Context
Against the backdrop of a cost-of-living crisis, high inflation and mounting concerns over inequality, differing types of wealth taxes are gaining attention. But will the proposed taxes work? And what will be the potential implications?
KPMG International hosted this roundtable discussion, which focused on the UK but with global implications, to explore the potential role of wealth taxes in addressing the widening wealth gap and fostering a fairer society; their effectiveness and feasibility and any potential unintended consequences and potential behavioral responses from individuals; diverse international approaches to wealth taxation; challenges around implementation and enforcement; as well as alternative policy options to address these issues.
The conversation was held under the Chatham House Rule (which means nothing can be attributed to attendees) and was attended by seventeen specialist participants (see below for a list of attendees). The write-up below summarizes the personal views of participants and does not necessarily reflect the view of any particular organization, including KPMG International.
Executive summary
- Wealth concentration, productivity challenges, labor market participation rates and the ever-growing need to raise revenues to support public services and deal with climate transition and more have resulted in growing momentum behind a conversation around wealth taxes.
- There is a strong moral and philosophical case for wealth taxes and arguments around permissible levels of inequality.
- There are concerns that national wealth taxes may cause an exodus of wealthy individuals and disincentivize entrepreneurship. International wealth taxes may resolve these potential problems but how they are implemented remains in question.
- There are practical challenges regarding the implementation of a UK wealth tax, including how we value assets properly, limited data for comparison internationally, whether or not revenues should be hypothecated and the impact of politics and political ambition.
- Alternatives to a UK wealth tax were explored, including reforming income tax, inheritance tax and/or capital gains tax. Furthermore, the attendees discussed whether economic growth could be more effective at generating revenues to support public services, though this will not impact wealth concentration.
Why wealth taxes and why now?
Wealth concentration, productivity challenges, participation rates and the need to raise revenues to support public spending.
Participants suggested that the topic of wealth taxes is at the forefront of debate in the UK currently for several reasons.
One significant overarching trend is the increase of wealth relative to income over the last century. It was argued that as total wealth rises for those who inherit at a faster pace than those relying on earnings. Thirty percent of lifetime income for those born in the 1980s will be inherited.1 It is vital to talk about this now as wealth is becoming both increasingly concentrated and distorted.
It was also implied that in order to have both a functioning society and a functioning economy work needs to pay. In terms of efficiency and productivity, it is less than ideal to have a group of individuals who do not need to participate in work due to their unearned incomes.
It was suggested that the current UK tax system is better at taxing earned rather than unearned income. At a time when many have been feeling the impact of the cost-of-living crisis, Porsche celebrated record car sales.2 This disparity is not going unnoticed. The growing public pressure to rectify this imbalance is sparking debate about the need for wealth taxes.
There was general consensus that the current degradation of public services combined with economic and environmental pressures requires further discussion on potential reforms to several taxes, including wealth, to increase revenues. It was also suggested that wealth's relative stability, compared to income, makes it a useful source of revenue at a time when many things are unpredictable. The question of how we pay for the regeneration of public services and infrastructure is a key component in the consideration of wealth taxes at this moment.
Deepening this argument, it was suggested that with almost 8 million people waiting for NHS treatment3, the UK faces a productivity crisis that will only reinforce economic stagnation and social polarization. Wealth taxes, it was suggested, could be part of the solution to raising sufficient revenues to restore public services like the NHS.
What are some of the moral or philosophical cases for wealth taxes?
Addressing inequality, decision-making behind a “veil of ignorance” and corrosion of societal trust.
When attempting to decide what is fair, one participant referred to the “veil of ignorance” argument made by Philosopher John Rawls.4 It suggests that when considering fundamental principles of justice, we should imagine we sit behind a veil of ignorance that keeps us from knowing who we are and identifying with any personal circumstances such as class, wealth or social status etc. By imagining this scenario, the suggestion is that people would be more likely to choose policies that would be just for everyone (in terms of equal basic rights and liberties but also regarding what is permissible in terms of social and economic inequalities) regardless of their specific life situation. Individuals would not want to risk being disadvantaged by the system they help to create.
