Wealth tax academic paper

[JohnB]

The talk and the q&a were interesting. One author was rather an evangelist, the other two were grounded

[Lootman]

The talk and the q&a were interesting. One author was rather an evangelist, the other two were grounded

Was the first speaker the evangelical one? I got 8 minutes in and I wanted to punch the guy on the nose.

Then again the big giveaway was in the first minute: Sponsored by the "International Inequalities Institute". If there is an organisation that wears its ideological bias on its sleeve more than that then I would like to hear of it.

Maybe the Wealth Tax Commission?

[Gengulphus]

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.

It is actually quite easy to home in on what the paper has to say about valuations of pensions, by using the table of contents to find that there are seven pages starting on page 54 about valuations and skimming those seven pages for mentions of pensions. That will come up quickly with:

For pensions, the process for defined contribution (DC) schemes would be similar to other financial assets. Defined benefit (DB) schemes are more complex, because unlike a DC scheme there is no fund assigned to the individual. However, there are nevertheless several existing purposes for which DB scheme providers must determine the current value of an individual’s future pension entitlements. The most appropriate measure for the purposes of a wealth tax would be the Cash Equivalent Transfer Value (CETV), following the guidance that is already published by the Pensions Regulator for the purpose of transfers between pension schemes. This approach has the important benefit of ensuring, so far as possible, horizontal equity between holders of DC and DB pensions.

Finding stuff about the state pension is harder, because although the paper does mention the "state pension" three times (*), they don't say anything about valuing it. However, the following passage starting on page 47 can be found by searching for " state " (with the spaces at start and end to avoid a lot of matches to "estate", "statement", etc):

The definition of ‘wealth’ for wealth tax purposes also excludes any entitlements to state benefits, although for a subtly different reason. Although such entitlements may be legally enforceable, they can only be enforced in public law through an action against the state in its state capacity. A wealth tax is more narrowly concerned with private property i.e. legal rights and interests enforceable as a matter of private law. An individual’s entitlement to the state retirement pension is therefore not ‘wealth’ for wealth tax purposes, because there is no private legal right to receive this benefit. For the same reason, the present value of one’s entitlement to NHS care and other state benefits is also outside the scope of a wealth tax, even though in a general sense these can be very valuable.

Just to be clear, by the way, I'm only posting these quotes to help people find what the paper says about valuing pensions - not to argue either for or against what it says.

(*) If you want to do a computer search for them, you may want to know that two of them have a single space in the middle and the other a double space.

Gengulphus

[Lootman]

The definition of ‘wealth’ for wealth tax purposes also excludes any entitlements to state benefits, although for a subtly different reason. Although such entitlements may be legally enforceable, they can only be enforced in public law through an action against the state in its state capacity. A wealth tax is more narrowly concerned with private property i.e. legal rights and interests enforceable as a matter of private law. An individual’s entitlement to the state retirement pension is therefore not ‘wealth’ for wealth tax purposes, because there is no private legal right to receive this benefit. For the same reason, the present value of one’s entitlement to NHS care and other state benefits is also outside the scope of a wealth tax, even though in a general sense these can be very valuable.

Just to be clear, by the way, I'm only posting these quotes to help people find what the paper says about valuing pensions - not to argue either for or against what it says.

There may be reasonable arguments to exclude the present value of a state pension entitlement from your net worth. But claiming, as they do, that is because a state pension is like entitlement to NHS treatment is not one of them. A state pension is an assurance of a future stream of cashflows to the recipient. The NHS is not.

I see no good reason to include private pensions and not state pensions or benefits, other than ideological bias. The claim of the authors was that "all" assets are included and then, from your citation, they carve out the ones that they find to be politically incorrect.

On the subject of valuing pensions, the simplest method might be to mirror the computations that insurance companies make when deciding what to charge for annuities, which is a similar concept i.e. what is the present value of a promise of a set of defined cashflows in the future for as long as you live?

[Gengulphus]

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.

I wonder how many of the politicians who might be ideologically be in favour of this wealth tax proposal at first sight might get a similar nasty shock when they look at their own level of wealth and end up reconsidering...

