'Why we need a wealth tax'
A well-designed net wealth tax can raise revenue and tackle inequality, argues the FT's Martin Sandbu. But critics say a wealth tax is hard to value, unfair to savers and inefficient. Welcome to Free Lunch on Film where unorthodox economic ideas are put to the test
Written and presented by Martin Sandbu. Filmed by James Sandy and Petros Gioumpasis. Produced and edited by Josh de la Mare. Graphics by Russell Birkett. Sign up for Martin Sandbu's Free Lunch newsletter, ft.com/newsletters.
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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. 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 with inequality that wouldn't get fixed, which means that there would never be an economic 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, you know, I've spent a lot of time thinking about this. 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 Perret, 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. Merryn 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 jewellery, 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 people in the top 1 per cent of wealth - they are people who have more than £2mn in wealth - so if, say, you had £2.5mn in wealth and you had a 1 per cent annual wealth tax, then you'd be paying 1 per cent on the bit of wealth you have above £2mn - so about half a million. So someone at £2.5mn would be paying about £5,000 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 sceptical, as are many of my FT colleagues.
Most countries who've tried this find that it doesn't work, so I'm... to be honest, I'm bemused 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.
The 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 broadest shoulders?
Arun 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 a tax like this at the very top end is very sensible.
And Sarah Perret 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 £10mn. That would be taxing the top 22,000 people in the country, and that would raise, at a rate of, say, 1 per cent, it would raise about £10bn. So that would be enough, for example, to send every household a cheque for more than £400.
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 undertaxed relative to income, I think, 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 redistribute wealth because they're all taxes 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 judgement 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 richest paying the most tax, it's not. It's the... it's the people who work who 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... in higher yielding, more productive assets.
So here's a proposal that I think could win over some sceptics; 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 per cent annual wealth tax if other taxes were reduced or removed? Well, that would be a perfectly reasonable conversation, but I've been in this business a long time now, and so have you, and I have never seen a tax 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 were 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 to avoid and evade wealth taxes in a lot of countries, which led to... in France, we would say the wealth tax was a tax on the millionaires, not the 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 nicer 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 the retiree in a house that 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 instalments; 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 per cent or something. Firstly, it's administratively easier because it's just a small number of them. The other point is that they are 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 your worry is that you're capturing people who are 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 £1mn, it's the people with £100mn. 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 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 evasion - we need to continue working on that, because that is a prerequisite to have well-functioning wealth taxes.
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 per cent of total tax revenue.
There's another practical objection to address. Wouldn't a 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... a) find ways not to pay it; or b) change their behaviour in order to produce the money to pay it. There comes a point when you have to think, well, you know, might they just move to Portugal?
What does the evidence say?
There is 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 Gerard Depardieu in France. Another case that's cited is the founder of IKEA in 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, though to be fair, Switzerland does have a lighter system for foreign tax exiles.
Anyway, there are things governments can do. When US presidential hopeful Elizabeth Warren proposed a wealth tax, her advisers outlined a large one-off exit levy that would apply when someone moved their wealth out of the tax net. Even those who move away will have to leave some assets behind, and those can be taxed.
I like the term wealth creator. It's sort of... conceptually, like they're Gandalf or something... they come with their magic, and they create wealth in society. And we imagine them like they 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 our... 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 could do it, but the government choose 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 evasion.
Even my wealth tax sceptic colleague agrees with that.
Humans are natural improvers, barterers, accumulators, et cetera... 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 at 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 wealth tax.
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 realise 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 have 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. And finally, we'd love to hear what you think, so please share your comments.