The Tax After Coronavirus (TACs) project suggests that the most important role of tax in a jurisdiction is to shape its society and economy in the fashion that its government, and those who elect it in a democracy, might desire. I have already demonstrated that there is scope for a considerable increase in taxes on wealth in the UK without any economic or social injustice arising. in this post I argue that taxing increases in income and wealth as being synonymous makes economic sense. The post is based on arguments in my 2015 book 'The Joy of Tax'.
The relationship between income, wealth and tax
The link between tax and wealth is not hard to establish. Despite this it does, however, need explanation.
The first linkage between tax and wealth is to be found in many of our most widely known taxes, such as income tax, corporation tax and capital gains tax. These are, in fact, all taxes on the accumulation of wealth. That is because income, if properly defined, records the increase in our wealth over a period of time before taking into account the spending we incur to maintain ourselves. This is, for example, the basis for all accounting. There is, then, nothing unusual about this suggestion.
The reality is that a wide range of activities can contribute to that increase in wealth. Most of us will think of income from work, whether from a wage or the profit from a business activity, as the primary source of that increase, but in practice these are far from being the only sources of this wealth accumulation over time. So, for example, cash received from rents, investment income, the sale of our own property at a profit, and from the receipt of gifts can all increase our cash wealth just as much as earnings from work can.
Despite this, historically many of these sources of increase in our financial wellbeing have been treated differently from income for tax purposes. However, the reality is that as far as anyone is concerned (and I stress, anyone) £1 received from one source of accumulated wealth is identical in economic value to £1 received from any other source. In fact, when put side by side as coins, or when mixed together in a bank account, it would be impossible for a person to tell whether a particular £1 was derived from earned income resulting from work, or from savings income (such as interest on a bank account), or from a capital gain on the sale of shares or a house, or a gift from another person. A pound is a pound, is a pound and each contributes in the same way to a person's well-being, albeit (as is widely economically understood) the more of such pounds that a person has the less that each one is individually significant to the person who has them, which is why progressive taxation not only makes sense, but is economically necessary.
For this reason, the argument, often put forward, that the taxation of capital should be at lower rates than the rate applied to income makes no sense in economic terms.
That is not to say that it might, at one time, have made sense in practical terms. At the time when tax havens were impenetrable and those who could move income and wealth to them could basically evade their tax obligations in the location where they were resident then there was a real problem with taxing wealth. That problem was simply finding it. Governments reacted to this situation in a way that was deeply socially unacceptable, and profoundly helpful to all owners of capital, and which actually encouraged the cheats, which was to induce it to stay onshore by offering lower tax rates on it. It was a desperate measure to seek some revenue when the prospect of none was thought to be the potential alternative.
However, that risk has now largely gone. The automatic information exchange of data from tax havens, that happened to no small extent because of pressure brought to bear by the tax justice movement, means that a great deal of wealth can now be traced on the world, at least through declarations on the beneficial ownership of companies and trusts for tax purposes, and on the exchange of data on income earned offshore. So this pressure to reduce rates no longer exists: when capital and income derived from it can be located then rates can be equalised.
That is the position that we are now in. The argument that low rates of tax on capital are either justified or are a practical necessity no longer hold water. The time has come then to review wealth taxation and to begin its normalisation: no one should gain a tax advantage in society because they can increase their well being through wealth accumulation rather than work. The Tax After Coronavirus (TACs) project intends, amongst many other things, to tackle this issue.
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You haven’t demonstrated anything of the sort, because you analysis is so cursory and flimsy that it doesn’t stand up to any real scrutiny.
I will point out a quick list of errors here.
1. You have taken a very short time period (7 years) which occurs just after a crash, when asset prices started low and ended much higher through the recovery. This is going to dramatically skew you results, making the data you have presented meaningless.
2. You don’t seem to understand the difference between a flow (incomes) and a stock (assets). Stocks are typically purchased though the proceeds of incomes, so are you suggesting double taxation on stock wealth?
3. Much of the stock wealth you cover is valued, but not liquid. Property, pensions and physical wealth specifically. Are you planning on levying annual taxes on these items? How would that work?
4. You haven’t covered any second order or substitution effects. Do you really think that asset prices will remain the same if you levy increasingly higher taxes on them?
5. You totally ignore any reasons for a distribution in income and wealth. Specifically age. Older people tend to be more experienced, earn more and have had more time to accumulate wealth.
