Wealth tax academic paper

[Lootman]

I wish people would read the paper. They propose solutions to people moving abroad, and attempting to circumventing it. The tax would be on assets-debts, so wittering on about big mortgages and buying gold/cars/art is pointless.

Far from pointless. How would the tax man even know what physical assets you had, let alone how much they were worth?

Apart from a suggested de minimis limit of £3k, its a tax on your net wealth, irrespective of its asset type or location worldwide, provided you were living in the UK for 4 out of the last 7 years before T-Day.

And if you left the UK after that 4 years, how on earth would collection be enforced?

Claiming exemptions for your personal circumstances won't work. In this context wealth is absolute, and above a threshold, you are expected to be able to absorb a 5% hit. You'd always be prudent to have such a margin for a rainy day, and the pandemic is viewed as such a day for the society in which you live.

It is so easy to confiscate the wealth of others, isn't it? So much easier than creating wealth yourself.

[JohnB]

@Lootman, why do you presume that I won't be affected by this tax, or query how I got my wealth? You already need to keep records on all significant physical assets you own for Capital Gains reasons. Of course you could attempt to evade the tax, as you might for CGT and IHT. The paper authors anticipate evasion at a 9% level, to match that for IHT.

[Lootman]

@Lootman, why do you presume that I won't be affected by this tax, or query how I got my wealth? You already need to keep records on all significant physical assets you own for Capital Gains reasons. Of course you could attempt to evade the tax, as you might for CGT and IHT. The paper authors anticipate evasion at a 9% level, to match that for IHT.

I am fascinated to know what is the basis for their 9% estimate of the percentage evasion level since, by definition, that cannot be known.

My broader point was that avoidance and evasion will increase if a new punitive tax on wealth were to be introduced.

[Gengulphus]

Definition of suitable Wealth Tax cut-off,

"$1.00 more than Lootman's net assets"

Sure, but then doesn't everyone feel that way? My point was more about the perception of who is wealthy. And a million doesn't do it if everything is included. ...

Whose perception of who is wealthy?

There are huge numbers of people in this country for whom a million is wealth beyond all but their wildest dreams (e.g. dreams of winning a Lottery jackpot).

Or even two million if you are in London with a big mortgage and kids to support. In fact the entire concept takes no account of your location, nor financial outgoings, commitments and responsibilities, but those do inform your sense of "wealth".

Ah, you're talking about people's perceptions of whether they themselves are wealthy. And yes, you have a point about a million not doing that for most people. But it's not a point that taxation can sensibly pay attention to - a tax law that said "Tax Lootman according to whether Lootman feels he's wealthy, tax Gengulphus according to whether Gengulphus feels he's wealthy, ..." would be a ridiculously cumbersome method of raising funds compared with just making a charitable appeal!

Gengulphus

[dspp]

To be quite frank £0.5m is wealthy. I fit that bracket once you take house & pension assets into consideration.

Even if that is all in a house and you have no cash to pay the tax?

lootman is correct this will be a middle class tax, not a wealth tax, as the super wealthy will avoid by moving abroad or employing accountants to avoid.

I do think Labour will bring in this in, as they have dropped so many hints, but it will change behaviour. Apart from the obvious flight of very rich. More modestly wealthy will change things too. Such as invest more in equities as opposed to bonds to boost returns, to offset the costs of the tax. Perhaps spend on cars, property or invest in gold or art to avoid, i.e. Use it or lose it.

In other words the actual tax take will be much, much smaller. And certainly do harm, as job creators flee, as did in France, when they tried it

Yes, you are quite correct in the first part. This is a middle-income tax on folk at (the lower end) like myself to substantially higher. Above that they have organised themselves over centuries to keep the wealth anonymous. You have only to observe some of the footwork alluded to here on TLF to see the lower rungs of that in action, and higher up the footwork gets considerably more adept.

