Evidence Papers
To develop a comprehensive evidence-base for this project we commissioned a series of papers written by a network of world-leading experts on tax policy. These include thirteen ‘core’ evidence papers covering key issues of principle and design, and over twenty additional ‘background’ evidence papers, making this the largest repository of evidence on wealth taxes globally to date. Our final report, based on this evidence, was published on 9th December 2020. You can read the report here.
THE UK’S WEALTH DISTRIBUTION AND CHARACTERISTICS OF HIGH-WEALTH HOUSEHOLDS
Arun Advani, George Bangham and Jack Leslie
Household wealth is profoundly important for living standards. We show that wealth inequality in the UK is high and has increased slightly over the past decade as financial asset prices increased in the wake of the financial crisis. But data deficiencies are a major barrier in understanding the true distribution, composition and size of household wealth. We find that the most comprehensive survey of household wealth in the UK does a good job of capturing the vast majority of the wealth distribution, but that more than £1 trillion of wealth held by the very wealthiest UK households is missing. We also find tentative evidence to suggest that survey measures of high-wealth families undervalue their assets – our central estimate of the true value of wealth held by households in the UK is 7% higher than official estimates.
THE ECONOMICS OF A WEALTH TAX
Stuart Adam and Helen Miller
This paper asks when a wealth tax would be desirable in principle, setting aside the practicalities and politics that would be crucial in reality. If a wealth tax were unexpected and credibly one-off, it would be an efficient way to raise revenue and could be used to address existing wealth inequality, although whether it would be desirable hinges on whether it is considered fair. Making the case for an annual wealth tax, which would affect future wealth accumulation as well as existing wealth, is less straightforward. It requires explaining why it is better to tax the same wealth every year rather than taxing all sources of wealth once when they are received (and/or when they are spent). The theoretical arguments probably justify some taxation of wealth in principle, though it is questionable whether the achievable benefits outweigh the costs of an imperfect wealth tax in practice.
BEHAVIOURAL RESPONSES TO A WEALTH TAX
Arun Advani and Hannah Tarrant
In this paper, we review the existing empirical evidence on how individuals respond to the incentives created by a net wealth tax. Variation in the overall magnitude of behavioural responses is substantial: estimates of the elasticity of taxable wealth vary by a factor of 800. We explore three key reasons for this variation: tax design, context, and methodology. We then discuss what is known about the importance of individual margins of response and how these interact with policy choices. Finally, we use our analysis to systematically narrow down and reconcile the range of elasticity estimates. We argue that a well-designed wealth tax would reduce the tax base (of reported wealth) by 7-17% if levied at a tax rate of 1%.
ONE-OFF WEALTH TAXES: THEORY AND EVIDENCE
Nick O’Donovan
One-off wealth taxes and recurring wealth taxes share many of the same properties, and face many of the same challenges. However, there are also important differences in how they operate, when viewed from the perspective of economic theory, tax administration, politics and ethics. In this paper, I survey the distinctive features of ‘one-off’ wealth taxes and consider how they have operated in practice for countries that have implemented them. Over the past century, several countries have introduced one-off capital levies, with varying degrees of success. I examine two examples from the post-Second World War era, as well as three instances of more limited one-off wealth taxes implemented over the last decade.
VALUATION
Stephen Daly and Glen Loutzenhiser
This paper considers valuation issues under a wealth tax. Valuation issues are frequently cited in the literature as the most problematic aspect of wealth taxes. First, we discuss some general issues, arguing that valuation should be based on ‘open market value’, but recognising that this value may be determined using either market transactions, future income or cost-based approaches, depending on the relevant practical constraints. Second, we turn to an examination of the most problematic asset types from a valuation perspective and consider a range of solutions to manage these concerns, drawing on international experience and the approaches already taken for other taxes within the UK system.
THE ADMINISTRATION OF A WEALTH TAX
Edward Troup, John Barnett and Katherine Bullock
In this paper we set out how a wealth tax might be administered in practice, how a system of returns, valuation, assessment and payment might work and describe some of the challenges which the UK tax authority (HMRC) would face in maintaining an adequate level of collection. We first set out some of the principles of tax administration, before turning to examine the administration of existing taxes on wealth (in the UK and overseas). Next we describe the various elements of tax administration and the issues and choices that the administration of a wealth tax would need to address. Then we examine tax leakage, the various potential areas of tax loss and the likely size of the tax gap for a wealth tax. Finally we consider the investigation and enforcement of a wealth tax by HMRC and the tools and powers that it might need.
