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Martin Chick on Taxing Wealth

24th September 2012

Dr. Martin Chick, Ph.D, M.A. is a professor of Economic History at the University of Edinburgh. His recent research in Edinburgh and Paris focuses on the philosophical underpinnings of economic use of such concepts as utilitarianism, ownership, normativity and choice. He is currently writing the Oxford Economic and Social History of Britain since 1951, including themes such as income and wealth inequality, the allocation of health and educational resources, externalities and free-riding behavior, public expenditure and capital productivity.

Foreword by Philipp Requat (European Ideas Ambassador at the University of Edinburgh): At a time when the governments of liberal Western democracies are inundated by debt, only to be rivalled by the level of leverage reached during the 2nd World War and the private households of these nations have accumulated historically unseen wealth, discussions of the systems of taxation have become a prominent feature of political debate. In the U.S.A, where(as investor Warren Buffet has pointed out) billionaires often end up paying a lower percentage of income tax than their secretaries, Republican presidential candidate and multimillionaire Mitt Romney is publicly struggling to justify paying “between 13 and 15%”  in annual income tax. The debate is also being lead in Europe. French President François Hollande recently backtracked from his election campaign promise to levy a 75% tax on the income of the country’s highest earners, as German chancellor Angela Merkel tries to persuade her parliamentary opposition to ratify a tax deal with Switzerland, intended to retrieve a part of tax evaded funds of German citizens kept in Swiss banks. Perhaps the nations that feel the need to reform their taxation system the strongest are Greece and Italy, where governments that are already fighting to remain solvent must additionally deal with the effects of widespread tax evasion. Black market activity in Greece costs the state between 12 and 30 billion EUR in annual tax income, whereas in Italy the annual costs of “evasione” are thought to total between 120 and 150 billion EUR, according to estimates by the OECD, Transparency International and the Chicago Booth School of Business. Throughout the continent, calls for more efficient and effective methods of taxation are heard, such as focusing more strongly on the taxation of wealth.

The recent revival of calls for a greater taxation of wealth in the UK and elsewhere prompts the question of what happened to previous ideas for such taxation.  Inequality of wealth in the UK has been greater than inequality of income for well over a century, and in Britain wealth inequality was high by international standards.  In 1954 the top 1% of American wealth-holders owned   24% of total personal wealth compared with 43% in Britain.  While across the twentieth century there had been some redistribution of wealth in Britain, this redistribution had occurred amongst the top 20% of the population and even began to go into reverse among that group towards the end of the twentieth century. Across the   1990s,   the top 1% of wealth holders increased their share of marketable wealth from 17%   in 1991 to 23% by 2001. Against such a background, and in the context of economic stagnation and public finance difficulties, it is perhaps unsurprising that calls are heard again for increased taxation of wealth. Yet what precisely is meant by such calls?

A commonly proposed form of taxation is an Annual Wealth Tax. The last attempt to introduce such a tax in the UK was in the 1970s, and even then the established Select Committee could not produce a unanimous report. Inevitably perhaps, on 18th December 1975, Denis Healey, the Chancellor of the Exchequer, indicated that he was postponing the introduction of a wealth tax.  Subsequently, neither of the two major reviews of the system of taxation in Britain, the Meade Report (1978) and the Mirrlees Review (2011), evinced enthusiasm for an Annual Wealth Tax. It is not just the scope which exists for evading such a tax and its potential distorting effects on behaviour which is of concern, but that such taxation merely scratches the surface, and inefficiently so, of the issues affecting  the taxation of wealth.

 To outline just a few of the most obvious questions: Should wealth that has been earned by its possessor be taxed, and if so, should it be so at the same rate as inherited wealth? If inherited wealth is to be taxed, when should it be taxed, and who should be taxed? If inherited wealth is only taxed at death, then the incidence of this taxation can vary greatly between sets of individuals. The grandfather who lives to be 101 and whose inheriting great-grandchild also lives to be 101 potentially only becomes liable to inheritance tax once every 200 years.  Generations of a family not enjoying such longevity are further penalised by paying inheritance tax more often. And why tax the donor and not the recipient (donee)? If the donee was taxed, would it be possible for him or her to be taxed in advance for their future enjoyment of the wealth,   based on the probability that he or she was likely to live to be 85 years old.

