My proposed Wealth Tax

Labour leadership challenger Owen Smith has proposed a ‘wealth tax’ to raise £2.8bn from ‘the top 1%’. What might this mean for financially independent people, Londoners and the like?

What are wealth taxes

A tax on wealth, literally, means a tax on assets.  The UK has no annual tax based on asset value, unlike many countries.  A surprising number of countries do tax assets, for instance:

• The USA has real estate tax – over 1% per year in most of the ‘best’ states.
• The Netherlands taxes possessions of more than €21k at 1.2% per year.
• France taxes wealth of over €800k, at rates of 0.5%-1.5%.

Owen Smith is however not proposing taxing assets.  There is a good reason for this.  Having to value your entire asset base every year is a massive amount of work.  Having to report this to the tax authorities is a major invasion of privacy, at least relative to only reporting income (akin to a business now needing to report its balance sheet as well as its profit statement).  And this being done in a way that doesn’t clog up the bureaucracy would be difficult to implement quickly.

The simple way to tax assets is to tax property.  The database exists.  Valuations are not that expensive to update. And they can’t flee the country.  More on this below.

Owen Smith’s 15% wealth tax proposal

However, Owen Smith’s proposal is instead to tax income – or at least the sort which the ‘top 1%’ often have – namely unearned income.  He is proposing a 15% tax surcharge on dividends, interest, rental income etc to be payable by people with earnings of over £150k ‘from such sources’ according to the FT.  Apparently this would raise £2.8bn from 265k people, i.e. about £11k per person.

Owen Smith’s proposal would hit:

• Wealthy pensioners.  Fred Goodwin types, mostly.
• Buy-to-let empresarios.
• Company owners.  Both the hereditary types and entrepreneurs.
• Artists, assuming royalties are included.  Successful ones.

Current tax rates on unearned income are, even for high earners, slightly lower than earned income taxes.  Personally I find it odd that we tax work more than non-work so I can understand this.  When you factor in National insurance there is even more of a discrepancy, though the marginal rate of National Insurance on high incomes is only 2%.  So I can see some logic for a surcharge on this income.

The issue with trying to tax the wealthy is that they are the most mobile people, and can more easily divide their time overseas.  The top 1% pay about 28% of tax so even a few of these people leaving the country could have the opposite effect on overall tax revenues than intended.  But of course Owen Smith’s proposals are not entirely revenue-focused; he is also trying to reduce inequality and if the richest people flee then this objective may be satisfied.

Interestingly Owen Smith’s proposals hit Londoners far less than a ‘proper’ wealth tax would.  Most London properties would count as ‘wealth’ using any of the international thresholds.  So if assets / property were taxed most London property owners would be adversely affected.  Given that London is Labour-voting you can understand why Owen Smith hasn’t (yet) gone down this route.

My proposal

Personally, while it wouldn’t benefit me personally, I generally support the case for taxing wealth rather than income (and also prefer taxing the dead to the living – i.e. would rather raise funds from inheritance taxes on income/spending).

I’m going to go out on a limb and propose the best way of implementing a wealth tax from Labour’s point of view:

• Introduce a land tax.  Not a property tax, but a land tax.
• Give every landowner an allowance, which would be a fixed amount that would ensure that 99% of non-Londoners escape it.  For the sake of argument, the allowance would be £100k. With average house prices being about £350k, and the average construction cost of an average house being very similar, the average house’s land value is relatively low. London is different; construction costs are similar to the rest of the country but the average house is worth £500k, and for the top 1% the figures are probably average house value of £2m and average construction cost <£1m i.e. land value of >£1m.
• To raise £3bn from 300k people (the top 1%, roughly) you need to raise £10k per person.  Assuming half these people own land, this is £20k per land owner. I imagine the average land value of these guys’ assets is at least £1m; this suggests an annual tax of perhaps 2% per year on land value.  Given that land value is less than property value, this will amount to <2% of property value.

This tax would be by definition impossible to escape.  You can’t take land to Monaco, Geneva or Australia.  What this tax would do:

• reduce property prices in London.  This would be very unhelpful for yours truly right now as I am very long on property – but given that my blog post has the audience of a gnat I can take that risk.
• increase rental yields.  But overall given the reduction in property values overall rents would probably fall.
• encourage more development of under-utilised land.  This would encourage more residential building development.
• reduce inequality a bit.  Taking £20k per year out of some top 1% would materially dent their cashflows, but probably not in a way they couldn’t fund.  Real-estate taxes in California or Florida, for such people, would amount to similar figures.

What do readers think? If you were told you had to find £2.8bn from the ‘top 1%’, how would you do it? I will delete comments that suggest a different objective – which isn’t the point of this post.