some taxation on capital, even at relatively high rates, could lead to greater investment. As it becomes less attractive to hoard wealth because of taxation, risk appetites would then increase in pursuit of higher returns. You might be less tempted to keep your money in a vanilla savings account that can be taxed hard and easily if you can get a much better rate of return – even with a bit more risk – elsewhere.
Treasury insiders argue that Reeves has followed the more modern logic, having already taken steps to widen the scope of inheritance and capital gains tax (IHT and CGT). They posit that her reluctance to pursue a headline wealth tax does not mean she has pulled her punches when it comes to taxing wealth.
Hostile backbenchers, on the other hand, suggest she follows the old orthodoxy too closely. They often cite her decision to go for relatively small changes in the amounts of tax paid via CGT, rather than bring it more closely in line with income tax at the last budget, which also upset more senior political colleagues.
What the debate about how to handle changes to IHT (which have been fiercely opposed by farmers) or CGT illustrates is that if the government really wants to tax wealth more effectively then it has all kinds of ways to do so before opting for a politically – and potentially economically – sensitive route with a headline wealth tax.
Yet even changing existing mechanisms might not be easy, when the UK already has one of the highest rates of tax on property and wealth among developed economies, according to the Organisation for Economic Co-operation and Development.
Political pressure may make it harder to maintain a more gradualist approach, however. Figures on the left of the Labour parliamentary party are attracted to totemic wealth taxes of the kind introduced in Spain – its so-called solidarity tax – and Switzerland. They see it as part of showing a commitment to rebalancing the economy.
Reeves is critical of international examples, saying that Switzerland does not have IHT, and that Spain’s wealth tax is so riddled with exemptions that it raises too little money. Some developed economies that had comparable wealth taxes have dropped them, too.
“We have inheritance tax. We have capital gains. We’ve just got rid of the non-dom tax status that doesn’t exist anymore in our tax system. So we do have taxes that tax the wealthy,” Reeves said in a recent interview with LBC.
Other measures that go further are not yet proven to work, she claims, saying that those who “come up with simple solutions” must do more to “explain exactly how it would work, whether it’s an ongoing tax, what it would do to tax avoidance, what it would do about people moving or changing the way that their wealth is stored”.
Economists argue that the government should focus its energies on raising existing taxes, such as equalising CGT with income tax, for example, or changing gifting rules around IHT first, rather than introduce a novel wealth tax. The Treasury is already examining gifting rules among other possible IHT changes.
Yet while Reeves might agree with some of these arguments, it’s less clear whether her cabinet colleagues will tolerate a slow and steady approach, particularly if the fiscal picture sours.