Gengulphus

[dealtn]

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?

There might be some that aren't, and there might be an argument about what "public sector" means, but army pensions can be transferred, nurses can, teachers can. Maybe it is only some, not all, and there might be restrictions. I know some defined benefits schemes only allow transfers to other defined benefit schemes, although I'm not sure how that works.

Its an interesting area, and maybe it isn't as straightforward as I assumed.

[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.

I wonder how many of the politicians who might be ideologically be in favour of this wealth tax proposal at first sight might get a similar nasty shock when they look at their own level of wealth and end up reconsidering...

Gengulphus

I remember years ago in parliament Denis Skinner (Beast of Bolsover) was complaining about the size of the pension fund of a businessman. Another member got up and pointed out that the actuarial value of Mr Skinner's MP's pension was worth more. It did take the wind out of his sails!

[ursaminortaur]

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

Are they?

There might be some that aren't, and there might be an argument about what "public sector" means, but army pensions can be transferred, nurses can, teachers can. Maybe it is only some, not all, and there might be restrictions. I know some defined benefits schemes only allow transfers to other defined benefit schemes, although I'm not sure how that works.

Its an interesting area, and maybe it isn't as straightforward as I assumed.

Since Osborne's pension freedoms unfunded public sector pensions can no longer be transferred to DC schemes as the government feared that large number of such members might wish to transfer in order to take advantage of those freedoms which would mean the government would have to find a lot of money by either raising taxes or increased borrowing.

https://citywire.co.uk/funds-insider/news/why-theres-no-pension-freedom-for-the-public-sector/a801075

Police officers, nurses and other public sector workers have just one month to transfer their pensions and take advantage of the government's new retirement 'freedom' reforms.
.
.
.

However, this causes a headache for the Treasury, which will have to fund a large number of ‘transfer values’ – the lump sum given to those transferring out of DB schemes.

To stop a run on pensions and avoid paying out large sums of money, the government has said those in unfunded DB pension schemes will not be able to transfer out from 6 April, giving public sector workers just a month to do so.

Transfers though are still allowed from funded public sector schemes such as the LGPS to DC schemes.

[Charlottesquare]

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. But, given the entire ponzi scheme is political rather than economic, surely it would be subject to the whims of the politicos of the day? Which would most likely mean Labour implementing the wealth tax and then valuing the public sector "pots" at way under market value to keep their core vote happy.

It wouldn't be a political discussion without a dig at public sector pensions of course, or London house prices.

Given that the public sector pension liability is something like 75% of GDP, and that we're talking about tax to pay "government expenditure", it seems like it should be central to the discussion. And this is without even mentioning the other ponzi scheme known as the state pension!

It is surely mere actuarial techniques re anticipated life expectancies applied to a future increasing (RPI/CPI) income stream with a likely reduced benefit for surviving spouse.

[Nimrod103]

Transfers though are still allowed from funded public sector schemes such as the LGPS to DC schemes.

I am by no means a pension expert, but I find the statement that the LGPS is funded a bit hard to swallow.
From Google:
In 2016-17 councils and other bodies across England paid £7.4bn in pension contributions,....... During that period, people in England paid £26bn in council tax, So 28% of council tax goes towards local govt pensions. Many council tax payers probably put more into the LGPS than their own pensions.

The LGPS is funded only because so much public tax money is poured into the scheme, to the detriment of all the other things we expect from our council tax.

[scrumpyjack]

Transfers though are still allowed from funded public sector schemes such as the LGPS to DC schemes.

I am by no means a pension expert, but I find the statement that the LGPS is funded a bit hard to swallow.
From Google:
In 2016-17 councils and other bodies across England paid £7.4bn in pension contributions,....... During that period, people in England paid £26bn in council tax, So 28% of council tax goes towards local govt pensions. Many council tax payers probably put more into the LGPS than their own pensions.

The LGPS is funded only because so much public tax money is poured into the scheme, to the detriment of all the other things we expect from our council tax.

