The wealth tax debate is often centred around expected economic gains. But in a world where the UK’s annual budget deficit is £132 billion according to the OBR, how much benefit would the proposed £10 billion a year from Gabriel Zucman and Ben Tippet actually bring? Firstly, it would reduce the deficit by a measly 7.8 per cent. Secondly, there’s a good chance that the money will go towards paying off the deficit rather than funding public services. In short, a wealth tax won’t fix the UK’s finances. Nor should it.
Legal Loopholes & Tax Inequality
A wealth tax isn’t a magic wand or a silver bullet for fixing the country’s problems. Taxing the wealthy is primarily about equality before the law. The super-rich can manipulate a loophole that lets them pay a reduced tax in proportion to their earnings. Choosing not to receive an income and compensating yourself through stocks and assets means you’re only liable for capital gains tax. This move enables the wealthy to pay a lower proportion of tax on their net wealth compared to someone whose income comes from employment. And this inequality serves as the basis for a wealth tax.
In the UK, taxation is supposed to be progressive. Those with the largest incomes pay the most tax as they can afford the burden. The income tax bands are a guide to how tax is calculated. For instance, those earning over £125,140 annually pay the highest tax rate at 45 per cent. Simple right? Those who earn the most pay the most. However, this rarely reflects reality. If you can afford a financial advisor, they will guarantee that you benefit from at least one legal loophole.
Ok, but how exactly do the wealthy avoid tax? Well, as already explained, they don’t pay themselves an income. This removes the income tax burden, which incidentally carries the highest obligation. Instead, stocks and shares are used as payment. Since stocks and shares are assets, they can be sold and become liable to capital gains tax (but at a maximum rate of 24 per cent), or they can be used as collateral in a loan.
The most tax-efficient strategy is to use your stocks and shares to secure a favourable interest-only loan, which is often worth a fraction of the collateral listed. This money is then used to fund a lavish lifestyle and to invest in more assets. The interest on the loan can be paid by selling small amounts of capital, which is liable to capital gains tax, paid for by dividends which meet a lower maximum tax rate of 39.35 per cent compared to income tax or through offshore bond investments. With an offshore bond investment, you can withdraw up to 5 per cent without paying immediate tax. This tax is then deferred until the owner of the bond dies, or the bond is surrendered. With the interest payments on that loan now covered, the billionaire’s capital grows in value. This additional capital can now be listed as collateral for an even larger loan, which pays off the previous loan and continues to fund that fabulous billionaire’s lifestyle we see in magazines. It is an endless, but also endlessly lucrative cycle that helps sustain and grow wealth while paying minimum tax.
You might think that once wealth is passed down, it’s subject to inheritance tax —right? Wrong. There are loopholes here too. Billionaires can utilise trusts to minimise their tax bill and use business property relief to reduce inheritance tax on their business assets by an eye-catching 50 per cent. And that’s not all. The assets transferred are no longer liable to capital gains tax on the previously accrued value. The rules say that capital gains tax will only be paid from the new value generated from the assets. This allows recipients to sell their assets to pay off any inherited debt and restart the cycle all over again.
What Can a Wealth Tax Do?
It should be clear by now that we need a wealth tax to restore tax equality. Trying to do this by legislating around the loopholes is a hopeless endeavour, since it’s a bit like fighting a Hydra. Cut off one head and another two will appear, only instead of heads it’s tax loopholes. Instead, a designated, purpose-built wealth tax for the ultra-wealthy is the most effective solution, and one that will avoid harming low- and middle-income earners
What might this wealth tax include? Well, one suggestion by the likes of Gabriel Zucman would be to introduce a 2 per cent tax on those with a net worth over £100 million. For those already paying 2 or more per cent of their net worth in taxes, they would owe nothing. The legislation specifically aims to target tax avoiders and raise £10 billion. And though the money may not seem like much, it is the principle that matters most here, the one that says: if you’re earning more, you must pay your equal share.
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