'Why we need a wealth tax' | Free Lunch on Film

the importance of wealth in our economies and the inequality of that wealth have been going up for decades but the tax revenue raised from that wealth has not followed suit so i think politicians facing pressure on their public finances are missing a trick and that trick is an annual levy on the total wealth of taxpayers [Music] welcome to free lunch on film the series where i explore controversial economic policy ideas that i find appealing such as an annual wealth tax so if you create a tax system that taxes the rich efficiently then i'll be happy to give it away i think it would be an awful idea what we're really talking about is not a wealth tax but a punishment tax of some kind they are complicated to administer and haven't raised much revenue the thing it can do that no other tax on wealth can do is to reduce wealth inequality at the very top in the last 40 years wealth and capital have become much more important in rich economies the total amount of wealth has gone from about three times annual national income to more than six times and this larger amount of wealth is now distributed more unevenly than it used to in many countries owners of capital now receive a larger share of national income than earlier and workers a smaller share for that reason some of the very rich think that they should pay a wealth tax like gary stevenson born in east london he became citibank's top trader he now campaigns for pressure group patriotic millionaires so i came to the conclusion that we had a structural problem inequality it wouldn't get fixed which means that there would never be an econ recovery and i started betting on that and by the end of that year i was citibank's most profitable trader in the world so um you know i've spent a lot of time thinking about this um i think that if you don't fix inequality the economy will get worse and worse and worse and worse and i'm from a poor background there's people from where i'm from like my friends like my family like me growing up that are bearing the brunt of that and yet many governments have moved away from directly taxing this growing wealth until the 1990s about a dozen european countries levied a net wealth tax and one by one they got rid of it like here in france when emmanuel macron became president in 2017 one of his first acts was to abolish the country's net wealth tax for his opponents that branded him as the president of the rich for his supporters it ushered in a new era of french business dynamism the idea of repealing the wealth tax was to make france more competitive and attractive to entrepreneurs sarah perry an economist at the oecd think tank has looked hard at the pros and cons of a wealth tax they are unusual today there are only three oecd countries that currently levy annual wealth taxes and those countries are norway spain and switzerland it's not that other countries don't tax wealth at all we have many taxes that could be called wealth taxes in a broad sense my critics will point out that you're taxed when you buy a house or when you inherit or on capital gains when you sell an asset to name just a few examples marin somerset webb is an investment columnist for the ft we don't call them wealth taxes but they are wealth taxes you can disagree with them or agree with them as you like and i think that they're very flawed but nonetheless they do something that makes sense which is that they ask people to hand over money at the point at which they have money at a point of transaction so what is a wealth tax proper a net wealth tax is a tax on the net wealth of individuals so assets minus debts and it's usually levied on only certain individuals above a certain threshold of wealth so it doesn't apply to everybody and the important part as well is that it's a recurrent tax we're talking about annual wealth taxes so the base on which a net wealth tax would be levied includes all the wealth somebody owns property obviously also financial wealth such as bank deposits shares bonds but also valuables like art and jewelry fine wine and classic cars and ownership stakes in private businesses from all that you would deduct the debts somebody owes a mortgage on their house car loans money they may have borrowed to invest and finally you would deduct a tax-free allowance and with all of that you would arrive at the taxable wealth on which an annual rate would be levied so for example the you know some people in the top one percent of wealth they're people who have more than two million pounds in wealth so if say you had two and a half million pounds in wealth and you had a one percent annual wealth tax then you'd be paying one percent on the bit of wealth you have above two million that half a million so someone at two and a half million pounds would be paying about five thousand pounds a year and the list of taxable assets could go on private jets pension plans trusts horses intellectual property so at a time of increasing demands on public finance is a wealth tax worth considering most economists and tax experts are skeptical as are many of my ft colleagues most countries who've tried this find that it doesn't work so i mean i'm sometimes amused we're still having a conversation about it but especially after the pandemic some experts think it's an option we should at least look into pandemic was awful for almost everybody you know lots of people were getting into debt and at the top end you just see wealth continue to rise continue to explode and i think that's one of the reasons that people have then really been thinking well how are we taxing this wealth why aren't we getting more money from the people who in some sense really have the broader shoulders aaron advani co-chaired an independent commission of academics in the uk which ended up backing a one-off wealth tax from an economic point of view i think attacks like this at the very top end yeah is very sensible and sarah pereira says it is becoming a live issue and not just in europe so the most prominent example was the us where wealth taxes were a big part of the debate in the democratic primaries but there's also been discussions in some latin american countries chile is one argentina introduced a one-off wealth tax during the pandemic so let's go through the arguments for and against first the basic function of taxes is to raise revenue for the government so how much could a wealth tax bring in potentially it could raise significant