6. You ignore the fact that pensions when drawn are taxable as income, so you are double counting.
7. You the also forget to mention public sector pensions. If you are saying private pensions should be taxed more as assets, surely public sector pensions should be taxed to the same extent?
8. Given that you are proposing equalising taxes on income and wealth, do you realize that the marginal tax rates that would then exist would dramatically increase? For a standard higher rate taxpayer at the 40% rate, you could easily see them being hit by another 40% tax rate just for having a pension and owing a home.
9. Given also that you are proposing dramatically higher marginal tax rates, you have done no analysis on how this would affect the economy, or even if the £174bn increase in tax revenues is realistic or achievable. Do you not perhaps think that people will simply work less, retire earlier (cf Doctors) or do everything they can to avoid such draconian tax rates?
I could go on, but the number of errors you make is so large that your “research” is meaningless. You seem surprised that wealth peaks in the 55-64 age range, when most wealth is pension related. People tend to retire by 65. You make various incorrect or simply indistinct comparisons between income, tax and inequality and likewise between GDP and wealth. It is clear that you haven’t actually done any real analysis, but have just produced a few numbers (without any statistical treatment) to support what are clearly already preconceived ideas.
What a load of nonsense!
If I cant look at the last decade what can I look at?
And I have clearly differentiated stocks and flows – vert precisely
And I have proposed no solution as yet – all I have sought to do is show a capacity to pay tax. If you think wealth does not provide that then you are deeply disingenuous, or just profoundly mistaken
I am going to propose solutions, but as the Guardian noted, a wealth tax will not be one of them
In other words, you made up almost all the objections to things I had not said
I suggest you ca=ome back and read what I actually have to say and stop talking nonsense now, which is all you have done
You can look at the last decade, but you haven’t. You have picked a very specific period of 7 years. More importantly, your sample of 7 years may or may not be a good comparator for the series of data as a whole.
In this case, we know it isn’t a good one at all. You have omitted the 2008 crisis and started you data from the low point of 2011. In other words, your data is highly selective, and will show the greatest possible increase in total wealth in recent history.
Which hardly makes for good analysis. You could easily test to see if your data is representative via a number of statistical tests, but I doubt somehow that you are willing or capable of doing this.
Having actually had a look at the data, the period you have picked actually shows the greatest total annualized percentage increase since 1965 – so you have very much cherry picked the data.
It is also worth noting that you haven’t adjusted for inflation – rather an important point when talking about the value of stock asset wealth.
“And I have clearly differentiated stocks and flows — vert precisely”
I assume this is a joke. Your whole methodology involves working out the average tax rate for income taxes, then applying that rate to the increase in asset wealth. That is it.
By definition you are treating the two identically.
To accentuate the point, you have ignored that private pension wealth is actually taxed as income on withdrawal (si is included in the income tax numbers you quote) but then you apply a wealth tax to it at the same rates – thus double counting. All while totally ignoring public sector pensions and the various effects they have on the distributions of wealth and inequality.
“all I have sought to do is show a capacity to pay tax.”
You research doesn’t show this any more than saying that tax rates could be higher.
To say you aren’t proposing a wealth tax is also highly disingenous, when the proposals you do lay out are:
Introducing a capital gains tax charge on former main residences passed on after death, with the exception of cohabiting spouses and civil partners and recognised long-term related carers.
Equalising the tax rates on income and capital gains.
Significantly reducing the annual capital gains tax allowance.
Abolishing higher-rate tax reliefs for pension contributions.
All of which are taxes on wealth, given the definitions of wealth that you use in your data.
Of course I intend that wealth should be taxed
Have you noticed by how much it is undertaxed
And my data stacks
As for your claim that inflation matters, not if the flows are all from the same periods it doesn’t…
You will really have to do a lot better than this – because as far as I can discern all you have managed to say is that I am a person you don’t much like
On data and anything technical you’ve failed, miserably
OK, I think you are now losing all logic and reason. Assuming you had any before, because the analysis you have done is so basic that it doesn’t belong in any research note, let alone being published. Do you really think that your data handling and analysis has been credible in any way?
How different would your answers be be if you used the last 20 years of data?
Or the data since 1965? Which is also available.
You have taken the data from the 7 years with the highest growth in wealth over the last 50 years, partly because there was an abrupt fall just before your data set starts. Do you not understand that this is going to make your answers extreme, and not representative at all?