Well when Trump was moaning about Nato countries not spending the promised 2% of GDP on defence, it came out that in 2016 33% of the Belgian defence budget went on pensions and it is probably a lot more now. Perhaps they are planning to have a Dad's army fighting off the Russians?

[dspp]

Transfers though are still allowed from funded public sector schemes such as the LGPS to DC schemes.

I am by no means a pension expert, but I find the statement that the LGPS is funded a bit hard to swallow.
From Google:
In 2016-17 councils and other bodies across England paid £7.4bn in pension contributions,....... During that period, people in England paid £26bn in council tax, So 28% of council tax goes towards local govt pensions. Many council tax payers probably put more into the LGPS than their own pensions.

The LGPS is funded only because so much public tax money is poured into the scheme, to the detriment of all the other things we expect from our council tax.

Well when Trump was moaning about Nato countries not spending the promised 2% of GDP on defence, it came out that in 2016 33% of the Belgian defence budget went on pensions and it is probably a lot more now. Perhaps they are planning to have a Dad's army fighting off the Russians?

All of the NATO countries include pensions as part of the calculation of the %. There is a standardised definition set out.

regards, dspp

[Adamski]

I'd be staggered if Rishi takes this up, it has Labour writ large all over it. Next election is May 2024, odds currently slightly favour Labour (as better chance of forming a minority government), but it's a long way off, so much can happen.

The next 3 years 6 months is a window for those with modest wealth and above, to maximise ISAs and Pensions for yourself and family between now and then, and make any lifetime gifts to children, grandchildren before the next election. In a free country people shouldn't have to be taxed on the same income multiple times, but I think this will come in some form down the line.

[Lootman]

I'd be staggered if Rishi takes this up, it has Labour writ large all over it. Next election is May 2024, odds currently slightly favour Labour (as better chance of forming a minority government), but it's a long way off, so much can happen.

The next 3 years 6 months is a window for those with modest wealth and above, to maximise ISAs and Pensions for yourself and family between now and then, and make any lifetime gifts to children, grandchildren before the next election. In a free country people shouldn't have to be taxed on the same income multiple times, but I think this will come in some form down the line.

Yes, I mentioned earlier that there is no chance of the Tories doing this to their base. Whilst if Corbyn had won a year ago we would already have something like this.

Maximising ISAs and pensions is usually sound tax advice but of course both of those would fall into a wealth tax capture, along with your home. So if you really wanted to avoid this tax then at some point you'd want to liquidate those kinds of assets so that you can gift or relocate them.

Having now watched about half of the presentation cited above, I can already see several holes in their arguments. Just three examples:

1) They claim that the wealth tax can simply be "deferred" if you are asset-rich but cash-poor. But in such a case there is no revenue now, which is surely the point of a tax that targets the alleged Covid deficit? And such a deferral gives the taxpayer many years to liquidate and finesse.

2) They claim that taxpayers cannot simply avoid this tax by emigrating with their assets, because they look back at the last 7 years of residency. But that won't help the taxman actually collect if the taxpayer is overseas and not cooperating. There would be no jurisdiction.

3) They totally dodge the question of how private assets would be valued, or even known about. They talk about the taxman doing those valuations rather than the individual taxpayer, but offer no solution to how that will happen in practice.

The sponsors do not seem unintelligent, but they do seem to lack real world experience, perhaps to be expected of those who never leave the comfy cacoon of academia.

[ursaminortaur]

Transfers though are still allowed from funded public sector schemes such as the LGPS to DC schemes.

I am by no means a pension expert, but I find the statement that the LGPS is funded a bit hard to swallow.
From Google:
In 2016-17 councils and other bodies across England paid £7.4bn in pension contributions,....... During that period, people in England paid £26bn in council tax, So 28% of council tax goes towards local govt pensions. Many council tax payers probably put more into the LGPS than their own pensions.

The LGPS is funded only because so much public tax money is poured into the scheme, to the detriment of all the other things we expect from our council tax.