amounts of revenue and not only that but from a limited number of very wealthy taxpayers so for example if you were to have an annual wealth tax that taxed all wealth above 10 million pounds that would be taxing the top 22 000 people in the country and that would raise at a rate of say one percent it would raise about 10 billion pounds so that'll be enough for example to send every household a check for more than 400 pounds of course this money isn't free somebody has to pay it and some would say the rich are taxed enough already to look at the uk and say wealth is is under tax relative to income i think it is completely wrong we've already had a jolly good go at the rich over the last couple of decades and we've had an excellent go at the moderately rich as well but others disagree like gary stevenson the problem is the taxes that we have don't really beat wealth because they're all tax on income and some rich people pay extremely low rates on their incomes from their wealth and so just with income taxes the tax burden on these very wealthy individuals might be minimal and so say you're a billionaire and you never sell your shares you're never going to be subject to capital gains taxes say your company doesn't distribute dividends you're not going to be paying dividend taxes on your dividend income and so obviously a wealth tax might be a way of taxing potentially very wealthy people i think there are three ways you could respond to the fact that a wealth tax could raise serious amounts of money one is to question the need for that extra government revenue ultimately a political judgment for each of us another is to say that some countries have relatively low tax burdens others have very high ones so the wealth tax question depends on which country we're talking about but the third response is to consider a wealth tax not as a policy to raise more government revenue but to raise the same amount of revenue in smarter ways a wealth tax could be used to reduce taxes on work it's not the riches paying the most tax it's not it's the it's the people who work you pay the most tax a wealth tax could also replace other taxes on capital that could in theory encourage better and more productive investments a wealth tax is levied irrespective of the returns that your assets generate so the last thing that you want when you have a wealth tax is to have assets that don't generate any returns or that generate really small returns because you'll be taxed anyway so that should encourage you to invest in more you know in higher yielding more productive assets so here's a proposal that i think could win over some skeptics to introduce a wealth tax specifically to lower or eliminate other taxes if they believe that that's what would happen would i be happy with a say 1 annual wealth tax if other taxes were reduced or removed well that would be a perfectly reasonable conversation but i've you know i've been in this business a long time now and so have you and i have never seen attacks abolished not once ever now if you think that public spending needs to go up to pay for better schools or hospitals or roads then this is fine so long as you can be sure that a wealth tax will actually bring in the expected extra money for here we come to the pragmatic objections to wealth taxes because in practice they have not always worked as advertised they didn't raise that much revenue in the countries that had them because there are so many assets benefiting from either full exemptions or other forms of preferential tax treatment and often those were the assets that were predominantly held by the wealthiest people and so that means that an increase in the value of household wealth doesn't necessarily translate in an increase in wealth tax revenues and the problem hasn't just been about exempting some assets typically your home or more unusual assets like artwork it is also about avoidance and evasion it was relatively easy um to avoid and evade wealth taxes in a lot of countries which led to in france we would say the wealth tax was the tax on the millionaires not billionaires you know what i think these guys would pay it if they felt no one else was avoiding it the problem is you create a situation where it's easy to avoid and then it becomes a choice and then you're a rich guy and all the other guys you work with are avoiding it and then their kids are going to go to better schools than your kids and their kids are going to have nice houses than your kids because you chose to pay tax there's another common criticism that many people with property wealth don't have the cash to pay a wealth tax if you live in your house it doesn't give you a return it doesn't give you income that you can use to then pay the tax and so we always give this example of you know the retiree in a house that uh has tripled in value in the last 30 years and they're faced with the wealth tax it's incredibly cruel very unkind to people who hold wealth and are unable to come up with cash without making very significant changes to their lifestyle well there are solutions you can have tax deferrals you can have tax payment in installments also solutions like imposing a tax cap limiting the total amount of tax that you owe as a share of your income another practical objection is that wealth is really hard to value so how do you value a private company how do you value land how do you value a picture how do you value the things that make up wealth this is an extraordinarily intense admin effort we have to be put into this and i think there is some merit to that that's why i think you wouldn't want to have a wealth tax that covers huge shares of the population covers you know 10 or something firstly it's administratively easier because there's just a small number of them the other point is that they're typically people who are wealthy enough that actually they have other people managing their money for them already where they already have some process going on and so actually it's not that hard for them usually to get some kind of value and to have some discussion about where those values come from the idea that your personal belongings should somehow be catalogued and valued by the state i think is very intrusive in any case the poor design of many actual wealth taxes was the main reason why they were eventually abolished so what would a well-designed wealth tax look like you have to capture all kinds of wealth and if you're worries that you're capturing kind