Tax after coronavirus Contents

4Windfall and wealth taxes


63.In the face of the deterioration of the public finances described in Chapter 2, there have been calls for new taxes to help tackle the increase in public debt stemming from the pandemic. We consider below two such potential additional types of tax:

Windfall taxes on business

64.The consequences of the pandemic have been spread unequally across businesses. While some have seen their business effectively suspended or even terminated by the restrictions put in place to protect public health, others have seen an increase in their profits, for example as competitors closed or demand went online.

65.These rising profits at some firms have led to calls for “windfall” taxes. Oxfam UK noted that “given the context of the pandemic, there is a clear fairness rationale for higher taxes on those that appear to have benefited economically from the crisis whilst most individuals and companies have become poorer.”70 The Resolution Foundation argued, in its November 2020 “Unhealthy Finances” report,71 for two temporary measures to provide additional revenue, drawing on the “principles of solidarity and fair burden-sharing”:

First, we recommend a Pandemic Profit Levy of 10 per cent on windfall profits made by firms during the pandemic, reflecting the fact that such profits in many cases reflect the luck of some firms being presented opportunities by the crisis or not being adversely affected by social distancing restrictions. Second, the self-employed who have seen their incomes actually rise this year while claiming the poorly-targeted Self-Employment Income Support Scheme (SEISS) grants should have their grants partially clawed back. This would narrow the enormous gap in treatment with the self-employed who have seen income falls but been excluded from support, and would raise at least £3 billion.72

66.The Tax Justice Network has called for both windfall taxes and a 100% excess profits tax.73 We asked Alex Cobham, CEO at the Tax Justice Network, about this. He said that

The last year has seen this completely unprecedented state intervention in economies all around the world, including the UK. Some multinational companies in particular, through no virtue of their own, have done exceptionally well from that. They have made vast unearned profits simply because their smaller, local competitors have been locked down for long periods. The entirety of that profit is an unearned rent captured from these state interventions. Ideally, 100% of that would come back into the public purse to pay for some of the other costs of that intervention.74

67.Some large firms seem to have responded to this potential criticism and have paid back business rates and furlough grants given during the pandemic.75 Tom Clougherty explained that

[ … ] part of the reason they returned that money or did not take it in the first place is perhaps that they did not want to be subject to a windfall tax. They did not want to have the argument that they were profiting at the taxpayer’s expense aimed at them. [ … ] It would be wholly unjust to punish basically those businesses that have helped make the last year barely tolerable for all of us, by providing essential goods and services when we could not get them in the way that we did before.76

68.Others were similarly cautious about the imposition of such “windfall” taxes and their potential long-term impact. Chris Sanger, Global Government Leader at Ernst and Young and Chair of the Tax Professionals Forum, said that a windfall tax would have a negative impact on inward investment in the future:

If businesses think that, when they make money in the UK, a retrospective tax is going to come and claw back some of those profits, they will embed that into their thinking about what the corporate tax rate is in the UK. It can therefore undermine the investment proposition for the UK as opposed to somewhere else.77

69.The Chartered Institute of Taxation was also not convinced that a conclusive case had been made, and it told us that “It is easier to say who has lost out as a result of COVID than who has unexpectedly benefited, and it is difficult to see a convincing tax base being identified which would yield worthwhile revenues”.78

70.Some firms and sectors have seen a significant increase in turnover as a result of the pandemic, and some witnesses made arguments in favour of a windfall tax on the profits which have resulted. There are downsides to a windfall tax, including its potentially retrospective nature. There would also be complexities, including the difficulties of identifying sectors to which any such tax should apply, ensuring that such a tax is fairly targeted at firms which have benefited excessively within those sectors, and identifying the element of a firm’s profits which could be reasonably attributed to excessive profits generated by the pandemic. For these reasons, introducing such a tax would be problematic, but that is not to say that it would be impossible to introduce a windfall tax in certain circumstances in the future, if that was the political choice made. The Treasury would clearly need to conduct a thorough assessment of its feasibility and of the revenue which it might raise.