That "footwork" would not be remotely necessary if politicians and think tanks did not endlessly ruminate on a million ways to take our hard-earned money.

And by the way, re your earlier comment about wealth being "lucky", is it not true that you make a living from the whole sustainable/renewable energy craze? And whilst I do not agree with that I give you credit for predicting a lucrative trend and milking it. There is nothing lucky about that. You were smarter than most in seeing a trend and exploiting it. Kudos to you, and I would never want you to be punished for a good call.

1. Read the paper ! It sets out ways of addressing the hypothetical person with a £0.5m house and no income, and they appear perfectly reasonable proposals to me. I actually have close friends in very similar circumstances to this, and they too think the proposals reasonable.

2. You keep saying, who will tell the authorities about things like valuable paintings etc. The answer is, you and I will. And we would tell the truth, or at least I would. And for my part I would be paying as I do fit into this proposed wealth tax (unless TSLA bombs ....).

3. Regarding luck, please read Piketty et al. The role of luck (primarily various forms of inheritance) is undoubted, and that is the primary luck. Other factors are modifiers, but once again we are apparently heading (and have been for decades) into a period of declining global social mobility, which over the long run (millenia) was in fact the norm, with only the last 1.5-centuries as being the abnormal period.

4. Regarding me working in renewables, yes I do, and also in non-renewables. Neither are a 'craze', both are serious scientific, engineering, and commercial endeavours. Energy is my sector, and it is a worthy one to put my efforts into as it is one of the crucial areas for humanity. That is why I chose it as the sector to make my career in. Quite candidly, if I had not switched from fossils (where I was once better remunerated than the average City banker) and pursued renewables for some 20-years when it was not popular or well-rewarded, then I would be far far more financially well-off than I am now. By working in renewables I myself have had pretty close encounters with very scanty financial circumstances (and no safety net), in ways that would not have been the case if I had stayed in fossils, and that is one reason why I am very aware of how hard things can be even in the UK. Right now I am in grid, which is somewhat neutral in fossil vs non-fossil (though that gets into other discussions). But anyway my career choices really are irrelevant, this proposed wealth tax treats all people as being equal in that respect. However I do take the time to set out my sectoral insights here for others to either deride, or take advantage of, as they see fit (HUR, not so good; TSLA, cracking; etc).

5. It seems to me that your real reason for not liking these proposals is because they would adversely affect you personally. Fine, say so, be honest. Greed is a well known human trait.

- dspp

[Lootman]

It seems to me that your real reason for not liking these proposals is because they would adversely affect you personally. Fine, say so, be honest. Greed is a well known human trait.

I would be lying if I said I do not resent the fact that there is a faction who think it is entirely reasonable to mug me for 5% of my hard-earned net worth. However I do have other reasons to oppose it and would not feel comfortable expressing my opposition if greed was the only factor. For instance I believe that:

1) Only transactions should be taxed, and not assets.
2) Taxes should be broad-based and not target smaller classes of people.
3) Taxes are more efficient when the value involved can be easily measured and verified, which excludes that painting in my attic or those diamonds in my safe which of course nobody knows about. ISAs and SIPPs might be easier to measure but then there are also private holdings as Gengulphus mentioned earlier.
4) Taxes should not punish those who are asset-rich but cash-poor, as many older people are. You claim there are ways around that but, absent people being forced to sell their home, the only alternative I can envisage is something like what happens with care home funding when councils pay for it and take a charge against your home, to be eventually collected from your estate along with IHT.
5) This would lead to an uplift in avoidance and evasion, and the exporting of capital and perhaps HNW people to other more tax-favourable locations.
6) This would not be temporary. Once politicians get used to this annual bounty from those who are not numerous enough to effect election results, it will become permanent. That in turn is why I prefer hikes in existing tax rates to a new tax in any event.

[Charlottesquare]

It seems to me that your real reason for not liking these proposals is because they would adversely affect you personally. Fine, say so, be honest. Greed is a well known human trait.

