As lockdown restrictions ease, countries across the world are grappling with how to safely restart their economies after such a sudden halt. Despite the inevitable risks and uncertainties that come with reopening society and getting people back to work, governments are keen to avoid the economic fall-out becoming any greater. It will be a long time before the total cost of COVID-19 to the UK economy will be known but, to take just one figure, the Office for Budget Responsibility has estimated that total government borrowing could rise to just under £300 billion for 2020/21 (for context, total government revenue in 2018/19 was roughly £630 billion).
Across Europe, the worst affected countries are wondering how to start repaying what amount to some of the highest levels of borrowing in peacetime. Some governments, such as that in France, appear to be hoping that the debt will become more manageable once the economy starts back up again (as a result of strong growth and continued low interest rates). Nevertheless, the governor of the Bank of France has already warned that there could be significant cuts on public spending as soon as the economy starts getting back on its feet. Spain has thrown its weight behind the proposal for a European recovery fund that would both invest in public projects and buy up the public debt of those countries facing difficulty. Italy is working towards an emergency budget.
Instinctively, governments are looking at the lessons from the global financial crisis a decade ago (the magnitude of which many fear will pale in comparison to the current crisis). During that period, both France and Italy leaned heavily on raising taxes to plug the hole in public finances. In the UK, by contrast, the majority of measures were directed at cutting spending (around 80% of the UK's fiscal measures were spending cuts rather than tax rises, in contrast to 33% in France). That said, another round of austerity would be politically costly to the UK government and it seems more likely than not that an increase in taxation, together with a number of other stimulus measures which may include injecting new liquidity in the economy (so called 'quantitative easing'), will be the result instead.
Increasing taxes is never easy and governments know that it rarely wins them votes. Changes to Income Tax or National Insurance contributions are an incredibly difficult balancing act and an increase in VAT (Value Added Tax) would be easily perceived as an indiscriminate blunt tool. In light of this, the idea of a wealth or property tax as a means of shifting more of the financial burden onto the wealthiest in society appears to be meeting wider approval that in the past. Such a tax has not been imposed in the UK in modern times but there are plenty of examples of it being a well-trodden path across Europe.
The term 'wealth tax' can refer to a broad range of taxes. The common feature of these is that they all are calculated by reference to capital and are charged without the need for a triggering event (such as what we would call a 'disposal' for capital gains tax purposes). Some European countries, such as Norway and Spain, impose a net wealth tax on residents. Others, such as France, impose a property tax in respect of real estate assets only (although it did impose a tax in relation an individual's net wealth prior to 2018).
Wealth taxes should be implemented cautiously. Whilst they can ensure a steady stream of revenue, they also risk becoming a false economy if they end up encouraging wealthy and internationally mobile individuals to vote with their feet. The French experience provides an almost textbook example of the difficult science (or art!) of finding this balance.
In France, it is reported that at least 10,000 wealthy people left the country to avoid paying the wealth tax (formerly known as the Impôt de solidarité sur la fortune), which was introduced in 1998 and has since been significantly reformed (it currently applies only in relation to real estate exceeding a value of €800,000) by Emmanuel Macron in 2017. French economist Eric Pichet is widely quoted on this topic. He speculated that the wealth tax ended up costing the French Government almost twice as much as what it brought in due, in part, to the loss of other tax revenue from wealthy individuals who are no longer tax resident in France. At the same time, however, it is widely believed that it was in fact the 75% tax rate temporarily imposed under François Hollande in 2012 on income in excess of one million euros that really drove the wealth exodus from France in the early 2010s.
Probably due to France's notoriety among the jurisdictions with wealth taxes, it is often forgotten that wealth taxes are not the preserve of what would be regarded as high tax jurisdictions. Many are often surprised when they are reminded that Switzerland, the land of the forfait regime, receives approximately 3.5% of its tax revenue from wealth tax (the highest percentage across OECD countries which impose a wealth tax). It is levied at a cantonal level and the rates vary between roughly 0.10% and just under 1% according to canton.
