So how does a wealth tax work then?

Ed Balls: Labour would impose permanent wealth tax on rich

I know he\’s talking about a mansion tax (better dealt with by LVT or at least more council tax bands) but a wealth tax.

Let\’s take the mythical rentier. They\’ve got £10 million in moolah. Decent house, holiday home. £8 million in actual cash. Retired, or they\’re living off their capital income.

So what is income from capital these days? Say they\’re in gilts. They get, what 1% these days?

So, income £80k. They\’ll pay £30 odd tax on that? Net income £50k.

Now we want to tax them on their wealth. 1% say. That\’s £80k a year in tax then. More than their income.

So, err, who is going to stick around to be taxed at over 100% on their income?

Yes, I know that it\’s nominally the wealth being taxed. But taxes have to be paid out of liquid cash, don\’t they?

27 comments on “So how does a wealth tax work then?

  1. I think Labour peer Joan Bakewell made a similar point in an article in the Guardian last year when the Lib Dem’s Mansion Tax was being discussed.

    She said it wasn’t fair that she should have to pay a Mansion Tax on her £5m Primrose Hill as she was a poor pensioner and her house wasn’t really a mansion as when she bought it in 1970 this 5 bed town house in a leafy garden square was a little derelict and “sooty”.

    Needless to say she didn’t elicit much sympathy.

    More to the point what happens in other countries with Wealth Taxes ? Do all the asset rich rentier class move overseas or just pay the tax out of capital ?

  2. Shinsei

    The fact that London is full of wealthy foreigners is not because of the nice weather so yes wealthy people tend to be very mobile and their capital even more so

  3. “More to the point what happens in other countries with Wealth Taxes ? Do all the asset rich rentier class move overseas or just pay the tax out of capital ?”

    At least in my country (Finland), there is a specific law to cap combined taxes at 70 % of income. Thus, if you own 1 M€ and have an income of 10 k€, and if your wealth tax were 1 % of wealth and income tax were 10 % of income, you’d still only pay 7 k€, not 11 k€.

    This is no longer so relevant because the wealth tax was abolished as a counter-productive instrument.

    (For additional, somewhat related discussion about Sweden, look up “Pomperipossa in Monismania”.)

  4. In France, the “Impôt de solidarité sur la fortune” raised about €3.3bn in 2010 and €4.4bn in 2011 (source: French Wikipedia, so take with a pinch of salt). Around half a million households were hit; and the threshold for payment is €1.3m. The sums raised aren’t insignificant; but the risk to Britain is particularly great given the concentration of highly mobile millionaires in London.

  5. Andrew M (#5), didn’t the UK Treasury estimate that non-doms pay around £7bn in tax (£4bn income tax and £3bn other taxes)?

    They’re probably the most mobile of the rich, so most at risk of clearing off if we tax them too much, and they alone are paying twice what the Frogs’ wealth tax collects.

    So, as you say, very risky for us.

  6. @Emil:

    “so yes wealthy people tend to be very mobile and their capital even more so”

    However there are still plenty of asset rich French people continuing to live in France. They haven’t been sent abroad by France’s wealth tax.

    The French living in London are largely here to work in professional jobs and not to avoid wealth taxes.

    So my question is just one of evidence. Is a wealthy Brit with £10m in the bank going to move overseas or just stay in his Old Rectory and whinge about the wealth tax ?

  7. “But taxes have to be paid out of liquid cash, don’t they?”

    Ahh, but you’ve missed the master-plan behind this! They decide to sell up and move and their nice house becomes available for Minister’s relatives and ‘Guardian’ columnists and…

    Wait. I mean ‘decent poor people’ to rent, obviously.

  8. ‘Say they’re in gilts. They get, what 1% these days?

    So, income £80k. They’ll pay £30 odd tax on that? Net income £50k.’

    In part, that’s just the point. They sell the gilts and invest in something with a higher social return.

  9. And who are the wealthy going to sell to? Why would you want to buy a property which will just land you with an even bigger tax bill?

    A wealth tax can only be paid out of income or by selling the asset. It’s not really a tax on wealth at all but on house inflation, caused in part by the government’s failure to manage the economy properly.

  10. As Cyclefree correctly points out all these schemes are just ways of taxing property inflation, or rather the super-normal property inflation of London and parts of the South East.

    All genuine wealth whether earned through a 9-5 job, or made entrepreneurially or made through careful investment has already been taxed as income, dividends or capital gains.

    However buying a town house in London in 1970 on a university lecturers salary and being able to sell it today to a Goldman Sachs MD is untaxed. Surely can’t be beyond the wit of man to find a solution for this particular “problem”.

  11. “Wealth taxes” in the wider sense simply don’t work – either they don’t raise much money or the tax base is eroded through evasion and political pressure-loopholes. And they are in effect just a surcharge on income tax.

    A tax on the rental value of land, on the other hand, suffers none of these problems. There’s a huge tax base; land is easy to value and can’t be hidden or taken abroad; there are plenty of bad taxes we can get rid of (choose your own list of most hated taxes); taxes on land spur rather than hinder economic growth; and as we know from logic and observation, cuts in taxes on earned income push up land rents so most existing taxes can be replaced £ for £.

