How we can make sure the wealthiest pay more tax than normal people

We recently wrote that, once you take into account total economic income from all sources including unrealised capital gains, the richest pay a very low percentage rate of tax – lower in fact than most normal people, including most people reading this article. If you have not read that article, it might be good to take a look before reading this one.

We pointed out that the graph which showed this was illustrative but not precise as it relied on simplifying assumptions. The most significant are 1) that there is such a thing as a ‘normal’ wealthy person, whose income from different sources can be standardised and 2) a ‘normal’ year in which the increase in wealth approximates to the long-run averages. We cited the examples of Warren Buffett (huge wealth, very low earned income by billionaire standards) and Denise Coates (not quite such huge wealth, very high earned income by billionaire standards) to illustrate the first point. And Donald Trump’s economic policies are illustrating the second as we write.

This article asks, could we really make the system progressive, or should we just give up?

We should not  give up. There are many ways that the problem could be addressed in principle. The simplest and most direct is to introduce a wealth tax:

  • A well-designed wealth tax could make our system progressive;
  • Like all taxes, it would face practical issues, and avoidance would be an issue – but the obstacles are not insurmountable;
  • If it did cause an increase in ‘capital flight’ this could be turned to the advantage of the 99%.

A wealth tax would make our system progressive

There are many possible forms of a wealth tax: we have chosen to illustrate one promoted by Tax Justice UK and Patriotic Millionaires,  which they estimate would raise £24 billion per annum. Their suggestion is to tax all wealth above £10 million at an annual rate of 2%.

In this article we use the same assumptions as last time, plus one additional one: to be fair to the billionaires, we should recognise only their real (inflation-adjusted) income, not their nominal income. If the value of their assets rises by 7% in terms of pounds sterling, but inflation runs at 2%, their real increase in wealth is only 5%. On that basis, adding such a tax would produce a very different shape to the curve:

A graph showing how a wealth tax could make our system progressive

The original curve was progressive only up to the point where total economic income was around £200,000 per annum, then flattish, and then falling sharply for those whose economic income is largely in the form of unrealised capital gains. The wealth tax would eradicate this decline and produce a system which is far more progressive.

There are, of course, many potential variants of this proposal. A slightly simpler to implement version would be a one-off wealth tax. But this would be a temporary solution to a permanent problem.

There are practical complications but not insurmountable

Like all taxes, this one faces complications.

One set of complications is administrative: ‘wealth from all sources’ is not an easy-to-establish number. That could include (in increasing order of difficulty of valuation) cash at hand or in the bank; stocks, shares and other quoted securities; land and property; art, wines and jewellery; and privately owned businesses and other illiquid assets. Setting a value on all these things would not be straightforward, and of course, the very wealthy would not hesitate to argue about the valuations.

Another set regards avoidance, some of these forms of wealth are movable, and the very wealthy would be tempted to move them to a lower tax jurisdiction if possible. Many are fungible, they could be sold and converted into a movable form. And, of course, there would be many tax avoidance schemes created around transfers of ownership – at the lower levels, within the family (if I had just over £10 million, I could share it between my relations in such a way that no one had more than the threshold level of wealth) and at higher levels, by using trustees in tax havens as the legal owners of the wealth.

These problems are not unique to a wealth tax – as we saw in the Panama papers, there is a huge and flourishing tax avoidance industry – but no one argues that we should abolish income tax because some people have found ways to avoid it.

A better-funded and more clearly briefed HMRC, especially if it cooperated closely with the EU anti-tax avoidance programme, would be able to tackle many of these issues.

Capital flight could be advantageous to the bottom 99%

A final counter argument is that it would be counter-productive: if we dared to try such a thing, the wealthiest would all leave the UK for Monaco or Dubai, the trickle-down effect (which has of course not been visible, despite many years of assurances) would cease and we would all be worse off. In a previous article, What if We Shrug?, we tackled this suggestion and argued that, on the contrary:

  • First of all, in terms of their money, many have already left;
  • Secondly, the saner and more patriotic ones would not leave;
  • Thirdly, if more of the unpatriotic ones did leave – and we shut the door behind them – that would free up real resources to fix the problems the country urgently needs to address.

The point about shutting the door is particularly important. In the past, it has been possible to leave for tax purposes but continue to enjoy all the benefits that the UK has to offer including huge influence over our politics. That must change. If they choose to leave, they should not be able to spend more than a few days per year in the country; they should not be able to buy UK land, businesses or pre-existing assets; they should not be allowed to own critical national infrastructure; they should not be allowed to fund political ‘think tanks’; and they should not be allowed to make political donations.

This is one case where ‘leave’ should mean ‘leave’.

Conclusion

Our current tax system is unfair to 99% of the population. We have not fixed it because of a combination of significant but not insurmountable practical concerns and fear of upsetting the rich and powerful.

This government promised to take tough decisions in the national interest. Here is a good one to start with.

If you think more people should be aware of how unfair our tax system is today, and how we could fix it, please share using the buttons below.

And take a look at the 99% Organisation and join us.