{"id":8058,"date":"2020-12-09T20:07:44","date_gmt":"2020-12-09T20:07:44","guid":{"rendered":"http:\/\/www.economicsobservatory.com\/question\/how-much-revenue-might-be-raised-one-wealth-tax"},"modified":"2021-03-11T12:12:13","modified_gmt":"2021-03-11T12:12:13","slug":"how-much-revenue-might-be-raised-one-wealth-tax","status":"publish","type":"question","link":"https:\/\/www.economicsobservatory.com\/test\/how-much-revenue-might-be-raised-one-wealth-tax","title":{"rendered":"How much revenue might be raised by a one-off wealth tax?"},"content":{"rendered":"

Despite recent positive news of the various effective vaccines, the Covid-19 recovery process is likely to be long and costly.<\/p>\n

As the Office for Budget Responsibility\u2019s\u00a0recent report<\/a>\u00a0highlights, the economic damage is likely to be substantial. According to the report, even when the economy returns to its pre-crisis levels of unemployment and GDP, tax revenues are likely to fall short of spending by \u00a320-30 billion.<\/p>\n

Related video:\u00a0Covid-19: Paying for the pandemic<\/a><\/strong><\/p><\/blockquote>\n

The government has already signalled a preference not to return to the austerity of the past decade. Even before the pandemic there were plans to increase spending to \u2018level up\u2019 less well-off regions of the country.<\/p>\n

Related question: #economicsfest:\u00a0Where next for the UK\u2019s \u2018levelling up\u2019 agenda?<\/a><\/strong><\/p><\/blockquote>\n

This suggests that tax rises will be coming at some point. But a key question for policy-makers to address is where these tax rises should fall.<\/p>\n

How much money could a wealth tax generate and who would pay it?<\/h3>\n

The\u00a0conventional wisdom<\/a>\u00a0is that there are only three taxes that are effective when it comes to raising substantial fiscal revenue: income tax, national insurance contributions and VAT. But\u00a0analysis<\/a>\u00a0in the final report of the\u00a0Wealth Tax Commission<\/a>\u00a0shows the scale of revenues that could be raised by a one-off tax on assets.<\/p>\n

The report suggests that a wealth tax could raise a substantial amount of revenue at relatively modest tax rates. For an annual wealth tax, a flat tax of 0.18% on wealth above \u00a3500,000 could generate \u00a310 billion in revenue.<\/p>\n

Alternatively, the government could introduce a one-off tax or \u2018windfall tax\u2019 on wealth. A one-off wealth tax charging a tax rate of 4.8% on wealth above \u00a3500,000 would generate \u00a3250 billion in revenue, before administrative costs. This would come at a total cost of \u00a31.7 billion to the government, and \u00a37.2 billion to the taxpayer (see Figure 1).<\/p>\n

As a one-off event, it is possible to achieve a much higher ratio of revenue to cost than under an annual wealth tax. A higher threshold would reduce the administrative costs further, though achieving the same amount of revenue would necessitate higher rates.<\/p>\n

Figure 1: Rate and thresholds generating different revenue targets from a one-off wealth tax, after administrative costs<\/h4>\n

\"Figure<\/p>\n

Source:\u00a0Advani et al (2020)<\/a><\/h5>\n

The advantage of a one-off wealth tax is that it would be closely linked to people\u2019s ability to pay and does not discourage people from working. It would also be popular: in a survey of\u00a0public attitudes<\/a>\u00a0commissioned as part of the report, a one-off wealth tax was the most preferred option for any tax rise \u2013 twice as popular as second place council tax.<\/p>\n

In either case, the majority of taxpayers would be of working age, with individuals aged 55-64 being the most heavily represented. According to the commission\u2019s report, the population of taxpayers would be skewed toward men. Further, taxpayers would be concentrated in London and the South East (see Figure 2), with these regions accounting for 37% of all taxpayers under a wealth tax starting at \u00a3500,000.<\/p>\n

Figure 2: Geographical distribution of taxpayers with a \u00a3500,000 exemption threshold<\/h4>\n

\"Map<\/p>\n

Source:\u00a0Advani et al (2020)<\/a><\/h5>\n

How else could the government pay for the pandemic?<\/h3>\n

In order to meeting the mounting costs of Covid-19, the government could also raise revenue by reforming existing taxes on capital. This would, however, still come at a cost, and would not necessarily avoid the challenges imposed by a wealth tax. Options for reform include:<\/p>\n