Rawls’ Difference Principle was also cited – that economic inequalities of income, wealth, powers and prerogatives are only acceptable if they can be arranged to maximally benefit the least advantaged members of society, making them better off than they would be in any alternative economic system. It was questioned whether most people would agree that current levels of wealth inequality align with this principle.
What type of society do we wish to operate in and what do we consider to be permissible from a moral standpoint? Here, a question was raised about whether the level of wealth inequality we see currently is also detrimental to economic purposes. Is it enough to drive productivity and entrepreneurial spirit or so excessive that it is impeding it?
There was also an argument made that taxing wealth is viewed as discretionary while taxing income is not. If you pay ‘PAYE’ there is an expectation that every penny is paid while those with wealth are not only taxed at a lower rate but also have the ability to take advantage of loopholes in the system. It was argued that this has a corrosive effect on societal trust and one participant acknowledged that while wealth taxes may not be a silver bullet, reforming them is an important signal regarding the type of society we wish to live in.
Are wealth taxes effective?
Exodus of wealthy individuals, disincentivization of entrepreneurship, international wealth taxes and modelling the revenues of an annual UK Wealth Tax.
During the conversation, some participants suggested that wealth taxes may not be the most effective way of achieving a fairer distribution of wealth, nor to raising revenues to meet the growing societal need to better fund public services in the UK.
It was suggested that if introduced, they could see an exodus of wealthy individuals who could simply move their fortunes elsewhere. Norway was highlighted as an example where this has been the case.5 However, the correlation may not be direct due to compounding factors. Evidence from The Wealth Tax Commission suggests that the reason for the flight is little to do with wealth tax but rather the changes to Capital Gains Tax. Since 2006 Norway has had a CGT, which – as in the UK – applies to gains on realization. Like the UK the tax is largely residency-based and in the case of Norway, under the old rules, if they left before 29 November 2022, there was a ‘deferred’ exit tax which expired five years after departure unless the shares had been sold in the interim. This meant that leaving Norway for five years provided a relatively easy way of avoiding CGT. Since November 2022, however, the exit tax obligation remains indefinite, and the shareholder must pay an increased rate of CGT – currently 37.84% – upon the sale of shares. The Wealth Commission suggests that this change rather than the Wealth Tax, was the cause of the response seen in Norway and demonstrates that pre-announcement of certain reforms can be costly when there are delays in implementation.6
It was also suggested that increasing the tax burden in the UK would impact entrepreneurship and relatively low tax rates in the UK are good for business and investment. An international wealth tax could alleviate many of these issues but there was an understanding that there are many barriers to achieving this including: geopolitical issues, the absence of a global body equipped to govern this and how revenues would be distributed fairly.
Countering some of the concerns raised in the discussion, it was noted that a wealth tax in the UK has the potential to generate substantial revenues and work effectively to meet the needs of the country. Findings from the Wealth Tax Commission suggest that a one-off wealth tax payable on all individual wealth above £500,000 and charged at 1% a year for five years would raise £260 billion; at a threshold of £2 million, it would raise £80 billion. Alternatively, though the report does not recommend it without reforms to existing taxes on wealth in the UK, an annual wealth tax starting above £2 million at a rate of 0.6% could raise £10 billion after ongoing administrative costs.7 Revenues of this scale would contribute substantially to the funding requirements of public services and would also begin to tackle wealth inequality.
What are the practical challenges?
How do we value assets properly, limited data for comparison, should revenues be hypothecated and, what role does politics play?
In terms of the practical considerations regarding a UK wealth tax, a few issues were raised. Firstly, some suggested that valuing assets properly will be key to the success of any future wealth tax reforms. It was highlighted that data deficiencies are a major barrier to understanding the true distribution, composition and size of household wealth in the UK. According to evidence from the Wealth Tax Commission, nearly £800 billion of wealth held by the very wealthiest UK households is missing,8 and there is tentative evidence to suggest that survey measurements of high-wealth families may undervalue their assets – the actual wealth held by these households in the UK may be approximately 5% higher than what is reflected in the survey data.9 How to go about valuing assets correctly is a key challenge to the notion of a UK wealth tax.
