Putting the cart before the horse or why taxing wealth is problematical!

There is ongoing speculation about whether the government will consider introducing some form of wealth tax.  Several lobby groups have also proposed a wealth tax, as has Zack Polanski the recently elected leader of the Green party.

 

What is wealth?

But imposing taxes on wealth is problematical.  For one thing there are significant differences between different forms of wealth.

 

There are different forms of wealth or asset.  There are property assets – housing, land or business assets.  Then there are the assets supporting private pensions.  Other assets include artworks and yachts for example.

 

If we look at housing assets for most people with one property, which they live in, unless they remortgaged to finance another property, then the asset value is locked in place. It has an exchange value, if they should seek to move to another property but apart from that it is illiquid, dead value. 

 

Then we have farmland and business assets.  These should be regarded as working capital necessary for the business to operate.  If one generation transfers the business to the next, what has been transferred is the working capital to keep the business going.  It is not being sold such that the value is turned into cash.

 

For householders and those with a business the asset value is not the same as money in the bank – ready to be splashed on holidays etc! 

 

The assets in pension pots used to provide private pensions could be regarded as the equivalent of resources used to provide state pensions. 

 

A problem

There is a problem with the reality that some people do hold significant assets – more than one house for example, or those who buy farmland seeking to avoid tax. We also have to ask the question – what is too much wealth and what sort is it?

  

The cart before the horse

Looking at taxes on assets often misses the point – looking at the result of policy rather than the causes.  It’s like seeing a balloon and taxing the size rather than looking at why it has increased in size. 

 

So what should be examined?

The role of ISAs,

Tax relief for private pensions

Who can buy land?

Earnings – many of those advocating wealth taxes think that income from work is good but they ignore the high earnings of some ‘workers' who can use their extra income to buy property - for example bankers and their bonuses.

Solutions

So what should be considered?

There are options. These include:

Restricting who can own farmland

Limiting the amount of land any one individual can own

Charging the recipients of housing assets such that they cannot accumulate more than one house

Changing the totals of ISAs that can be held

Reducing or ending tax relief for high earners

Increasing tax rates on high earnings. 

 

Conclusion

Taxing inequalities in wealth requires a range of polices, a targeted approach rather than some simplistic solution.