A ‘lifetime income super-tax’ would tax wealth and fix inequality
News•Business• 17.12.2018 • Nick O'Donovan/Manchester Metropolitan University
Protestors in Paris are seen demonstrating against a fuel tax hike on 1 December 2018
What if taxpayers paid an additional 5% on all their future taxable income, once they had earned over £2.5m? Nick O'Donovan considers alternatives to wealth tax.
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”
So said Jean-Baptiste Colbert, minister of finance to France’s 17th-century “Sun King”, Louis XIV. Today, almost four centuries after Colbert’s birth, his compatriots are rioting on the streets of Paris and taxation is once again a focal point for French political debate.
The “gilets jaunes” movement, which began as a protest against fuel tax rises, has morphed into a more wide-ranging critique of the fiscal reforms of the French president, Emmanuel Macron. This includes the abolition of France’s wealth tax, the impôt de solidarité sur la fortune (or ISF).
Wealth taxes such as the ISF levy an annual charge on the net assets held by the wealthy: property, cash, shares, helicopters, super yachts and so forth. The charge is usually small in percentage terms (the ISF ranged from 0.5% to 1.5%), but still leaves well-off taxpayers facing massive tax bills.
Consequently, people caught by wealth taxes have a substantial incentive to relocate themselves or their assets overseas (legally or otherwise). The process of valuing assets for wealth tax purposes is often complicated, contentious, and time consuming. People near the wealth tax threshold might opt to splurge their savings on fine wine and luxury holidays, rather than invest in ways that make a long-term contribution to economic growth.
Wealth begets wealth
It is perhaps unsurprising, then, that many economists are hostile to the idea of wealth taxes. Yet better taxation of wealth remains fiscally and economically imperative. Increases in inequality within almost all developed democracies have been well-documented by the OECD, IMF and others – as has the increasing capacity of wealth to beget more wealth, to the detriment of wage-earners.
If governments are to maintain existing levels of public spending, then it seems logical to ask the wealthiest to pay more. Added to that, research published by the IMF suggests that widening gaps between the richest and the rest can damage medium-term economic growth.
How else, then, might governments seek to target the wealthy? The most obvious alternative to taxing wealth is taxing income. Wealth (at least, wealth that is not simply inherited) is, in essence, accumulated income – whether in the form of earnings from a business, the returns made on shares, property and other investments, or wages from high-earning jobs. Why not simply increase the income tax rate for higher earners?
Such reforms have found support from international institutions and prominent economists. But people with higher incomes may not feel all that wealthy, particularly younger people early in their careers who are confronted with substantial housing costs. Critics of higher top rates of income tax argue that they dissuade the most economically productive members of society from working, harming both economic growth and the government’s tax receipts.
There is an alternative
Yet there is a straightforward way to address these concerns. By making an increase in income tax rates dependent on a taxpayer’s income over their lifetime, rather than how much they earn in any given year, some of the pitfalls of both income and wealth tax could be avoided. Both the increase and the threshold would apply to taxable income of any kind – salaries, gains on assets, dividends, whatever.
Consider, for example, a policy whereby taxpayers would pay an additional 5% on all their future taxable income, once they had earned lifetime income far exceeding that of an average person – say £2.5m. Such a “lifetime income super-tax” (or LIST) would be easy for individuals to calculate and for tax authorities to verify. It would use data that tax authorities already collect, and historical data that they already possess.
The idea of a LIST is still new (and something that colleagues and I are exploring at MMU’s Future Economies Research Centre), but LISTs have the potential to tax wealth in a progressive yet practical manner. From a taxpayer perspective, the incremental tax increase incurred would be sufficiently small that few LIST-payers would want to give up on the careers and businesses they have built for themselves over a lifetime, including the lifestyle, prestige and personal satisfaction associated with their positions.
True, some people may migrate, though this would mean giving up on the communities and markets in which they had thrived. Others will be tempted to work less, choosing to live off their wealth instead. However, any gains they make from liquidating their wealth – and any income they receive from it – would also be subject to the LIST.
The impact of the LIST on investment would also be much lower than for conventional wealth taxes. Unlike taxes based on how much wealth someone possesses at a given point in time, individuals cannot consume more to stay below the LIST threshold. As a LIST would tend to target people towards the end of their careers, it would also improve intergenerational inequality. A LIST might even help address gender differences in disposable income – with those (predominantly women) who take time out of their careers to care for children less likely to pay the surcharge.
Wealth taxes as they exist today are deeply flawed. But that doesn’t mean that policymakers need abandon taxing wealth altogether. To extend Colbert’s metaphor, it makes sense to pluck the geese with the most feathers – we just need to use methods that minimise hissing.
Nick O'Donovan, Senior Lecturer at the Future Economies Research Centre, Manchester Metropolitan University