Wealth – to tax or not to tax?

Wealth – to tax or not to tax?

  • Greg Limb, Partner |

I remember speaking to one of my clients about how much tax should the wealthy pay, and her answer came swiftly: as much as is right. The concept of fairness in taxation is one much debated at government levels across the world, yet perhaps without becoming too ideological about the subject and trying to delineate a scale of rightness, one should first ask themselves – what is the purpose of tax?

This conversation helped me frame our discussion at a recent roundtable hosted by Chris Morgan, our Global Head of Tax Policy and Jane McCormick, Global Head of Tax and Legal, where we invited over a dozen academics, economists, wealth professionals and UHNW clients to share views on the much-debated topic: the potential introduction of a wealth tax in the aftermath of COVID 19.

There are many ways in which you might approach the viability of such a tax, however before going into its design and practicalities, it is important to reflect on its very essence – is it supposed to act as a short-term solution to help redress funding levels, or perhaps be a mechanism for managing levels of wealth inequality? Or maybe, to provide future long-term funding for certain sectors such as health or education?

Once there is clarity on purpose, the spotlight shifts to the operational mechanics. As with chess, there are always a finite number of moves one can make and, applying the same concept here, there are a limited number of direct and indirect ways in which wealth can be taxed. A recent study by the Institute of Fiscal Studies (“Is it time for a wealth tax in the UK?”) highlights three key options:

  • a pure tax on the wealth owned by an individual taxpayer (a model currently used in Spain and Switzerland using a percentage of total net wealth);
  • a tax on the transfer of wealth, be it in the shape of a gift tax (such as the Greek model), and / or inheritance tax (such as in the UK); and
  • a tax on the returns (income and gains) generated from wealth, as is currently employed by many countries across the globe. 

Annual wealth taxes are not a new concept and in fact, many countries have been using them and still are in some form or shape. Of course, there are those who removed them, or decided they are best served by other fiscal tools. We have therefore established that whilst the premise is longstanding, the nuance of the contemporary debate is new.

So, it is now up to each country to decide what they wish to achieve and whether their plan might be served by introducing a type of wealth tax, be it a singular or a compound instrument made up of several taxes. One thing is clear – where budgetary coffers have been depleted by external factors, measures of some sort should be taken to restore some form of balance and restart the economy.

Ultimately, most countries already have mechanisms in place for taxing accumulated wealth (whether set at lower or higher levels), and it may well be a matter of reassessing administration and logistics to spot means for optimisation before even considering something new.

There is of course the argument that countries should perhaps consult and work together to provide a coherent and consistent international approach for the taxation of wealth and foster a culture of neutrality, thus removing any impact on decision-making concerning relocation.

This topic warrants much reflection and I am certain we will be seeing much of that soon. So, in the meantime, I would like to leave you with this thought piece; in a utopian world where a country’s spending can be fully funded by an equitable taxation system that seeks to suppress poverty and mitigate unemployment, recharge the economy and encourage entrepreneurship, should we tax effort or assets?