A “one off” wealth tax?

I read a very interesting article by Nick Donovan called “A Unique Contribution” which focused on the policy of a one off wealth tax on passive assets over £10 million (i.e. high threshold earners) in order to deal with the governments budget deficit & thus the implementation of austerity measures. A link is provided here: http://www.fabians.org.uk/publications/a-unique-contribution/

Could a one off wealth tax or levy aid governments in reducing budget deficits without adversely affecting growth? During the 2008 financial crisis economies, such as the United Kingdom, with a disproportionate reliance on financial services ran up huge budget deficits from pumping capital into many ailing banks and financial institutions. The present conundrum for policy makers in the post “crash” world is how balance the books and get back “into the black”. Many governments, the United Kingdom included, have so far chosen to engage with this via the implementation of measures of austerity, choosing to cut public expenditure in order to pay off its debts. It is true in the long term running a perpetual budget deficit is not healthy. Excessive borrowing for “day to day” spending will mean larger debt interest payments as a proportion of gross domestic product (GDP) in the future. The effect of austerity, however fiscally “prudent” it is perceived to be, has often meant the burden falls on those on lower incomes and more reliant on state support or public services.

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Nicky Morgan struggling to understand net gains & losses in the poorest & richest incomes as a result of tax & benefit cuts 

One theory to side-step this political & social difficulty is the idea of the “wealth tax”. “Wealth” for the purposes of this article is defined as the accumulation of income: the amount of water in a bath is the stock of wealth and the water flowing in is income. Since the revelations of the “Panama Papers” public attention has focused on the assets and wealth held offshore by the super-rich. Much “wealth” of the “super-rich” is held in passive assets (bonds, derivatives & stocks ect) which yield passive income and gains. Most workers pay their share of taxation via PAYE. For the ultra-wealthy things are very different. Though hard to estimate, it can be said with some authority there is a vast pool of wealth “under-taxed” currently out of reach of authorities. Governments should seek to address inequality in the manner in which they address the nation’s finances in the post-2008 crash space.

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The central idea behind a one off wealth tax would be to raise tax revenue quickly in order to reduce a government’s budget deficit, without the burden falling disproportionately on those with low incomes. The fact the tax is “one off” is in order to avoid the pitfalls and risks associated with ongoing forms of taxation: possible negative impact on “work incentives” (i.e. to be seen to be anti-business) alongside the possibility for individuals with substantial assets to hide it via evasion and emigration (alongside the complexity in valuation of said wealth). Such a tax is designed to avoid distortionary effects on the economy i.e. capital flight, decreased investment or the appeal of avoidance schemes, which may hinder growth. It would arguably have a restorative or re-balancing effect while maintaining an economy receptive to business and international capital. The current political climate seems to demand both fiscal responsibility & fairness; a one off “wealth tax” may provide governments with a policy to bridge this divide.

By Frederick Antonio Gallucci | International Law LLM | @GallucciFred

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