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On the silliness of the wealth tax idea

I tend not to bother much these days with the dead-tree press but occasionally I’ll pick up a paper on my journeys on London’s Underground to one meeting or whatever. Yesterday, Anthony Hilton, writing in his regular column in the Evening Standard, absolutely crushed the argument, as floated by the mis-named Liberal Democrats and its leader, Nick Clegg, that what Britain needs is a “wealth tax”, given the existence of current state grabs of our wealth upon death:

“What no one seems to have grasped, however, is that if a further wealth tax were imposed to be paid by people when they were still living, it would reduce the yield on inheritance tax. A wealth tax on the living would not raise additional revenue so much as bring part of the payment forward which would ultimately have come out of the person’s estate anyway on their death. This is most obvious in considering some of the schemes mooted to pay a mansion tax. It is understood that the nearest most people come to wealth is to own a house that has gone up in value over the years. Many of the people living in expensive homes are old and not particularly well-off in terms of income. The house is probably the only thing of real value they have. It means they do not have the ready cash to pay the tax.”

Absolutely. Hilton continues:

“This cash-flow problem could be overcome, it is suggested by wealth-tax supporters, by telling them to borrow against the value of their property through an equity release scheme. They would of course have to pay interest on the money thus borrowed, or have it added to their debt. Alternatively, it may be permissible for them to defer payment and allow the outstanding tax to roll up into a lump sum. This would then be collected on death when the house could be sold. Obviously, both solutions are possible. But both would directly reduce the value of the deceased’s estate, and would therefore result in a pro rata reduction in the amount of estate duty.”

And he plunges a stake into the heart:

“So we have a proposal that would deliver no increase in the overall tax take but would create even more impoverished pensioners, who would be most likely to get their revenge at the ballot box. It might not go down that well with younger voters either once they saw a wealth tax — or the fear of a wealth tax — take away any chance that their parents might help them with a deposit for a house.”

Of course, it is entirely possible that Clegg and his allies are only giving the impression of wanting to enact such a tax in exchange for agreeing to more, supposed spending cuts, and in reality, they realise how pointless and self-destructive such taxes could be. But it is also a sign of how far away we are from any coherent notions of tax in the first place. Consider: the current government recently sought to attract foreign investors to the UK by offering accelerated visas for those investing serious amounts in the UK; it has, it says, sought to clarify rules about domicile and residence. Last year, finance minister George Osborne vowed to cut the top rate of income tax to a still-high 45 per cent. Imposing a wealth tax would blow such limited moves towards commonsense out of the water.

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22 comments to On the silliness of the wealth tax idea

  • Jim

    It occurs to me that the tax might raise even less IHT than the post suggests. The most likely course of action for pensioners with expensive houses but not enough income to pay a wealth/mansion tax would be to sell up and buy a new smaller house and give away any surplus proceeds to children until their assets were reduced under any wealth tax limit. Given that all this would happen when people were not ill, or close to death, the seven year rule would most likely mean most of these transfers fell outside IHT or any clawback provision for state care home fees. So IHT revenue would fall significantly, as the wealth tax would force people into taking steps they might otherwise have put off and fallen into the IHT net.

    The other issue is business assets – would a wealth tax affect them? If so it would be very damaging to business – taking a % out every year would reduce capital available for investment, apart from the likelihood of some businesses eventually having to be liquidated to pay the tax. If business assets fall outside the tax, then I foresee a massive series of arguments over what assets constitute business or non-business use. I think if I owned a mansion I’d turn it into a B&B – even if it ran at a loss, it would stop the tax man getting his hands on any money. The lawyers and accountants must be rubbing their hands.

  • Laird

    Since when has silliness, or even downright idiocy, been a successful argument against a proposed taxing scheme (or, for that matter, against any government program)?

    And the fact that a wealth tax would be “revenue neutral” (in the preferred argot here in the US) is also a non-starter. First of all, bringing the tax forward is not truly “neutral”; the benefit to politicians of having cash today is clearly greater than having the same amount of cash several years from now. Second, governments are notorious for short-term thinking. Cash in hand now can be spent today by the politicians now in office; prospective cash tomorrow only benefits their successors, and so it completely irrelevant. They’ll gladly kill the golden goose for an extra egg today. Short-term benefit always trumps long-term harm. (Think not? Just examine every western government’s monetary policies, which are an obvious recipe for long-term disaster.)

    And finally, I don’t believe that most politicians are as interested in enhancing governmental revenues as they are in redistributing wealth. If they truly wanted to increase tax receipts they would simply cut marginal tax rates. Rate cuts always increase tax revenues; that is suggested by the Laffer Curve and other academic analyses and has been proven empirically time and time again (viz the Kennedy tax cuts, the Reagan tax cuts, and the Bush tax cuts). Politicians (and leftists; I’m not sure there’s a difference any more) don’t care about that. All they care about is having the power to control an ever-greater portion of the nation’s wealth, even if it is demonstrably harmful to the economy and even if their policies result in less absolute revenue to the government even in the short term.

