Wealth tax would prove taxing for the Tories

A think tank of policy wonks and policy makers, the Wealth Tax Commission (WTC), has recently published its report/proposals into how the UK should implement a wealth tax – to fund the enormous sums HM Government has been spending to try to mitigate the covid-19 pandemic. This report has received a lot of well-deserved media comment. It is well written, fair minded, and full of useful research.

I’m sure most readers of my blog have seen some of the media stories, and you will certainly have views. As somebody who is close to the target’s bulls-eye, here are my views – as they stand in December 2020.

The key proposals are summarised in the table ES.1 below.

These data look a bit suspect to me. Apparently by 2030, one in four homes in London will be worth at least £1m; this is about 1m homes, so at the lower end of the table the figures look plausible. But at the top end, these figures look undercooked. The Sunday Times Rich List has 1000 people in it with assets of £120m+, and anecdotally it misses more people than it overestimates, so the idea that there are only 22,000 people with assets of £10m+ does not fit the power curve. My guess is that there are already at least 50k people in the UK worth £10m+. Whether they are all taxpayers or not is, I suppose, a question one should consider – but I am going to treat as off scope for this piece – as the idea that I should have assets confiscated so that other multimillionaires can avoid tax altogether feels absurd.

Anyway, for the purposes of this piece I am one of the wealthiest 22,000 taxpayers in the UK. I’m in the UK’s top 0.03%. I.e. Close to one percent of the one percent. Which is a shame, really, for the other 99.97%, but that is yet another topic. As the report itself says, “the available data for upper echelons of wealth (greater than £10 million per individual) is too thin to draw reliable conclusions”. I am not bragging, I am just processing the numbers.

As it happens the UK readers of my blog would also, mostly, be caught by these proposals. Around 50% of my UK readers already have investments, excluding home and pension, of over £500k (let alone the £250k used as a possible threshold). When you add in home and pension, my guess is that nearly all my readers are, or expect to be fairly soon, ‘wealthy’ as defined by this report – with around £500k-£1m+ of assets including home and pension.

I should also declare, by way of background, my income situation.

Approximately speaking, masked, etc, my salary is around £125k per year. And my ‘unearned’ income is a bit higher. Let’s say my total income is around £300k per year. This includes investment income, some of which is tax free, such as pension income – which most people have but do not track. This does not include capital gains, i.e. the increase in value of my holdings.

Any wealth tax, of any flavour, is going to catch most of us. But it is most definitely going to catch me. So, given this context, what do I think of the numbers proposed ?

I support the proposed wealth tax, if enacted unchanged.

The core proposal in the report is for a one-off wealth tax, based on the net wealth ‘broadly defined’, i.e. including family homes, pensions, and illiquid assets.

The challenge for us wealthy types, as the report acknowledges, is that not all our wealth is liquid – i.e. in a form you can send it to the taxman.

In my case my wealth sits in four main pots. Masking my numbers, with a £10m total pot in mind, these pots are:

• My Dream Home, worth £3m. I live in the home, and it produces no income (nor capital gain, but that is another story). This home is unmortgaged. So it is all taxable, in the eyes of the WTC. Valuing it is not trivial – it is ‘mid complexity’, according to the WTC report (p57).
• My other properties, worth £1m net of debt. I own some buy to let properties, and some commercial retail properties, all with mortgages. The taxman would call this about £1m value. Though exactly how I value the retail properties is not clear – these are ‘mid complexity’ according to the WTC report – in the current climate I would be scurrying off to a valuer and marking down the properties by several hundred thousand pounds.
• My listed investments, worth £5m (net of margin loans). This includes almost £1m of pension. These are ‘easy-to-value’ under the WTC definition.
• My unlisted, private investments, which I paid around £500k for. I have some angel investments in unlisted private companies, mostly in the UK. These investments are hard to value. According to the WTC, in fact (p60), they are “the biggest challenge for valuation under a wealth tax”). But they are even harder to liquidate. Sale of my shares is often subject to board approval, and there are good reasons for boards to block such sales. The amount you’d have to offer me to tempt me to sell the bloc would probably be around £2m. If we are forced by a Wealth Tax to get every company to assess its value, lower would be helpful please, I suspect the total value would be less than £1m. But there is a small chance that a tax inspector would believe one of my single holdings would be worth £2m, and the total lot worth as much as £5m. That would be unwelcome, to put it mildly.
• No other ‘hard-to-value’ assets, thankfully. I don’t own any intellectual or intangible property. My art/jewelry/tech/furniture would probably all fall under the ‘chattels’ minimum threshold (the WTC report is good on this stuff). My car would probably be caught in the net but is not worth more than £20k so the main stress is simply how to agree a valuation.

