Here’s an idea for you Gary Stevenson: a 0 per cent wealth tax
Gary Stevenson’s success lies in translating a highly complicated economic problem into an emotional story people instinctively understand. The trouble is that successful communication is not really about popularity, it is about ensuring the policy underpinning the message can survive contact with a political and economic reality, says Tim Focas
Eye catching, the audience wants to believe it, while the reveal delivers rapturous applause – the wealth tax has become the political equivalent of a magician’s trick. A two per cent annual levy on wealth above £10m, raising billions for the treasury and paid by people who can easily afford it. What is not to like about this magic show?
Well, from a communications perspective, it is certainly easy to see why the idea resonates. As former Citi rates trader Gary Stevenson demonstrated in his recent Channel 4 documentary, the ability to explain inequality in a way that connects with the average Joe is very persuasive. His success lies in translating a highly complicated economic problem into an emotional story people instinctively understand. The trouble is that successful communication is not really about popularity, it is about ensuring the policy underpinning the message can survive contact with a political and economic reality.
Unlike a dividends tax or capital gains tax which are based on returns, Stevenson’s wealth tax is based on the stock of assets someone owns. The problem is that the super wealthy do not all receive exactly the same levels of passive returns. For instance, if someone earns a 10 per cent annual passive return, and someone else takes home only three per cent, both would pay exactly the same amount despite generating vastly different levels of income from their assets. A tax on wealth therefore lands very differently from a tax on income because the latter guarantees a flow of revenue. A tax on wealth, in contrast, does not.
With wealth taxes, the arithmetic begins to unravel quickly. A two per cent annual wealth tax on assets generating a five per cent return is effectively equivalent to taxing 40 per cent of the return on capital before any existing taxes are considered. With corporation tax at 25 per cent, a dividend tax hovering at around 39.35 per cent, not to mention capital gains tax at 24 per cent for most assets, the UK already has several wealth taxes.
Deterring investment
Once all these taxes are considered, the share of investment returns absorbed by taxation rises rapidly. At some point, one has to pose the question, if the state is taking the overwhelming majority of returns generated by investment, why would anyone take the risk of investing in the first place? The treasury receives zilch if the super-rich don’t make the investment in the first place.
But disincentivising investment is not the only problem. Britain’s billionaire wealth was estimated at around £182bn two years ago, while the government borrows more than £150bn annually. Confiscating an astonishing 83 per cent of billionaire wealth would cover roughly one year of borrowing, but this would only encourage those individuals to reallocate their investments elsewhere. Around 80 per cent of ultra wealthy assets are held in financial assets such as bonds, deposits and other securities. Capital has a habit of moving away from places where it is treated least favourably.
Perhaps the biggest challenge though is that policymakers don’t know how wealth is held, where it is located and, most importantly, the returns it generates. From private funds and trusts, to countless overseas investment vehicles and even artwork, wealth can be housed in numerous places. Therefore, if wealthy individuals generate vastly different returns from different levels of wealth, how can politicians work out the right tax rate levy that brings in consistent revenue into the treasury?
In fact, why not start with a 0 per cent wealth tax? This would at least force the wealthy to declare their assets, as well as build a clearer picture of where wealth sits and how it generates returns. Then, the government could devise any policy based on hard evidence. After all, before pulling a rabbit from a hat, it helps to know whether there is actually a rabbit in the hat.
Skilful communicators such as Stevenson undoubtably get people interested in a really important issue. However, effective political communication only survives the backlash Stevenson is facing through robust and rigorous policy detail. A wealth tax may win the argument in an opinion poll. But turning it into durable legislation that raises meaningful revenue without undermining investment is an entirely different trick.
Tim Focas is head of capital markets at Aspectus Group