Taxing the rich: How a UK wealth tax could work

Forcing the affluent to pay higher taxes on their wealth – especially assets like property and stocks that can increase in value over time – enjoys broad-based support with the general public. But who counts as wealthy, and how can governments best levy these taxes?

A new report released on Wednesday drills down into how different types of wealth taxes could help shore up the coffers of the United Kingdom as it faces its largest peacetime deficit ever.

For example, a one-off, one percent tax charged for five years on individual wealth above 500,000 British pounds ($668,882) would generate 260 billion British pounds ($347.8bn) of revenue for the UK, found a report (PDF) by the independent Wealth Tax Commission.

Raise the threshold to two million pounds, and the proposed tax would produce a far less generous windfall of 80 billion British pounds ($107bn) for the UK treasury.

The half-a-million-pound threshold would affect 8,246 people residing in the UK, while the higher two million pound bar would impact 626 individuals.

A key advantage of a one-off wealth tax is that it is harder for the rich to dodge, given that it is based on individual wealth assessed at a particular date.

“Well-designed one-off taxes are very difficult to avoid since they are based on behaviour that has already occurred and past values,” said the report.

In contrast to a one-off wealth tax, an annual wealth tax would be a permanent fixture of the UK tax code (unless it is changed, of course).

The commission estimates that an annual 0.6 percent tax on wealth in excess of two million pounds would raise 10 billion pounds ($13.38bn) after administrative costs.

The report notes several drawbacks to an annual wealth tax, including the higher administrative costs associated with having to regularly assess individual wealth as well as the potential for people to find ways around it.

“Evidence from countries where annual wealth taxes exist suggests around 7 to 17 percent of the initial tax base would be lost to avoidance at a tax rate of 1 percent,” according to the report.

The commission further advises that if the goal of an annual wealth tax is to raise more revenue from the well-off, then a new tax is not the way to go.

“Existing wealth taxes could simply be adjusted, and this would bring in more revenue from people with wealth,” the report argued.

However, if the goal of the annual wealth tax is to tackle persistent inequality by forcing the affluent to pay their fair share, then “a wealth tax with a high rate could achieve this,” the report stated, “but only if avoidance behaviours could be minimised.”