Wealth taxes

71.Another additional form of taxation has been suggested to counter the large increase in public debt brought on by the pandemic—wealth taxes. The Committee has taken evidence on two potential forms: an annual wealth tax and a one-off tax.

Growth of wealth

72.The UK has never had a tax based on the net value of a living individual’s wealth, but it does tax capital gains, the value of estates at death, and income arising from capital. The UK also taxes the capital value of housing transactions through stamp duty land tax (SDLT),79 and council tax is linked to housing values.80 We address aspects of these two taxes in Chapter 6.

73.The value of wealth in the UK has grown much more rapidly than incomes in recent decades. The Office for National Statistics’ estimate of the UK’s net worth—a measure of wealth—has risen from 3.3 times annual GDP in 1995 to 4.5 times in 2019—and this measure is likely to understate the total level of wealth.81

74.Meanwhile, relative wealth inequality has been broadly stable since the 1980s, having fallen for most of the twentieth century, but on some measures there has been a slight rise in the last decade. Moreover, since households in the bottom half of the UK distribution hold little or no net wealth, they have gained much less in absolute terms from growth in wealth than have families in higher deciles. The growth in wealth relative to income means that it is harder for individual households to rise up the wealth distribution scale by building up savings.82

Figure 5: Mean household wealth by decile in Great Britain, 2006–08 and 2016–18 (£ million) [labels show absolute/proportion changes in wealth]

Figure 5: Mean household wealth by decile in Great Britain, 2006–08 and 2016–18 (£ million) [labels show absolute/proportion changes in wealth]

Source: ONS, Total wealth in Great Britain: April 2016 to March 2018, 5 December 2019 (Wealth and Assets Survey)

75.Meanwhile, the existing wealth and capital taxes make a significant and growing contribution to the public purse but a much smaller one than taxes on income and expenditure: they accounted for 9 per cent of tax revenues in 2019–20, up from 6 per cent in 1999–2000.83

An annual wealth tax

76.An annual wealth tax could be based on total net wealth of individuals. Some other European countries have taxes on that basis, including Switzerland, Norway and Spain.84

77.The case for a wealth tax was made by Robert Palmer, Executive Director, Tax Justice UK:

“There are two arguments in favour of a wealth tax: the first is to raise revenue, and the second is to tackle inequality. In the long term, as we build back from coronavirus, it looks as though we will have to raise more in tax. That leads to big questions about who should pay. As we all know, coronavirus has not hit equally. The poorest have seen their incomes disappear and end up relying on food banks, while wealthier people with salaries have ended up saving more than they would do usually. If we are thinking about how we raise taxes, taxing those who have wealth and assets is a good starting point.”85

78.On the other hand we were made aware of practical difficulties. Emma Chamberlain OBE, barrister at Pump Court Chambers and a member of an academic project known as the Wealth Tax Commission, which had examined the case for a wealth tax,86 told us that “it is important to distinguish between quite a lot of complexity and administrative problems with an annual wealth tax. I have been persuaded that that is really quite difficult to deliver. In practice, I am doubtful … about whether you could improve inequality or deliver revenue.”87

79.Tim Worstall, Fellow of the Adam Smith Institute, was concerned about the nature of a wealth tax, in that it would tax wealth accumulated in the past. He told us:

A retroactive tax is an appalling idea. It is akin to theft. Roy Jenkins did this in the 1960s. He retroactively imposed a 130% tax at the top end of capital incomes on the previous tax year that was already closed. That is just appalling behaviour. However much Government need the money, that is just not what we should be doing. Tax, just like any other form of law, should be: “It starts today. If you do not agree with it, you can change your behaviour in the future to avoid it and not do the activity [ … ]88

80.Many countries that have introduced wealth taxes have subsequently abandoned them, and so the number of countries with wealth taxes has been falling steadily in recent years, as the following chart shows.

