What is a wealth tax?

You may have seen the news recently that Labour has confirmed it has no plans to introduce a wealth tax (or introduce other tax reforms that could change the UK’s regressive system). This has been widely criticised as bad economics and politically dubious.

So what is a wealth tax? Well, it’s a tax on the total value of your assets minus any liabilities, so your house, investments, pension and so on. Colombia, Norway, Spain and Switzerland all have wealth taxes; they can be one-off or annual. 

The arguments against introducing a wealth tax include the fact the country’s richest may just up and leave, as many did in Norway. But in the UK, Prospect found taxing wealth above £5m would have support among voters. 

The TUC recently published an analysis that shows a modest wealth tax on the richest 140,000 individuals, around 0.3% of the UK population, could deliver a £10.4bn boost for the public purse. The wealth tax would only be applied, using a similar model to Spain, to wealth above £3m (excluding pensions) with a marginal tax rate of 1.7%, rising to a rate of 2.1% on wealth above £5m and to 3.5% on wealth above £10m. 

That means someone with £3m of wealth would pay nothing, someone with £4m would pay £17,000 and someone with £9m would pay £118,000.

The current UK tax system is very supportive of private domestic and international investors and households lucky enough to own property, whose assets further inflate. This, unsurprisingly, has a disproportionately negative effect on women, who make up the majority of lower earners.

The TUC said it is inherently “unfair and unjust” that people who get income from assets or property get off more lightly than someone who relies on work.   

“It is absurd that a nurse pays a bigger share of their income in tax than a city trader does on profits from their investment portfolio,” said general secretary Paul Nowak.

“That’s not only fundamentally unfair and unjust – it's bad for our economy too. 

“Our broken tax system means those at the top are hoarding wealth and getting richer and richer, while working people struggle to get by.”

Other options

However, is a wealth tax the most effective way to tax wealth? That’s the question professor Richard Murphy posed in a recent op-ed in the National. Valuing assets is very tricky, and the cost of collecting a wealth tax would be very high, he argued. £10bn is also a relatively small sum.

“It is my suggestion that making many changes to existing taxes is the way to address this issue – not least because I think this will raise considerably more money than a wealth tax,” he said.

Murphy is laying out 30 proposals to tweak existing UK taxes to make them fairer instead, sending them out in his blog, Funding the Future (a favourite of Rebalancing Act that we recommend reading!) For example, his latest proposal is that reducing the annual exempt amount of capital gains tax a person might get a year to £1,000 might raise at least £0.4bn of additional tax.

So, what do you think about a wealth tax? Let us know as your action of the week and keep sending us your questions.