Another form of wealth tax which has been advocated in response to the current COVID crisis is that of a 'one off' levy, justified by the need to tackle a national emergency. An example of this was the 0.6% levy applied on all Italian bank accounts in July 1992 in order for Italy to satisfy the public finance requirements of the Maastricht Treaty ahead of the introduction of the Euro. The emergency decree caused a major outcry as it was back-dated by two days in order to avoid pre-emptive withdrawals.
Despite high public debt, Italy has long resisted the temptation to introduce a wide-ranging wealth tax similar to the former French one. Nevertheless, it found itself having to raise new emergency funding when hit by the Eurozone crisis in 2011/12. It sought to target the flight of capital and investments out of Italy by taxing Italian tax residents on real estate located abroad (known as the Imposta sugli immobili situati all'estero, 'IVIE') and on foreign financial investments (the Imposta sul valore delle attività detenute all'estero, 'IVAFE'). These levies currently remain still in force at respectively 0.76% and 0.2%.
An example of an emergency levy remaining in force for longer than initially planned can be found in Germany. There, the solidarity surcharge (Solidaritaetszuschlag) was introduced in 1991 as a temporary additional tax to cover the cost of the reunification process. The Solidaritaetszuschlag is an additional levy on top of income tax, capital gains tax and corporate tax in Germany. It is still in place today, despite the passage of almost 30 years and increased public resentment, and this has been the subject of an investigation by the Federal Financial Court and Federal Constitutional Court. It is easy to collect, as the Solidaritaetszuschlag is collected in parallel with the tax type upon which it is charged as an additional tax as a 5.5% surcharge. It has been argued whether the Solidaritaetszuschlag can really be described as a 'wealth tax' as, whilst it is a flat levy, it does not apply to just the wealthiest taxpayers. The German experience provides a perfect example of how an 'emergency' levy applied across the board on top of income, which is already taxed at progressive rates, could be less popular than, for instance, a wealth tax levied on property.
Coming back to the UK, a wealth tax on real estate could be less of a fundamental shift in UK taxation. The UK already has a system which imposes higher or additional taxes on sellers and purchasers of second properties. For example, a stamp duty land tax ('SDLT') surcharge of 3% is imposed on purchases of second properties (unless the purchaser buys the property to replace his or her main residence and sells that main residence within three years). Furthermore, relief from capital gains tax ('CGT') is not available on the sale of a property which is not the seller's main residence. CGT is charged at 28% (higher rate) on residential property other than one's main residence. It is also the case that the higher rates of SDLT have increased materially in recent years. UK residential properties are of course also generally subject to Council Tax. Despite its relatively recent history, Council Tax has not been immune for calls for reform, not least because of the fact it generally targets occupiers as opposed to owners and the bands are historical rather than a reflection of current property values. A net wealth tax can be difficult to implement, this being one of the reasons it was abandoned by France in favour a property tax. A property tax would be an easier option for the UK government but then it would be sensible for it to consider the SDLT, CGT and Council Tax regimes holistically.
There is arguably an inherent Anglo-Saxon suspicion towards anything called a 'wealth tax'. At the same time, it is often forgotten that, for example, our rates of Inheritance Tax are amongst the highest in Europe (whilst 'wealth tax jurisdictions' such as Italy offer some of the most generous inheritance tax exemptions in Europe and many Spanish regions do not impose any tax on death). Considering the examples of wealth taxes across Europe, the real lesson is that we must look beyond the simplistic 'one size fits all' label of 'wealth tax' and instead focus on which taxpayers such a tax would affect, its scope and remit and how much it would actually raise. Only with these considerations in mind might a wealth tax become a way of attempting to square the circle of ensuring sufficient additional tax revenue to foot the COVID-19 bill in a way that meets with widespread approval.