REVENUE AND DISTRIBUTIONAL MODELLING
Arun Advani, Helen Hughson and Hannah Tarrant
This paper will build on estimates of the wealth distribution in Paper 1 and behavioural elasticities in Paper 5, to develop a dynamic model of the revenue and distributional impacts of a UK wealth tax. It will model different design options as well as various thresholds and tax rates. The paper will form the basis for a new open-access ‘tax simulator’ that will be available for use by the public in December 2020.
PUBLIC ATTITUDES TO A WEALTH TAX
Karen Rowlingson, Amrita Sood and Trinh Tu
This paper presents findings from the first study in the UK to focus on attitudes to an annual wealth tax. It starts by providing a brief review of key literature including recent studies of attitudes to wealth taxes in general and research on the drivers of attitudes to taxation. The paper then describes the mixed methods used in this new study, which aimed to measure and explore overall levels of support for a wealth tax compared with other taxes; arguments for and against a wealth tax; and opinions on the particular design of such a tax. We find high levels of public support for a wealth tax compared with other taxes. There is more support for including financial investments and property wealth (excluding the main home) within the tax base than for cash savings, pension wealth and the main home.
WAYS OF TAXING WEALTH: ALTERNATIVES AND INTERACTIONS
Andy Summers
This paper examines the role of a wealth tax in the context of the UK’s existing taxes on wealth. First, I outline several ways in which the UK could be said to tax wealth (or ‘the wealthy’) already, assessing their main deficiencies and options for reform. Second, I consider whether and under what circumstances a broad-based tax on the ownership of wealth – a ‘wealth tax’ – could be justified in addition to or instead of these reforms. Third, I consider how a wealth tax should interact with existing taxes on wealth, if one were introduced. I conclude that there is a large degree of consensus over existing proposals for how to reform our current taxes on wealth, and that most of these reforms are required whether or not a wealth tax is introduced as well.
WHY DID OTHER WEALTH TAXES FAIL AND IS THIS TIME DIFFERENT?
Sarah Perret
Wealth taxes are increasingly being considered as an option in policy and academic circles to collect additional revenue and address inequality. One objection that is often raised, however, is that they seem to have failed in countries that tried them. Is that so and does that mean that wealth taxes should be abandoned as a policy tool? This paper gives an overview of OECD countries’ experiences with wealth taxes and explores the different factors that have led to their repeal in most countries. The paper also discusses whether the situation might be different today and what the implications for tax policy might be.
DEFINING THE TAX BASE: DESIGN ISSUES
Emma Chamberlain
This paper considers several key issues regarding the design of the tax base for a wealth tax. First, I address the question of ‘who pays’, including the definition of the tax unit (e.g. whether individual or household) and the appropriate territorial connections with the UK for persons and assets. I also consider the tax treatment of trusts, foundations and estates under a wealth tax. Second, I consider issues relating to the definition of the tax base. I argue that in principle – leaving aside challenges of valuation and liquidity – a wealth tax should be broad-based covering all types of asset. I also discuss the deductibility of debt. Finally, I highlight how the threshold and rates of a wealth tax might affect key design choices.
LIQUIDITY ISSUES: SOLUTIONS FOR THE ASSET-RICH-CASH-POOR
Glen Loutzenhiser and Liz Mann
This paper considers liquidity issues under a wealth tax. The imposition of a tax on the stock of wealth can lead to difficulties for the ‘asset-rich-cash-poor’, if the assets upon which the tax is levied do not generate sufficient income and cannot be easily turned into cash, or where it is difficult or undesirable to dispose of the assets in order to pay the tax. The paper begins with a quantitative analysis of the scale of these problems. Next, we turn to the main administrative concerns, focusing on taxpayers who we identify as having potentially low liquidity based on our analysis and the existing literature. Finally, we consider a range of possible solutions to manage these concerns.
DELIVERING A WEALTH TAX: THE ROLE OF GOVERNMENT
Tom Pope and Gemma Tetlow
This paper sets out the role of government – particularly officials in the Treasury and HM Revenue and Customs – in delivering a wealth tax. We argue that it could take over four years to rigorously consider the options, build public support and effectively legislate for and implement a new net wealth tax. However, such a long timescale may not be consistent with the UK’s five-year electoral cycles, under which governments find it easier to pass major tax reforms early in the parliament. Ministers could seek to expedite the process but there would be risks in doing so, particularly if the tax were to affect a relatively large proportion of the population and if the government had no existing mandate for this reform.
BACKGROUND PAPERS
Various Academics and Practitioners
A series of background papers study other key issues such as devolution, the sources of wealth, and political economy issues. There are also two specialised background paper series: one on the structure of (past or present) wealth taxes in other countries, and one on the valuation of particular kinds of assets.