I would be lying if I said I do not resent the fact that there is a faction who think it is entirely reasonable to mug me for 5% of my hard-earned net worth. However I do have other reasons to oppose it and would not feel comfortable expressing my opposition if greed was the only factor. For instance I believe that:

1) Only transactions should be taxed, and not assets.
2) Taxes should be broad-based and not target smaller classes of people.
3) Taxes are more efficient when the value involved can be easily measured and verified, which excludes that painting in my attic or those diamonds in my safe which of course nobody knows about. ISAs and SIPPs might be easier to measure but then there are also private holdings as Gengulphus mentioned earlier.
4) Taxes should not punish those who are asset-rich but cash-poor, as many older people are. You claim there are ways around that but, absent people being forced to sell their home, the only alternative I can envisage is something like what happens with care home funding when councils pay for it and take a charge against your home, to be eventually collected from your estate along with IHT.
5) This would lead to an uplift in avoidance and evasion, and the exporting of capital and perhaps HNW people to other more tax-favourable locations.
6) This would not be temporary. Once politicians get used to this annual bounty from those who are not numerous enough to effect election results, it will become permanent. That in turn is why I prefer hikes in existing tax rates to a new tax in any event.

Fine, tax transactions, but why exclude your PPR from that charge. I find it strange that whilst notionally high tax countries have retreated from a wealth tax, and have no IHT, this blessed low tax UK may go in reverse- see Sweden.

The argument against double taxation is fine but only if all double taxation gets eliminated, if I hold a buy to let flat and sell it I may pay CGT on the gain, thirty one days later, having decided to blow some of the proceeds on a debauch ,I keel over dead and IHT is due on what I did not drink .

Perhaps the idea that all gains get taxed as all income gets taxed, death triggering an event (subject to spousal exemption), and PPR is also then taxed, we might have a more suitable relationship between capital and income and IHT could be avoided as could a Doomsday Book wealth tax. (I appreciate that is not what Doomsday did, it merely measured)

If looking at fairness why can I make massive untaxed gains from a house when I do not get a free pass for a similar amount of income? (I think my current latent gain on our house is circa £350,000 but sure lots of you have much higher latent tax free gains)

[dealtn]

If looking at fairness why can I make massive untaxed gains from a house when I do not get a free pass for a similar amount of income? (I think my current latent gain on our house is circa £350,000 but sure lots of you have much higher latent tax free gains)

I think there are valid reasons why (transaction) taxes on PPR should be minimal, or at least different from other assets. Here isn't the appropriate place to do so, without sidetracking a conversation on a different area though.

[dealtn]

A question for those who have read it: does the paper cover the valuation of pension pots for recipients who worked in the public sector?

Yes.

[JohnB]

Pension pots valued at transfer value. No silly *20 nonsense from these authors. It wouldn't be a political discussion without a dig at public sector pensions of course, or London house prices.

[Lootman]

does the paper cover the valuation of pension pots for recipients who worked in the public sector? Some of my leftist friends are very keen on a wealth tax. I wonder if they would be so keen once they found out a market valuation of their pension income would place their pots over £1M, and would therefore be subject to such a tax!

It raises the ironic possibility of a civil servant retiring and collecting his pension just as this tax costs him exactly the same amount as the payout.

No doubt Sir Humphrey would insert himself into the writing of the bill to ensure that never happens. And of course MPs would all vote to exempt themselves.

[scrumpyjack]

The fact that the government has not built up specific assets to pay these pensions is completely irrelevant in determining the current capital value of them. HMG has the unlimited resource of printing/borrowing/ raising by tax monies to pay any liabilities it has.

My guess is that the actuarial valuation of an index linked pension just starting to be paid at 65 would be about 35 to 40 times the initial annual pension.

If you are a fireman or policeman starting the pension in your 50s god knows what that is worth!