    Of course, to understand this, you have to realise that “land” or its rental value is neither true capital nor true wealth. It is just there, and under current rules, individuals try and grab as much as possible for themselves without adding anything to the overall stock of wealth, it is a negative sum game.

  12. wealth taxes are often proposed by people are don’t understand this, so we see proposals for daft levels of wealth taxation.

    A wealth tax has to be small if it’s going to work, for the reasons you suggest (otherwise, assuming for sake of argument the tax is not simply evaded, we’d see fire sales of assets).

    however, even a small wealth tax would be problematic for people with lots of wealth and little income. If they can’t transform some of their wealth into income (i.e. by selling the big house and using the proceed to buy income yielding assets) then they just have to sell the wealth and use the proceeds to pay the tax.

    oh well, they’ll still be rich afterwards.

  13. Cyclefree is right.

    I saw a hilarious Occupy spokesman on US saying rich people’s million dollar houses should be seized so that they could be sold to raise money.

    No one asked “To who?”

  14. Dave: “It’s not a land tax we need, but a planning permission tax. “

    Proper LVT is defined as the rental value of any site assuming optimum permitted use minus the cost of providing/maintaining the actual building on it etc.

    So by definition, LVT is pretty much the same as a tax on the annual value of the planning permission embedded in each building.

    Building more houses is a bit of a second-best approach. The total land rent generated by an economy is a fairly fixed figure, building more houses spreads it around a bit more thinly, but the total return to land ownership stays the same (and it’s more efficient to use existing buidings first before we build new ones, Hallowed Green Belt and all that).

  15. “Building more houses is a bit of a second-best approach.”

    Not so much. The reason the mansion-tax is being proposed is that homeowners in the SE (and to a lesser extent in other parts of the country) have made huge profits as demand for housing has increased whilst supply hasn’t kept up. You could tax those profits, or simply bring down the value of their houses by building lots more.

    “and it’s more efficient to use existing buidings first before we build new ones”

    Absolutely, and yet I seem to be the only person on this blog in favour of HS2 (at least in principle). No-one currently wants to live up North, but build a rail link so you can get to Manchester in an hour or less and that’ll change.

  16. Dave; “You could tax those profits, or simply bring down the value of their houses by building lots more.”

    That’s the point though – we build new houses elsewhere, and who banks the winnings? The farmers and others who own land which now gets planning. So we’re taking away some of the windfall gains from existing homeowners and giving them to other landowners. This leads to an even greater concentration of wealth (away from Poor Widows in Mansion and into the pockets of large landowners at the urban fringe).

  17. @Cyclefree

    ‘And who are the wealthy going to sell to?’

    This is a bit of a non-issue. The effect of the tax-incidence on assets is just to lower their price to the point at which the additional tax burden is offset for any potential purchaser.

    ‘A wealth tax can only be paid out of income or by selling the asset.’

    Or by making the asset productive in real or financial terms (eg: a mortgage).

  18. @Diarmid Weir: “In part, that’s just the point. They sell the gilts and invest in something with a higher social return.”

    There’s something about your view I don’t understand, mostly arising from why a government would simultaneously be trying to discourage people from holding gilts while also issuing such gilts. If you have a chartalist-influenced perspective then I suspect it makes more sense, so these are queries rather than criticisms, but:

    a) If the government does not want rich households to hold the gilts, then who do they want to instead, and why is this advantageous?

    b) If the government believes that gilts have a relatively low social return, why are they issuing them in the first place?

    c) If such a policy is effective at getting the wealthy to sell their gilts, then how large an effect is this expected to have on the gilt rate?

  19. Mark Wadsworth is, as usual ,right about the superior tax qualities of LVT which he knows more about than practically everybody, being a chartered tax advisor at a very prestigious firm.
    But Tim W does appear to endorse LVT (not for the first time) in his intro to this piece ,though the syntax is somewhat confusing (missing word?)

  20. @ Diarmuid Weir: “The effect of the tax-incidence on assets is just to lower their price to the point at which the additional tax burden is offset for any potential purchaser”

    Or in other words your wealth is reduced so that you no longer have to pay the tax on the wealth which you don’t have because of the tax.

    Doesn’t it make more sense to tax when sold rather than try and levy a tax on a notional value?

    Anyway, what with all these 6 metre conservatories being built over the small gardens of terraced houses, remaining houses will be all but worthless and the Tories will have reintroduced “back to back” slums.

  21. Ed Balls and his minions (including your pal Ritchie) still haven’t worked out that a tax on wealth can only be applied once, and not in perpetuity.

    A trip to Chatsworth to see the history of why it was turned over to the National Trust (90% inheritance taxes) may help, but I think Ed Bollocks really is too stupid to comprehend.

  22. Pingback: Ed Balls’ “Wealth Tax” – Malcolm Bracken

Leave a Reply

Name and email are required. Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.