Unlike the unfunded pay-as-you go public sector pension schemes the LGPS has a fund into which both employee and employer contributions are made. The main employer organisations belonging to the LGPS are the Councils who obviously pay the employer contribution from the council tax, business rates and central government grants that they receive. Though there are many other organisations which belong to the LGPS for instance most University admin staff (as opposed to lecturers who are members of the private USS scheme).

The combined value of the LGPS funds in England and Wales (Different council areas run their own separate funds) is around £291 billion.

https://www.lgpsboard.org/index.php/schemedata/scheme-annual-report

The LGPS is one of the largest defined benefit (DB) schemes in the world and is the largest DB scheme in England and Wales, with 15,700 employers, 5.9m members and assets of £291bn.

As of March 2019 the LGPS in England and Wales was 98% fully funded.

As at the 31st March 2019, the LGPS liabilities were estimated at £291bn indicating an overall funding level of 98%. During the intervening years since establishment, the Board actively developed proposals to tackle the funding deficit (£6bn in 2019, £37bn in 2016) to improve the sustainability of the LGPS and its future funding levels. The next triennial valuation of the LGPS will be as at 31st March 2022.

[Spet0789]

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?

Whether something is transferrable or not, it can be valued. As has been stated, the upfront cost to buy the exact same benefits as a public sector pension is something which many insurers would be able to quote.

Add in the lump sum and the surviving spouse benefit, and adjust upwards by the fact that it’s an obligation on HMG (and not say, Legal and General) and I think you could be over the 50x initial pension mark.

I also wouldn’t be surprised if public sector workers have higher longevity than the average.

[Lootman]

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?

Whether something is transferrable or not, it can be valued. As has been stated, the upfront cost to buy the exact same benefits as a public sector pension is something which many insurers would be able to quote.

Add in the lump sum and the surviving spouse benefit, and adjust upwards by the fact that it’s an obligation on HMG (and not say, Legal and General) and I think you could be over the 50x initial pension mark.

And I said earlier that actuaries and the folks who compute annuity values can do this. But it is a lot of work for those assets that have so far, never or rarely, been required to make those computations.

Frankly this idea is dead on arrival for all the reasons that I and others have outlined. If we really need the revenue, which I personally doubt, then jack VAT to 25% like Denmark and other places have, and be done with it.

[Gengulphus]

Having now watched about half of the presentation cited above, I can already see several holes in their arguments. Just three examples:

1) They claim that the wealth tax can simply be "deferred" if you are asset-rich but cash-poor. But in such a case there is no revenue now, which is surely the point of a tax that targets the alleged Covid deficit? And such a deferral gives the taxpayer many years to liquidate and finesse.

Not having watched the presentation, but having skimmed most of the paper and read in detail the bits I was particularly interested in (which incidentally I usually find to be a much quicker and more informative way of learning about proposals than watching presentations), I think they're only proposing deferring payment of the tax, not assessment of it. E.g. elderly people living in a £1m house but with only just enough income to live in it (including paying the council tax on it) would still have wealth tax of £25k+ assessed on it plus the value of their other assets (assuming a £500k threshold and 5% rate), and that assessment would not be altered by what they subsequently did, but paying that wealth tax could be deferred until the house was sold, by making it a charge on the house. That doesn't give any more time to "liquidate and finesse" - but there are of course potential problems with it if the asset concerned somehow has its value destroyed while the tax is still being deferred...

And as regards the point of a tax which targets the Covid deficit, if no revenue now in some cases were a fatal flaw in a proposed tax, no tax would ever get off the drawing board - there will always be some cases of people who are supposed to pay the tax, but don't and instead remove themselves and their assets from HMRC's reach before HMRC realise what is happening. And given the low level of current interest rates and the size of the Covid deficit, deferred payment is likely to be a lot better than no payment at all, and not all that much worse than payment now.

So I don't think this example really stands up to scrutiny.

2) They claim that taxpayers cannot simply avoid this tax by emigrating with their assets, because they look back at the last 7 years of residency. But that won't help the taxman actually collect if the taxpayer is overseas and not cooperating. There would be no jurisdiction.

Agreed, provided the country they choose and the UK don't have an agreement to help each other collect their taxes - and provided they keep alert to any signs of such an agreement being made in the future.