[scrumpyjack]

I would just add that AFAIW the state pension is different in that there is no contractual liability to pay it. It is whatever parliament decides each year, so it could be abolished if so legislated. It could therefore be argued its capital value is indeterminate and I expect the academics may have left that out of their wet dream.

[dealtn]

Pension pots valued at transfer value.

But my point is this: what is the transfer value of something that does not exist? AIUI most (if not all?) pubic sector pensions are paid out of taxation. I could be wrong on that and if I am then I will stand corrected.

Does anyone know what a likely transfer value calculaton would be on a public sector defined benefit pension that has just started to get paid out? I don't know myself.

Why would public sector pensions not have a transfer value?

[Lootman]

Pension pots valued at transfer value.

But my point is this: what is the transfer value of something that does not exist? AIUI most (if not all?) pubic sector pensions are paid out of taxation. I could be wrong on that and if I am then I will stand corrected.

Does anyone know what a likely transfer value calculaton would be on a public sector defined benefit pension that has just started to get paid out? I don't know myself.

Why would public sector pensions not have a transfer value?

If they are not transferable then nobody would ever bother to compute a transfer value, just like nobody does that for the state pension. One could do so for this purpose, of course, by making a number of assumptions about the future. That would be a challenge for those administering such a tax of course, but not impossible.

Maybe they should hire the banker in "Deal or no deal"?

[dealtn]

But my point is this: what is the transfer value of something that does not exist? AIUI most (if not all?) pubic sector pensions are paid out of taxation. I could be wrong on that and if I am then I will stand corrected.

Does anyone know what a likely transfer value calculaton would be on a public sector defined benefit pension that has just started to get paid out? I don't know myself.

Why would public sector pensions not have a transfer value?

If they are not transferable then nobody would ever bother to compute a transfer value, just like nobody does that for the state pension. One could do so for this purpose, of course, by making a number of assumptions about the future. That would be a challenge for those administering such a tax of course, but not impossible.

Maybe they should hire the banker in "Deal or no deal"?

Ok, should I re-phrase it?

What makes you think public sector schemes are non-transferable?

[scrumpyjack]

It does not matter whether they are transferable or not. It is easy for an actuary to estimate what it would cost to buy it, or, if it was in the Arcadia Pension scheme, how much Mrs Green needed to cough up.

Sir Humphrey might get a nasty shock when he finds out that his £50k pension entitlement is worth £2 million and added to his very modest Fulham house worth £2.6 m plus other assets, his net worth for this levy is about £5 m. If Mrs Humphrey is also a civil servant, from a 'nice' family, they will be choking on their claret in horror.

[dealtn]

Why would public sector pensions not have a transfer value?

They will do. It'll be a figure made up by a politician that happens to suit his or her agenda at the time; which will mean a very low value compared to what it would do if the pension was being paid for by an asset in a capital market. Public sector pensions are a poltical device and not an economic one and thus need treating as such.

And you evidence for this "made up" process is what exactly?

[mc2fool]

There's a public open-to-all presentation of it (via Zoom) by the authors at the LSE this afternoon, 4-5.30pm

https://www.lse.ac.uk/Events/2020/12/202012091000/tax

Register here: https://lse.zoom.us/webinar/register/WN_Vtpwmk-hTvuhJ-ESNGWNTQ

If it's like other LSE talks then a good amount of time will be allocated to questions from the audience (viewers).

The recording of the authors' presentation of the report is at https://www.facebook.com/lseps/videos/vb.6127898346/158549262682553. It's 1h29m, including the Q&A.

[Lootman]

Why would public sector pensions not have a transfer value?

If they are not transferable then nobody would ever bother to compute a transfer value, just like nobody does that for the state pension. One could do so for this purpose, of course, by making a number of assumptions about the future. That would be a challenge for those administering such a tax of course, but not impossible.

Maybe they should hire the banker in "Deal or no deal"?

What makes you think public sector schemes are non-transferable?

Are they?