The UK system of taxing capital is broken but introducing a wealth tax risks making the situation worse, a former top civil servant at HM Revenue & Customs said.
Edward Troup, previously first permanent secretary at HMRC, told MPs looking into the pros and cons of a wealth tax that the “defects” of the existing tax system needed to be tackled first.
Members of the Treasury select committee are investigating which tax changes should be made as a result of the economic fallout from the coronavirus pandemic.
“We have a lot of taxes on various aspects of capital . . . none of them work properly,” said Sir Edward on Wednesday, citing capital gains, inheritance and council taxes as examples. “It’s always better to try and fix what you’ve got than to pile something else on top of it.”
Politicians should focus on thinking about whether the existing system was taxing wealth in the right way, Sir Edward said.
“We probably should tax people who get wealth for undeserved reasons like just sitting on their house while the prices go up, but that’s a gain and that should be taxed in a very different way from passive ownership of wealth you’ve acquired through your own hard work and savings,” he said.
“There is a real risk that we are looking at putting something new and difficult and probably pretty inefficient [a wealth tax] on top of some already non-working taxes.”
The debate over new wealth taxes has intensified as the government considers how it might repair the damage inflicted on the public finances during the pandemic.
Chancellor Rishi Sunak asked the Office of Tax Simplification, an independent statutory body, to carry out a review of capital gains tax. Last week it published its recommendations, including increasing the CGT rates to match those of income tax, and a reduction in the annual exemption below which gains are not charged — currently set at £12,300.
Sir Edward was sceptical about how much a wealth tax could raise, noting that other countries raised relatively small amounts from it. But some panellists appearing before the committee argued a wealth tax would be a good way of raising revenue for the Treasury.
“If you want to try and raise money from the ultra-wealthy, then I think a wealth tax is really one of the few options you have,” said Robert Palmer, executive director at campaign group Tax Justice UK.
Arun Advani, assistant professor at the University of Warwick, said a one-off wealth tax that levied 4 per cent on net assets above £500,000 and allowed payment to be spread over a period of five years — could raise around £200bn.
Emma Chamberlain, a barrister at Pump Court Tax Chambers, who has researched the behavioural effects of tax increases, said an ongoing annual levy would lead many wealthy people to avoid it by leaving the country, but a one-off tax would be harder to escape.
“I do think it could raise a large amount of revenue much more efficiently than many other taxes and it could be targeted,” she said.
Such a tax would need to be broad based and include all assets, including pensions and the value of the main home, to prevent people shifting assets into exempt areas, Mr Advani and Ms Chamberlain said, adding that exemptions were one reason for the limited success of wealth taxes around the world.