3) They totally dodge the question of how private assets would be valued, or even known about. They talk about the taxman doing those valuations rather than the individual taxpayer, but offer no solution to how that will happen in practice.

Also agreed, provided they take care not to do the squirrelling away in private assets too blatantly and crudely. E.g. a wealthy individual who takes out a £1m loan just before the wealth tax is announced, uses the proceeds to buy a number of diamonds and doesn't declare the diamonds when their wealth tax is assessed is liable to find themselves being asked "We see that you took out this loan, so presumably you have £1m cash somewhere or other assets you bought with it - but all of the assets you've declared are ones you owned long before you took out the loan. How do you account for this?" - and they'd better have a story that stands up to at least a bit of scrutiny. I'm sure that such a story can be prepared, and would be by a determined tax evader, but preparing it makes the job rather more complicated than just taking out the loan and buying the diamonds, and it will probably be quite hard to put in place in a hurry.

The sponsors do not seem unintelligent, but they do seem to lack real world experience, perhaps to be expected of those who never leave the comfy cacoon of academia.

Totally agreed, and I don't really need any more evidence for that than the fact that they seem to believe a government could spring such a wealth tax on the population without word that they were planning such a move leaking widely, especially among the wealthy... Rather more alarmingly, though, such lacks of real-world experience aren't confined to academia - they're also quite common among government ministers and other politicians, of all political persuasions. A book I've just read ("The Blunders of Our Governments", by Anthony King and Ivor Crewe) has quite a bit to say about what they call "cultural disconnect" - the tendency for policy-setters to assume that the population consists of "people like us". That assumption lies behind many governmental blunders - to name just two, the poll tax and maintenance payments ordered by the Child Support Agency, both of which had the problem that they would be very-hard-to-impossible to collect from large parts of the population who were not "people like us"...

Gengulphus

[scrumpyjack]

Yes intelligence and common sense are very different!

[Bouleversee]

Gengulphus said:
Lootman wrote:
Having now watched about half of the presentation cited above, I can already see several holes in their arguments. Just three examples:

1) They claim that the wealth tax can simply be "deferred" if you are asset-rich but cash-poor. But in such a case there is no revenue now, which is surely the point of a tax that targets the alleged Covid deficit? And such a deferral gives the taxpayer many years to liquidate and finesse.

Not having watched the presentation, but having skimmed most of the paper and read in detail the bits I was particularly interested in (which incidentally I usually find to be a much quicker and more informative way of learning about proposals than watching presentations), I think they're only proposing deferring payment of the tax, not assessment of it. E.g. elderly people living in a £1m house but with only just enough income to live in it (including paying the council tax on it) would still have wealth tax of £25k+ assessed on it plus the value of their other assets (assuming a £500k threshold and 5% rate), and that assessment would not be altered by what they subsequently did, but paying that wealth tax could be deferred until the house was sold, by making it a charge on the house. That doesn't give any more time to "liquidate and finesse" - but there are of course potential problems with it if the asset concerned somehow has its value destroyed while the tax is still being deferred...

And as regards the point of a tax which targets the Covid deficit, if no revenue now in some cases were a fatal flaw in a proposed tax, no tax would ever get off the drawing board - there will always be some cases of people who are supposed to pay the tax, but don't and instead remove themselves and their assets from HMRC's reach before HMRC realise what is happening. And given the low level of current interest rates and the size of the Covid deficit, deferred payment is likely to be a lot better than no payment at all, and not all that much worse than payment now.

So I don't think this example really stands up to scrutiny.

The taxman might have to wait rather longer than when the house was sold if such a person had gone into care as I think the Care Home or Local
Authority would have first claim on the proceeds, don't you? And I daresay that might mean the taxman would, like the heirs, get nothing since the govt. has done nothing so far as I am aware to spread the cost of care home fees more fairly. Wealth of £500k could disappear rapidly if you had to fund all your care for a long time because you had the bad luck to have a long illness before dying rather than snuff it instantly due to a heart attack or other quick demise.