of people who are kind of too ordinary for what you're trying to go for you need to set the threshold higher not exempt certain asset classes not take out businesses or not take out pensions or not take out houses the people who are the problem it's not the people with one million pounds it's a people with 100 million pounds i'd be more than happy to exclude people with wealth of one two three million pounds if that meant that we got the people who are rich and there's a need to look at structures that may be used by individuals to circumvent wealth taxes like trusts or foundations or other similar structures that that may be used i think that is an important element and then continuing efforts on i was saying we made great progress on preventing offshore tax division we need to continue working on that because that is a prerequisite to have well-functioning wealth taxes [Music] politics means that no tax will ever live up to theoretical perfection but even less than perfect wealth taxes are not doomed to fail we know this because some countries have kept them for decades if not centuries switzerland and norway they're not perfect they also suffer from exemptions and loopholes but they do seem sustainable both economically and politically these are after all two of the world's most successful economies in both countries the wealth tax substitutes for other taxes inheritance tax has been eliminated in norway switzerland strictly limits both inheritance tax and capital gains tax and the swiss wealth tax alone contributes as much as four percent of total tax revenue there's another practical objection to address wouldn't the wealth tax just drive the wealthy away if people have to pay a tax and they do not have the income to pay that tax then they will find they find ways not to pay it or b change their behavior in order to produce the money to pay it it comes a point when you have to think well you might they just moved to portugal what does the evidence say there was definitely anecdotal evidence of people leaving countries with wealth taxes and usually they were very high profile cases and quite vocal about it so think about gerhard pardue in france another case that cited is the founder of ikea and sweden for example and so there's definitely anecdotal evidence but we're still missing solid evidence on let's say the scale of the issue so do the wealthy move away to avoid wealth taxes well the swiss and norwegian experiences suggest not both have more millionaires per capita than all the g7 countries so to be fair switzerland does have a lighter system for foreign tax exams anyway there are things governments can do when u.s presidential hopeful elizabeth warren proposed a wealth tax her advisors outlined a large one-off exit levy that would apply when someone moved their wealth out of the tax even those who move away will have to leave some assets behind and those can be taxed i like the term wealth creating sort of conceptual like they're gandalf or something they come with their magic and they create wealth in society um and we imagine them like they've got a big bag of cash that they can just magic off to the cayman islands these people are rich because they own our houses they own our mortgages you know what i mean they own ours they own our skyscrapers and they can leave the stuff is still here the government knows that if we actually wanted to tax these people based on the assets which are here and cannot be moved we can do it but the government chooses not to do it but even if they stay could a wealth tax not discourage the wealthy from saving and investing could the wealth creators just stop creating wealth the studies that are out there show that the impact on savings on wealth accumulation are limited and they find stronger impacts on how people report their wealth on tax avoidance and on tax division even my wealth tax skeptic colleague agrees with that humans are natural improvers barters accumulators etc it's a natural instinct people are not going to stop attempting to accumulate but they may certainly attempt to avoid or evade anyone removing any of that accumulated wealth from them all of this taken together suggests to me that a wealth tax doesn't have to be as impractical or as punitive as it's sometimes made out to be but it's also not yet obvious what a wealth tax achieves that we can't do better and simpler by fixing the taxes we already have you might want to look at your existing instruments first so your capital gains taxes your inheritance and gift taxes because there's so much scope to reform those taxes start with that because you can go a long way towards raising revenue from the wealthiest households and narrowing wealth gaps there is one thing however that a wealth tax can do more forcefully than any other tax at the point that enough people are concerned that wealth inequality at the very top end is rising and that's something they want to do something about that's the point in which it's clear that none of the alternatives will work and that's the point i think in which we'll see people actually passing an annual house if you think inequality has become dangerously high and has to be reduced a smart wealth tax is the quickest and simplest way to do that the ones who are smart they realize that being rich personally is not worth destroying your society and that needs it needs outflows from the rich to be enormously more to be really honestly enormously more there's no other way to say it so what have i learned from these conversations about annual wealth taxes well if well designed it would definitely reduce wealth inequality and it could very well encourage more productive investment but it would have to be very carefully structured both to overcome the very real practical challenges and the design flaws that are made countries abandon wealth taxes in the past above all it could raise very significant amounts of revenue and at a time of slowing growth and pressured public finances that is an advantage policymakers cannot afford to ignore [Music] and finally we'd love to hear what you think so please share your comments [Music] you

Channel: Financial Times

Views: 113,065

Keywords: business news, finance analysis, Financial Times, finance news, international news, global news, markets, china trade, us economy, brexit, news, business, tech, finance, technology, tax, wealth tax, revenue

Id: kHeYDHIeIBY

Length: 19min 49sec (1189 seconds)

Published: Mon Sep 05 2022