It was also suggested that there is limited data upon which to build assumptions about a wealth tax in the UK. Very few countries have implemented them and there are complicating factors when comparing data sets. For example, wealth taxes in Switzerland are administered locally rather than nationally, which can impact how likely wealthy individuals are to move abroad.10 The problem of data comparison would also make it difficult to assess how a UK wealth tax is performing. This is an area for further exploration.
There was a suggestion that a body akin to the UK’s Low Pay Commission may be useful in providing independent advice to the government on the economic affordability and benefits of a wealth tax as well as highlighting practical reform to reduce inequality through its implementation.11
In addition to the goals of raising revenues and reducing wealth inequality, there were also recommendations regarding how best to design any potential wealth taxes to encourage investment in productive assets. The idea of hypothecating revenues was also suggested to help focus the benefits from revenues raised by a wealth tax on the most pressing national issues.
Participants also highlighted the practical challenges presented by politics in the UK. It was suggested that presenting tax increases (or additional taxes) in the current economic climate, though necessary, is politically challenging. Political decisions around gaining voter support could play a huge role in the taxes we are likely to see reformed and implemented. At the same time, public awareness of current tax rates, for example, income tax versus corporate income tax, needs to be improved to bring the public on board. A better general understanding of the current state of affairs is necessary for people in the UK to make more informed decisions and evaluate proposals such as a wealth tax, in a measured way.
What are the alternatives?
Reforming income tax, inheritance tax or capital gains tax? Striving for economic growth in the round? What about wealth concentration?
During the conversation, many alternatives to a wealth tax were proposed. One proposition was to increase both income tax and the minimum wage to increase revenues. Another option could be to reform inheritance tax or make death a realization event for capital gains tax. The problem of underused land was also raised, along with tax incentives designed to encourage real estate to become a productive asset.
It was suggested that to rejuvenate public services, we should also look beyond taxes, towards growing the economy in the round – considering various facets of the economy simultaneously such as fostering growth, addressing wider inequality, and promoting sustainability etc. Do we, for instance, want the tax system to be neutral? Do we want to encourage people to invest in productive assets for example – steering investment into the right parts of the economy? Whatever it is, solving complex economic and social problems will involve a more experimental attitude to reform.
Some in the room suggested that in order to tackle wealth inequality we must look at the business sector. It was suggested that the UK should consider taxing businesses not solely based on their operational activities but rather on their ownership, as many businesses are owned by wealthy people. A wealth tax, it was argued, is the optimal solution for reducing wealth concentration in this regard.
We would be really interested in what you think – should wealth be taxed more, if so how, and if not where should money for reform, infrastructure, transition and public spending come from? Do get in touch and let us know your thoughts: becky.holloway@jerichochambers.com.
Contributors to the discussion included:
- Arun Advani, Associate Professor Economics Department, University of Warwick
- John Connors, Tax Counsel, Vodafone Group plc., Chair, International Chamber of Commerce Global Tax Commission
- Rosie Ferguson, CEO, House of St Barnabus
- Mubin Haq, Chief Executive Officer, abrdn Financial Fairness Trust
- Susan Himmelweit, Professor of Economics, Open University
- Becky Holloway, Programme Director, Jericho
- Neal Lawson, Partner, Jericho
- David Linke, Global Head of Tax and Legal, KPMG International
- Chris Morgan, Head of the KPMG Global Responsible Tax Project, KPMG International
- Paul Nowak, General Secretary, TUC
- Eithne O’Leary, President, Stifel Europe
- Robert Palmer, Executive Director, Tax Justice UK
- Steve Rigby, CEO, Rigby Group
- Tim Sarson, Head of Tax Policy, KPMG in the UK
- Nicola Smith, Head of Economics and Employment Rights, TUC
- Grant Wardell-Johnson, Global Tax Policy Leader, KPMG International
- Phil White, Founding Member, Patriotic Millionaires UK
