The problem of wealth – to tax or not to tax

With government finances in dire straits according to some economists and commentators (though they appear unaware of how government finances actually work!), discussion has turned to the issue of wealth and whether and how to tax it.

 

Despite having a certain appeal, people find it galling that there are individuals who are obviously very wealthy and often flaunt it – yachts spring to mind or expensive mansions, its more problematical than appears.

 

For one thing how to measure it.  To do so would require adding up the value of properties, business assets, shares and other investments, the value of pension pots etc.  Not that easy to achieve. 

 

Let us assume however that some estimate could be made of an individual’s wealth. What then?

 

One issue is what do we include? Should we look at the main residence of an individual, the value of which for most people is in one sense irrelevant – its dead money and if sold the cost of another dwelling often offsets the value of the old property. A person in say Hertfordshire may have a property worth a lot more than someone in Blaneau Gwent but in terms of house values there they are no better off unless they move to somewhere with lower house values.

 

Should the amount used to provide private pensions be classified as wealth, which discriminates against people with these pensions compared to those with public pensions. 

 

Looking at farming and wealth, figures suggest that the wealth of the average farming household is eight times the average level of wealth. But a farm is essentially working capital, necessary to operate the business.  The wealth value is not the same as money in the bank – ready to be splashed on holidays etc! 

 

A problem with taxing wealth is that it does not take account of the income of the individual.  It is likely that the actual income of most farmers is well below that of many others who do not depend on having land to work to provide an income.

 

So is there a solution? Probably not it requires policy changes on a number of fronts. It also means looking at income, you cannot look at wealth without looking at an individuals income.

 

 

 So what are the options?

1)     taxing income from wealth a the same level as income from earnings ;

2)     basing inheritance taxes on houses on the status of the beneficiary. This would enable those with little housing wealth to gain whereas those already holding property would pay more;https://www.cornwallecon.com/post/to-inherit-or-not-to-inherit-that-is-the-question

3) when someone moves from a high value to a lower value area tax the difference;

4)     Abolish IHT on farms and other businesses. For agriculture this post sets out some options for fairness for businesses;

https://www.cornwallecon.com/post/land-wealth-and-taxes-time-for-change-the-options

5) Remove pension assets from the category of wealth;

6) Taxing conspicuous assets – yachts, multiple properties.

7) limit the amounts which an individual can hold in ISAs or pension pots (or why not change the state pension system to provided a higher and tiered system of pensions thus limiting the need for private pensions.

 

8) At the same time increasing taxes on earning at the higher levels would be a useful mechanism for limiting the ability of high earners to accrue wealth.

 

There are some important questions to pursue -

How much wealth is there - is the value of dwellings actually real or illusory?

What share of wealth is fair?

What is the aim of taxing wealth - what do we want to achieve?