In round numbers, I have around £10m of assets. Possibly as little as £8.5m, Mr Taxman. Definitely not, Mr Taxman, as much as £15m. But at least £8.5m and no more than £15m. Quite a wide range of uncertainty, I grant you.

And of this, with very little uncertainty but plenty of vanilla market volatility, only around £4m is liquid. Liquidity matters. I learnt this, the hard way, over ten years ago, and even just contemplating a wealth tax is the umpteenth reminder that liquidity matters.

I should also say that of my £4m liquid portfolio, almost £1m is in an ISA, which as regular readers know, I will withdraw from only after pulling an eye out. I would sell properties, sell angel investments, mortgage my house, etc, before taking funds out of my ISAs.

So, let’s take a look at the Wealth Tax Commission’s proposals in turn. These are all one-off taxes.

• A flat tax of 5% (on assets over £500k, most likely), payable over 5 years. I would owe around £480k, payable as ~£100k a year for 5 years. Possibly, if I lose the argument with HM’s Tax Inspector about my private investments, as much as £750k, or £150k a year. I would pay for some of this out of income, and some of this by ‘borrowing’ the cash from my margin-ed portfolios.
• A flat tax of 1.71% on assets of £1m+. This would cost me £154k, which is about 3% of my listed portfolio. I would probably ‘borrow’ this, via my margin loan, and pay it fairly easily.
• A flat tax of 0.64% on assets above £250k. This would cost me about £60k. This would, realistically, barely register on my radar. I have tax bills like that every so often. At the time they hurt. But I know that they arise because I had some chunky income / windfall / similar a year or so earlier, and that I can afford to pay the tax.
• A progressive tax starting on assets of £1m+. I would pay 0.8% on £1m, i.e. £8k, 1.6% on £3m i.e. £48k, and 2.4% on £5m i.e. £120. I.e. I would pay £176k. I would handle this exactly as per the flat tax of 1.71% scenario above. I would avoid 3% on assets above £10m.
• A progressive tax starting on assets of £500k+. I would pay 0.6% on £500k i.e. £3k, 1.0% on the next £1m i.e. £10k, 1.2% on the next £3m i.e. £36k, and 1.4% on the top £5m i.e. £70k. This would total £119k. I would fund this out of margin loan as above.

I look at all of the above, and think of my portfolio’s performance. Last month, November, was a good month. My £5m listed portfolio gained almost 7%, i.e. £340k. I see monthly ups and downs of £100k-£200k almost every month. If I started screaming with anguish about paying a one-off £200k tax bill to the government I would come across as some sort of anti tax libertarian nutter. I am not that person.

Of course, if I lost the argument with HM Tax Inspector, then I’d have total assets of £15m. The scenario where this really bites is the progressive tax, in which case I would owe a further 3% on my >£10m assets, i.e. 3% on £5m or another £150k. I would be highly motivated to fight HM Tax Inspector here. But assuming I lost, I would have to find £326k in total – roughly a year’s worth of stockmarket gains, if you must put it like that. That would involve selling some assets, borrowing some money, and tightening belts for a bit. But would it materially change my situation? It would not. But it would leave me feeling hard done by, because I don’t believe I am actually worth £15m. I would consider myself to have been ‘shaken down’ by the tax man, and by the politics of envy.

