Polly Toynbee tells us that there should be a wealth tax. To, umm, well, do something or other:
But what if, with one bound, we could be free? Extraordinary times need astonishing remedies. In this very rich country, private wealth has soared to six times the value of annual GDP. So take a deep breath and jump in. A once-in-a-lifetime windfall tax of 10% on all wealth would yield £1 trillion – enough to pay for all the things we regard as essential for civilisation.
It wouldn’t yield £1 trillion, that’s a mistake so bad that even Richard Murphy has noted it – and if you’re further behind the economic knowledge curve than him you really, really, need some help. For the majority of that wealth is in pensions and we’re not about to go tax everyone’s pension. Next comes housing equity, which we’re also not going to tax and then half the remainder is in ISAs which we’re not going to……and we end up with perhaps £900 billion of wealth that might conceivably be taxed. And however hard we try to tax that we’re not going to gain £1 trillion.
That calculation comes from Professor Arun Advani, one of a team of people working on an Institute for Fiscal Studies project devising a wealth tax that would work. They are in close conversation with the Treasury, which wants results by the end of the year, to explore every kind of wealth tax and find a solution to every obstacle (there are many) in its way. The Institute for Fiscal Studies 10 years ago produced its Mirrlees review offering a totally reformed tax system, removing unjust reliefs and rebalancing more fairly. But the government moved in the opposite direction – taxing hard work more and wealth less.
At which point we’ve got to understand something about Mirrlees. Sure, that team is working on a wealth tax that would work. But they’re really rather restricted in what they can do – because the Mirrlees basic thought is that wealth – capital and the income from capital – shouldn’t be taxed at all. The point being that we like people investing because investment is what makes the future richer. We also know that we get less of the things we tax. So, why would we tax the people doing the very thing that makes our own future richer?
It gets even worse than that. In that Mirrlees Review this is made plain. To the point that the actual suggestion (here) is to tax wealth and capital less, not more:
There is a strong case for substantial reforms to the taxation of savings. In
keeping with our goal of promoting neutrality toward savings for the
majority of taxpayers, we favour an approach that exempts the normal
return to savings from taxation.
Currently the nominal returns – including both normal and excess – to capital are taxed. The Mirrlees Review would more to taxing only real returns and then only excess and not normal. This would be a substantial reduction in the taxation of returns to capital. It would also be economically correct and even rather wondrous but it wouldn’t, not in any short to medium term sense, increase the amount of revenue collected.
So Polly’s a bit out of luck there.
There is a coda though here to pensions taxation. It’s Thomas Piketty who complains so much about the increase of the wealth to taxation ratio. But this is a natural outcome of longer lifespans. Even two generations ago – about the time he starts complaining about – life in retirement was expected to be some handful of years. So, lifetime savings to pay for retirement were small as a percentage of lifetime earnings. Saving too much is a bad thing just as much as saving too little is, after all.
Now we expect to spend some two decades in retirement – yes, average lifespan is 80 summat, but it’s higher for those who have already reached 65 – and that means that we’ve got to save more of those lifetime earnings to pay for that period of time. When measured at the macro level then that ineluctably means that the savings/wealth to GDP ratio will rise. And, err, pensions savings are about 3 to 3,5 times GDP which is exactly the movement Piketty complains about.
The other more interesting little point is say that we do go tax everyone’s pensions. That should mean that we go tax everyone’s pensions of course. Including all those defined benefit ones. All those senior civil servants with a £1.5 to £2 million pension pot. Give us £200k please, right now, out of your income.
Hmm, actually, I’m coming around to the idea. Especially as Polly’s likely to have such a defined benefit pension off The Guardian and there are rumours that her house in London is worth £6 million and up….