Unit 2 & 4: Taxing the rich - does it work?

Wealth is spread far more unequally than income, so The Lib Dem leader and Coalition Deputy Prime Minister Nick Clegg has proposed a temporary wealth tax, and Ed Balls implied that Labour would introduce permanent tax on wealth. The graph from This week's Economist contrasts estimates of net private assets with net national debt. A wealth tax is being touted in Germany as a means to raise revenues.

This article on France's wealth tax was on the BBC's website this morning and might be used to consider Adam Smith's Canons of Taxation .


Equality -Tax payments should be proportional to income

Certainty- Tax liabilities should be clear and certain

Convenience of payment – Taxes should be collected at a time and in a manner convenient for taxpayer

Economy of collection- Taxes should not be expensive to collect and should not discourage business.

You can consider the costs of collection vs tax raised. Hardly predictable particularly in a French Presidential Election year, with arbitrary definitions of wealth. Of course the temptation to freeze tax bands to let fiscal drag haul more into the taxpayer's net is there.

In the 1970s, Harold Wilson's Labour Government proposed a Wealth Tax, civil servants considered that such a tax "Will lead people to seek non-resident status, result in a considerable outflow of funds in the form of dividends and interest." This was a warning of capital flight.

Treasury civil servants predicted that would result in an exodus of banks, insurance and shipping business moving out of the UK. Whilst Harold Lever, one of Labour's Cabinet Ministers observed that it would damange business confidence whilst the civil service implied that it would be ineffectual.

Will more civil servants be needed to collect a wealth tax? Is there a Renoir in the attic? How would the wealth valuations be carried out, by HMRC's staff or by the tax payers' self assesment of assets? Would there be an appeals system? Is there a danger that tax accountants would find ways to avoid a wealth tax, and is this really a good use of talented men and women?

Howard Glennerster, the author of the study observes that: "If any new move to tax wealth is to be successful it will only be so if the public,many of whom are now holders of modest wealth, are convinced that its unequal distribution is a problem."

If a wealth tax was introduced would it apply to pensions and savings? The list of exemptions listed by Bernard Jenkin suggests that a wealth tax might be incompatible with other economic goals.

Is there a risk of evasion, would people simply hide their jewellery, furniture and other assets? Is that a Renoir in your attic?

Conversely a wealth tax might create jobs for accountants and tax specialists, selling advice on how to avoid the tax. Does a wealth tax work? Jenkin estimated that 20,000 out of 20 million French households pay a wealth tax, the yield might be 0.04% of total wealth. Does it look as if it achieves a more equitable outcome?

Sweden abolished a wealth in 2011, the levy raised SKr4.5bn (£427m) from 2.5% of taxpayers, but was estimated to have driven SKr1,500bn (£142bn) out of the country. Yet the radical group Umfairteilen in Germany thinks that the wealth gap is widening, and that the wealth tax's time has come.

Denis Healy Labour's Chancellor of The Exchequer in the 1970s stated that Another lesson was that you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.‟

Questions:

Does a wealth tax create more problems than it solves, is there a case for trying to work out how existing taxes could raise more revenue.