Tax Reform: a wealth tax?

I follow, on Twitter, the so-called “Red Tory” Philip Blond.

He has tweeted a few times today about a wealth tax and a tax on land values (which the think tank ResPublica is working on, and which is a much better idea).

A wealth tax is a tax on net assets, that is, the value of what you own less what you owe. It’s usually levied at a few percent a year. Many countries have such a tax (in France, it’s called l’impot sur la fortune). It’s quite different to an income tax, which is a tax on what you earn. In theory, it’s a great idea. In practice….

The big problem with a wealth tax is determining the value of what’s being taxed. It’s a practical problem, not an economic problem. Values go up and down. It’s relatively easy to value liquid assets, like publicly-quoted stocks and shares, but what about the value of a private company? The old master on the wall of the mansion house? M’lady’s tiara? The contents of the cellar? Do you have to get a valuer in every year? Or do you value it, say, every five years and then apply an indexation figure for a particular class of asset?

Immediately you run into complications. And it immediately creates an opportunity for tax advisers, who will be all over your assets (if you are rich) working out how to minimise their taxable value. Much as they do with income and capital gains. This isn’t necessarily a bad thing, after all, the tax profession is an important sector in our service economy…. but in my view it is a significant weakness in the proposal.

I think that objective determination of the tax base is very important to make taxes fair. It’s a weakness of income tax that income (specifically, the difference between income and capital gain) is  subjectively determined, according to complicated rules which create an ecosystem in which tax professionals thrive.  It’s this complexity that explains why the 50p top income tax rate will raise much less than it should and won’t solve the deficit problem.



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