Do you not understand that your data set is so small that it statistically couldn’t show you anything relevant at all anyway?
“As for your claim that inflation matters, not if the flows are all from the same periods it doesn’t…”
You method involves taking the increase in wealth from each year, summing them together then averaging them. You have used no inflation adjustment when doing this. I hope we can agree this far.
The problem is that a pound in 2018 is not worth the same as in 2011. You have to control for inflation otherwise you are not comparing like for like. Without doing so you have no idea how much of the growth in asset wealth was down to actual increases in their value, or just from inflation.
Given historical CPI data is readily available, I have no idea why you haven’t done this in at least some simple form. Had you done so you would have found that the difference between the 2018 and 2011 values down to inflation alone is 17%. So quite significant.
So to put it bluntly, your simple average method is utterly, utterly wrong and your claim that you can ignore inflation because the flows are “from the same periods” is also rubbish.
Lastly, can you decide which way it is to be on wealth taxation?
First, in your Guardian article, you say that wealth should be taxed more. Then in your first reply to me you say “a wealth tax will not be one of them”. In your second reply to me above you say “Of course I intend that wealth should be taxed”.
Which is it????
You can tax wealth without a wealth tax
I thought you might be able to appreciate that
Clearly not
I’d give up before you dig really deep holes
Qand for the record, the data is not available in te form I used for 1965
And if you understood when indexing is required you’d realise it was not in this case
Each year was only compared with itself….
So if I was you I’d settle on not coming back and wasting any more of my time. OK?
“You can tax wealth without a wealth tax”
When is a wealth tax not a wealth tax? When Richard Murphy’s semantics say so.
“Qand for the record, the data is not available in te form I used for 1965”
The data is available in a slightly different form on the ONS website from 1965, and exactly the same form you used since 2000. Which again begs the question, why did you use just 7 years of data.
More to the point, why do you think those 7 years are representative of the whole historical series, when any cursory observation would tell you it isn’t.
As I said before, it is because you are simply cherry picking data, which makes your “report” little more than propaganda, as you have come to conclusions then tried to find data to fit those and not the other way around.
“And if you understood when indexing is required you’d realise it was not in this case
Each year was only compared with itself….”
This is simply not true. You have taken the nominal value of wealth increases in every year, without inflation adjustment, added them together then done a simple average.
This means you have not adjusted for inflation, and your answer is incorrect.
You can clearly see this in Table 2 of your report. You sum the increase in wealth over the 7.75 year period to get £5186bn and sum the tax paid over the 7 year period (without adjusting for the differences in period length, which is mind boggling in itself) to get £161bn. Then you simply divide 7.75 and 7 respectively.
So by definition you have not adjusted for inflation. What makes this more unbelievable is that the ONS actually publish inflation adjusted statistics as well.
It is clear to me that you have thrown this report together in a hurry, without any thought or care. Typically when someone does this it shows a level of scientific incompetence and preconceived ideas of what results they want their “report” to produce.
Either way, it is embarrassing that a Professor of a UK universities would put their name to such a shoddy piece of work.
You really are tedious
If you want to go from 65 feel free
And if you think inflation will make a difference, do it
But be wary of CPI. What has it to do with wealth?
And as a matter of fact I do adjust for period lengths, and ZiwYs opt for caution.
And just fir the record, this was read by several academics before publication. No one suggested alternative bases for data and some know data quite well.
I am very happy to stand by the work.
Now, go and do your own. And then suggest why 1965 has anything whatsoever to do with current tax debate, which is exactly why I looked at recent data.
I think you are trying to fix your answers…..heaven forbid…..
One of many complications that I would be grateful if you could clarify
— I convert some of my taxed income into a new kitchen.
— House value increases, but by less than the cost. Does my house equity bill increase or decrease?
— Is a new kitchen a form of wealth?
— Do I pay wealth tax on the full cost of appliances? What about the food in the fridge?
It is
I am only suggesting higher rates of council tax in your case
They could apply anyway
I am not proposing a wealth tax
I am suggesting a CGT on principle residence on death
You won’t need the kitchen then
So, Richard, let me get this right:
I choose to spend £20k (say) of my hard-earned (and already taxed) income on my kitchen, which may increase the price of my property by a similar amount.
And you think that is a justification for me paying higher Council tax?
Why?
Because that’s the way the system works…..if the council decides that is the case