None of these ideas is new. They were set out at length in the Report of the Meade Committee in  1978, a report which also favoured   the reduction of the top rate of taxation from a potential 98% to 70%, the removal of inconsistencies in the treatment of forms of savings and the introduction of tax incentives to work and to make life-cycle savings. Many of the committee’s recommendations for the tax-treatment of life-cycle savings were adopted by the Thatcher governments by such means as introducing tax-free savings accounts and tax-relief on personal pensions, and the governments were happy to follow   the recommendations of Meade, as well as the early work of Mirrlees on optimal taxation, in reducing marginal tax rates at both ends of the income scale. Where the Thatcher governments were firmly opposed to Meade was in his proposals for the taxation of wealth. In brief, the Meade Committee proposed a PAWAT(Progressive Annual Wealth Accessions Tax), which taxed both the  transfer of wealth and the likely duration of its possession. Tax was levied on the donee (as the beneficiary) rather than the donor at a progressive rate depending not only on the cumulative  amount of gifts already received, but also on the age of the donee. More generally, Meade proposed not that wealth itself, but rather the use of that wealth, should be taxed. This use could be tracked by comparing the value of  particular registered assets from one year to next, the decision as to what those assets should be (equity, property) being essentially as much a matter of politics as public finance. 

This was, and is, an interesting idea. It marks a break from using income as the basis of taxation, preferring instead to tax expenditure. As is commonly remarked, why tax what someone contributes to an economy (income) rather than what they take out (expenditure)? Moreover, why tax annually, and not over someone’s lifetime.  These were economic ideas with long roots, going back through Kaldor, Mill and to Hobbes, and the Inland Revenue fiercely opposed them on the grounds of practicality. But whatever the difficulties of implementing an expenditure tax, it was far less clear why a tax on the use of wealth over a lifetime should not be introduced. That it was not was due in considerable part to the Conservative party and government’s opposition to any further taxation of wealth, which in turn was part of  a wider contemporary concern to increase incentives, allow  a great share of earnings to be retained and to reduce   public expenditure.

 Arguably the public mood, at least in Britain, is now different. Whereas popular books in the 1970s were the likes of  Too Few Producers, some of the most popular political-economic reading of  recent years, with indicative subtitles, has been  The Winner-Take-All Society: Why The Few At The Top  get So Much More  Than The Rest   of Us (2010),  The Pinch: How the Baby Boomers   Took Their Children’s   Future: And Why They Should Give It  Back, and The Spirit Level: Why More Equal Societies Almost Always Do Better(2009).  Whatever the academic misgivings about the use of statistics in some of these books, their popularity attests to a general disquiet and unease with the distribution of income, wealth and opportunity across society and between generations.  It also begins to pick at a deeper issue in taxation. Should households be taxed on their ability to pay or on the basis of what is optimally efficient so as not to distort marginal incentives to work?  Meade’s preference for taxable capacity over optimal taxation and indeed the Meade Report’s concern with the lifetime taxation of the use of wealth is arguably better in tune with public opinion now than it was in 1978. In thinking of lifetime rather than annual taxation and in discussing intergenerational transfers of wealth and opportunity, it now shares a perspective and vocabulary with those concerned with action to reduce the rate of climate warming. Meade’s own writings, in such books as  Efficiency, Equality and the Ownership of Property (1964) with its chapter on ‘A property-owning democracy’, The Intelligent   Radical’s Guide to Economic Policy(1975), and  The Just Economy(1976) reflect his persistent concern with securing a just  distribution   of opportunity and wealth. Such concerns have now returned to the centre of the political debate, and talk of the taxation of wealth is once again to be heard from politicians.  In the 1980s, the Thatcher governments implemented many of the Meade Report’s recommendations but conspicuously rejected those for the progressive lifetime taxation of wealth. Public and political attitudes are no longer those of the 1970s and 1980s. Little is heard today of the benefits of ‘trickle down’ from higher to lower income groups.  In this changed political context with its particular concern with the taxation of wealth, is the implementation of the Meade Report unfinished business to which we should now return?  

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