So, I am relaxed about a wealth tax, if implemented as proposed in the WTC report. However, I am also unusually liquid – because a mighty 40% of my net assets are liquid. So I have the funds to pay a <10% tax charge, without becoming a forced seller / having to move house / dividing the family farm/ etc.

However, one of the key challenges here is, as the WTC report puts it, ‘liquidity constrained’ people. It defines such people as those for whom the wealth tax in any given year is both:

• Over 20% of net income
• Over 10% of (net income plus liquid assets).

Given my £5m liquid asset pot, I am not ‘liquidity constrained’ under this definition. I am in fact more than factor of 2 away from it. But it is not hard to see how plenty of Londoners would fall into this category. The FT paints some plausible portraits highlighting the challenges. A ‘banker’ earning £300k,with a £3m house, mostly paid off, a pension, and perhaps £50k of savings, but not many other assets could owe about £50k, and would be ‘liquidity constrained’ under this definition. They would squeal. Payment in instalments is a must, imho.

In fact the WTC itself acknowledges (p63) that the proportion of liquidity constrained individuals rises to 40% for those with over £5m. They argue that the popular conception is overstated, and most true for wealthier people – who are not a “pressing concern”. Perhaps. Which leads me on to my next section.

However, these proposals will not be enacted. They miss both the economics and the politics.

In my view, the proposals in the WTC will never see the light of day.

A key reason why I don’t believe the wealth tax as proposed will happen is the economics. I am unsure of its premise – i.e. that we need to find the money in the first place. We have ‘borrowed’ a lot of money, but we have had it lent to us by our own Bank of England printing presses. Debt servicing costs are low. It is unclear to me that we need to care about repaying the debt, at least for a long while. I am not a Modern Monetary Theory expert but I would become so before accepting meekly a ‘we must raise £250bn in taxes’ conclusion. Intuitively, debt needs to be paid back, but there would be plenty of lobbying arguing that the can merely needs to be kicked down the road.

But the real reason why I believe there is no chance whatsoever of the WTC’s proposals being enacted is politics. The Tories will never push these proposals through. And the Tories are the ones holding the baby.

The first political impediment is the home ownership dynamic. Of the ~£15trn wealth in the UK, almost 40% – over £5trn – is property, mostly primary homes. The WTC is clear you need to include primary homes. However, as the WTC acknowledges, taxing peoples’ primary homes is politically challenging to say the least.

“Part of the opposition to including main homes in the tax base for a wealth tax may be that people often do not view their house as an ‘asset’. Homes have sentimental value and it can feel distasteful to treat them as if they were just another investment. However, exempting main homes from a wealth tax would lead to serious unfairness for those who are yet to get a foothold on the property ladder, or are saving to move up it. Also, why should someone who chooses to live in a more modest home but has amassed large savings for their retirement, pay more tax than someone who has spent everything they have on their house? We think that these arguments of horizontal unfairness are underappreciated in current debates”

Wealth Tax Commission 2020 report, p53

I can’t find good stats here, but I believe that most of the UK’s property wealth is owned by Tories. These voters are simply not going to accept paying a large sum of tax based on something they don’t view as an asset. A Tory government can not make this happen and be re-elected.

An even bigger component of national wealth than property, pensions are 40% of aggregate private wealth (source: p51, WTC report, or ONS 2018 data here). Again, the politics here are poison. But this time, a lot of the holders of wealth are Labour voters. Public sector pensions are the best in the country. The fuss GPs/judges/etc caused about the tax consequences of becoming pension millionaires does not bode well. And pensioners themselves overwhelmingly voted Tory.

The OTC dismisses these concerns with wonderful de-haut-en-bas.

If you started hitting ‘middle class’ public sector workers, earning £50-£70k, with five figure tax bills based on their pensions, the public sector would simply never vote Tory ever, ever, ever again.