    This is about power, not revenue. Attacking it in terms of the latter is not only ineffective but plays directly into their hands by distracting people from the real issue.

  • Richard Thomas

    I prefer the argument “Get your hands off my stuff”.

    I have a big issue with the Laffer curve. That is, that it frames the argument in terms of revenue generation rather than what the proper role and scope of taxation should be. It was also abused by the republicans to cut taxes (mere number play) while not cutting spending (allocation of resources) and thus failing to actually address the issue.

  • Laird

    Richard, I don’t disagree with your point about politicians’ misuse of the Laffer Curve; and I certainly agree that we should be having a serious debate about the proper aggregate level of government spending (which I maintain is about an order of magnitude too high). And it’s also important to remember that the Laffer Curve, like the supply/demand curve and other similar devices, is merely an illustration of an idea, not a formula which can be used to compute some absolute ideal rate of taxes. But it certainly doesn’t “frame an argument”; it merely illustrates in a simple and very graphic way the unavoidable trade-off between marginal tax rates and tax revenues. What someone chooses to do with that information is hardly a criticism of the curve itself.

    And that’s not my point, anyway. My point was that revenue maximization is not the objective of most people advocating a wealth tax (or tax “increases” in general), and making the argument on those terms is a losing proposition. I merely cited the Laffer Curve as evidence of this.

  • Runcie Balspune

    The question to ask when anyone proposes some form of tax is “so what will you be spending it on?”.

    Probably a bunch of useless mandarins employed to assess and gather said tax.

  • If everybody’s forced to sell their stuff to pay the tax, who’s going to be there to buy it?

  • Richard Thomas

    Laird, true enough. I was actually going off on a bit of a tangent to be honest.

    Though your use of the Laffer curve assumes that we are on the side where increasing taxation reduces revenue and not on the side where it increases it (I would agree that we are but it must be shown rather than assumed in an honest discussion). There is also that wooly area in the middle (c.f. modified Laffer curve) where anything seems to go.

  • Richard Thomas

    Sorry, looks like what I was thinking of is not a modified Laffer curve but if you search for “gardner laffer curve”, you’ll see what I mean.

  • Richard Thomas

    Ran across this. Thought it was worth dropping in here:

    Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more—and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

    — John Maynard Keynes

    (Found here: http://blog.rlove.org/2008_02_01_archive.html)

  • Tedd

    There’s a more fundamental problem with the Laffer curve: it assumes that the relationship between tax rate and tax revenue is a monotonic function in two variables, which is extremely unlikely to be true, given the number of variables not accounted for in the model. The relationship between tax rates and tax revenues is extremely complex, and the Laffer curve should only be regarded as visualization tool for the basic concept that tax revenue doesn’t necessarily go up with tax rate. It’s simply not a model of the behaviour of any actual system.

  • RRS

    Laird is spot on!

    These proposals are about power not revenue.

    This is the colectivists’ goal.

    Now that the idea has become entrenched that the individual is simply the vehicle through which society produces income (goods and services), we move now to the stage that property (assets held) belong to society and the individual must pay for the “privilege” of holding and using that which is his or her wealth.

  • Laird

    Tedd, that’s exactly what I said: the Laffer Curve is “merely an illustration of an idea, not a formula which can be used to compute some absolute ideal rate of taxes.” And it’s also completely off-topic here, so everyone should just get off this fixation on an irrelevant side issue. The fundamental point I was making is that most people who advocate “increasing” taxes are not interested in increasing governmental revenues, but rather in increasing governmental power. Arguing that some particular tax scheme (a wealth tax, whatever) won’t generate the promised revenues is, at best, a waste of time, and at worst is playing directly into the taxer-hikers’ hands. The revenue which they claim will result from such taxes is merely a red herring, sleight of hand intended to distract everyone from the real issue. Actual revenues are irrelevant to these people.

  • Richard Thomas

    Laird, amen.

  • Rich Rostrom

    Rate cuts always increase tax revenues; that is suggested by the Laffer Curve…

    That is not true, and the Laffer Curve suggests nothing of the kind. Laffer’s argument was that increasing taxation of an activity above a certain level will reduce the volume of that activity by more than the increase in tax rate, leading to net loss of revenue, and that conversely, when an activity is taxed at levels that reduce volume of it, reducing tax increases activity by a higher proportion than the decrease in tax rate, leading to net increase in revenue.

    If the tax on an activity is modest, an increase is unlikely to depress volume, and so will generate more revenue. A decrease won’t increase volume and so will generate less revenue. That’s the left side of the Laffer Curve.

    For instance, if HMG imposed a 2p tax on football tickets, which sell for 30-50 pounds, would it affect sales? If the tax was later cut to 1p, would it cause sales to double?

    But tax rates rarely stay on the left side of the Laffer Curve. Revenue-hungry governments inevitably push them up to and past the Laffer optimum.

  • Laird

    You won’t get off this f*cking Laffer Curve irrelevancy, will you? Of course I’m talking about the right side of the curve, which is where all modern governments are; I would have thought that was self-evident from the context. Your point might have had some relevance a century ago, but certainly not since World War I, when income taxes first reached modern levels. So I stand by my statement that reductions in marginal income tax rates always increase governmental revenues; that has been proven empirically time and time again (Kennedy, Reagan, Bush). And I also stand by my statement that it doesn’t f*cking matter, because absolute revenues are irrelevant to the people advocating new and/or higher taxes.

    Focus on what’s important, not on pettifogging trivialities.

  • Hugo Neal

    Mansions are very much undertaxed in UK at the moment, and there are good arguments in equity for increasing tax on owner-occupied property (and making corresponding reductions elsewhere).

    Having the use of a house is equivalent to enjoying an income of the amount at which the house could be rented. This income is enjoyed without being subject to Income Tax: there is no corresponding provision for those who do rent to deduct this expense from their income before tax is computed on it. This is inequitable and unfairly favours those who can own their homes.

    This tax privileging of home ownership distorts the allocation of capital within the economy. (And never mind the reinforcement of this distortion arising from the exemption from Capital Gains Tax.)

    Making pensioners conscious of the value of the housing that they are “consuming” each year, by taxing it as income in this way, would discourage them from staying in houses that are beyond their needs (even if the tax is rolled up and only becomes payable when the house is sold). As they downsized, the return of the excess to the market would increase the supply and reduce housing costs for the upcoming generation which is so much downtrodden by this unfairness.

    I’m not taking a view on whether or not widows should be staying on in their family homes, just suggesting that they can only afford to do so because of these unseen and unfair tax privileges.

  • Hugo Neal’s presumption of his right to rent-seek (in the most literal sense) is nauseating. How dare he tell others what ‘their needs’ are? In reality what he is really saying is their ‘needs’ must adjusted to whatever is more convenient to the needs of the confiscatory state as it doles out the ‘privilege’ of owning things to people.

    A very fascistic (right-socialist) world view, to be sure, in which one may own things privately just as long as it is in convenient for the state’s objectives.

    Absence of a tax is not a ‘privilege’, the existence of one is an imposition, because ownership is not a privilege whose legitimacy depends of a King or State granting it, however much they would like you to think that way.

  • Paul Marks

    I have been hearing talk of a Wealth Tax (from the usual suspects – the open socialists and the “libertarian” left). However, I have not being paying much attention to it – the vermin are always plotting something.

    So it has gone “mainstream” has it?

    And just as I thought things could not get any more stupid and economically suicidal.

  • Hugo Neal

    Telling people what their needs are is not really the point I’m trying to make: sorry for inducing a nausea that has perhaps distracted you from addressing the argument.

    I’m really pointing out unequal tax treatment between renters and owners. This can be done in language of imposition rather than privilege if it makes it more digestible:

    Given that the confiscatory state actually is laying these various impositions on its subjects/victims, shouldn’t we prefer that it does so in a way that is more equal and less distorting of economic incentives?

  • Laird

    I agree with Perry; Hugo’s post is one of the more offensive I’ve seen here in a while. Using one’s own property for one’s own purposes is in no way “equivalent to income” except to someone whose worldview is that everything belongs to the state and anything you get to keep is entirely at its sufferance. That’s a philosophy which I absolutely reject. (It’s the same philosophy inherent in the “tax expenditure” concept.)

    However, there is one small element implicit in his comment which has some merit. The ability to deduct mortgage interest expense from gross income for tax purposes does artificially distort markets in favor of home ownership (since there is no corresponding deduction for rental payments). Personally, I take advantage of that deduction, but would not have much philosophic objection to its elimination (although a better solution would be to permit a deduction for rent, since it’s already taxed to the landlord as income so deductibility would restore parity).

  • Jim

    @Hugo Neal: the logical conclusion of your argument is that anyone who has a mortgage would have to have a deduct for the percentage of the house that they don’t own, before calculating their notional ‘income’ from home ownership. Otherwise they would be being taxed on notional income from an asset they don’t actually own. So you are in fact arguing for a return to a sort of MIRAS, which seems an odd thing to do.

    The other thing is why should your concept not be also introduced for other assets? After all some people own their cars, some hire them via leases, some buy via hire purchase, some buy via loans. Why not a car ownership tax, on the notional benefit to car owners?

  • Paul Marks

    “Increase taxation on the big houses of the rich – and correspondingly cut taxes elsewhere”.

    The “corresponding” tax cuts would not happen. And the media might well report the whole thing as tax CUTS on the rich.

    After the last British government budget (all things considered) put taxation on wealthy people – UP.

    However, the media presented the budget as doing exactly the opposite.

    It is not just the American media that is hopeless – or worse….