At the end of the day, when people want wealth taxes, they want taxes on wealthier people than them. Which, broadly speaking, means the guys with wealth that isn’t either property or pensions. This wealth is under 25% of the total wealth. To hit the numbers in the WTC report you’d need to quadruple the tax rates mentioned. At which point those golden geese are going to get very angry indeed, and fly a long way south/east – given that even Venezuela and North Korea will have advantageous tax regimes.

If not wealth, what?

So, my view is that the WTC’s proposals, however well reasoned, won’t happen. Yet at the same time there will be a need to find ways to increase taxes. And taxes will go up. How, and on whom?

• Tax non-voters. Expect corporation tax to increase. And certain corporations, such as tech companies, to face particular increases in their tax. Foreigners are good people to tax – hence making rich tourists pay VAT. Would the UK introduce dividend withholding taxes on foreigners? Ex-UK investors own £1trn of UK listed shares; a 15% withholding tax here could raise £5bn a year, with scarcely any votes lost at all. And when dividends are cut and UK pensioners start moaning, they could blame it all on Brexit/the French/Labour/similar anyway.
• Tighten reliefs. The Tories have committed not to increase tax rates. But they haven’t promised to leave reliefs alone. Pension tax relief is the obvious relief to go after – higher rate tax payers get the lion share of the £40bn p.a. relief. The only fly in the ointment here is that those higher rate taxpayers are mostly Tory voters. Still, who else are they going to vote for? Other key reliefs are on VAT (exempt on the biggest bit of consumer spending, food – but politically toxic to change), ISAs (thankfully, not on the media’s radar screen – most journalists don’t have one), primary homes (whose owners mostly vote Tory), and greenery (which pays for plenty of lobbyists); I somehow don’t see any big changes here.
• Tax dead people. When cash is tight because of a pandemic killing people, surely the tax revenue opportunities are obvious – tax the victims? Yet for some reasons the Tories don’t like taxing dead people, and prefer to tax live people. The other political parties prefer to tax dead people, which seems sensible to me. The UK only raises £5bn a year from Inheritance Tax; if I was Chancellor I would aim to double this number. The politics is difficult here, mainly due to Tory baggage. Similar difficulties exist in the USA. However I think the USA is a hostage to wealthy lobbyists, and the UK can escape the trap.
• Tax unearned income as earned income. The UK, as with many countries, taxes jobs far more than lottery winners / trustafarians. This seems perverse. A key example is capital gains tax, where there is plenty of mood music suggesting capital gains tax will rise from 20-28% to similar levels to income tax (40-45%, for people paying capital gains). This could raise up to £10bn a year. While there are good arguments for capital gains tax being lower, they aren’t going to get a good hearing.
• Tax mansions. The wind has been blowing in the right direction here, but has laboured under the wrong label. Taxing massive houses is obvious. They don’t vote. They can’t be taken to Switzerland. They are clearly owned by very wealthy folkers. However when every Englishman aspires to owning a mansion, taxing ‘mansions’ is a limit on aspiration. In London, most homes will end up as mansions, which leads to people objecting to the policy on semantic grounds. The answer here is obvious – add more upper bands to council tax. My annual council tax, on my dream home, is less than 0.1% of the property value. How can I object to that tax rising from 0.1% a year to 0.2%? If you made my council tax £6k a year, that’s what would happen. Across the country, that could raise £10bn a year. Yet my international peers would kill for 0.2% annual property taxes.
• Tax evil stuff. In the UK we already have pretty high ‘sin taxes’, on petrol/gasoline, fuel, gambling, etc. But there is no tax on aviation fuel, even though we are an island and could enforce such a tax more easily than most. There is probably scope to increase many of these taxes – notably fuel duties, where Chancellors have been cowards since some unruly protesters held the country to ransom in 2000.

So, my two questions for you, dear readers, are as follows:

1. Are you, like me, sanguine about a one-off wealth tax of less than the market movements last month? If not, and please at this point read the WTC report, is it for any reason the report has omitted?
2. How would you, if you were the Tory government, raise £50bn a year of additional taxes, without harming the economy and still being re-elected, ideally with the Red Wall northern voters?