Figure 6: Number of OECD countries levying individual wealth taxes over time

Figure 6: Number of OECD countries levying individual wealth taxes over timeSource: Wealth Tax Commission89

When asked why other countries had abandoned wealth taxes, Emma Chamberlain told us:

“It is all because of the administrative difficulties of an annual wealth tax. In Germany, it was abandoned in 1996–97 because it was found to be unconstitutional because land was very favourably taxed and businesses were not. It was essentially quite discriminatory. France abandoned it, although reintroduction is still very popular, because the revenue it raised was not worth the hassle and, in fact, richer people did not pay it because they had a cap that was prone to avoidance.”90

81.She contrasted the UK with Switzerland, which has an annual wealth tax:

“We are different from Switzerland. First of all, Switzerland does not have inheritance tax to any significant degree and it does not really have a capital gains tax. Wealth tax there is sort of substituting for capital gains tax. We have to be very careful comparing ourselves with Switzerland, but it does raise over 3% of tax revenues on an annual wealth tax. It is a low base and a very low threshold, under £500,000, with low rates. The maximum rate is 1% in Geneva and it is cantonally based.”91

82.Sir Edward Troup, former Chief Executive and Permanent Secretary of HMRC, summarised the cases for and against a wealth tax:

A lot has been said about this and I know there are some extreme views at either end. That is not suggesting that Robert and Tim’s views are extreme but there are a lot of views on this. You asked the question about complexity. Of course it is complex, but any act of taxation is intrinsically complex because it needs to deal with the millions of citizens out there. The question is not so much whether it is complex but whether its complexity and inefficiency—because all taxes impose some burden on the economy—are made up for or compensated for by the revenue raised or the other objectives that the tax might fulfil?

Robert has put forward some challenging suggestions about the amount of revenue that might be raised. If that were possible, in a sense the complexity and inefficiency could well be justified. I have to say I am sceptical. Spain raises about €1 billion a year with its wealth tax. The case and the justification for the wealth tax and the complexity it would introduce is not justified on revenue-raising grounds. Taxes can and should be introduced on other grounds, either to maintain overall support for the tax system, and the integrity and perceived fairness of the tax system, or to pursue other societal or economic objectives. Very often, taxes that are introduced on that basis are complex. That complexity is the cost you pay.

83.A fundamental concern about wealth taxes is that they do not take into account the ability to pay as they are a tax on assets rather than income. There are many who have seen an appreciation of asset values but have little income.

84.We believe that the development and administration of an annual wealth tax would be extremely challenging, and we note that other countries have abolished such a tax in recent years. We would not recommend an annual wealth tax. It is recognised though that were the wealth to income ratio to increase considerably, the political arguments for some form of wealth tax would become stronger.

The one-off wealth tax

85.We also heard evidence on the related case for a one-off wealth tax to reduce the public debt after the pandemic. We took evidence from Dr Arun Advani, Assistant Professor at the Department of Economics at the University of Warwick, who had led the Wealth Tax Commission, which had examined the case for a wealth tax.92 Its final report, published in December 2020, argued against an annual wealth tax but was favourable to the idea of a one-off wealth tax.93 The Commission maintained that it would be difficult to avoid, would work in practice with small administrative costs relative to yield, and would be “fairer and more economically efficient than alternative tax rises”. Calculating the yield and taking account of behavioural effects, it argued that a one-off tax could raise £260bn if based on a rate of 5% on net wealth over £500,000 per individual or £80bn if at a rate of 5% over £2m per individual, payable over 5 years.94

86.Emma Chamberlain thought that this idea was preferable to an annual tax. She said: “I think it could raise a large amount of revenue much more efficiently than many other tax rises, and it could be targeted.”95

87.Tim Worstall was, however, concerned about retrospection and precedent setting. He told us:

The other thing that has just struck me is that people are talking about retrospective one-off wealth taxes. One-off wealth taxes are not all that good an idea simply because, once it has happened once, absolutely nobody is ever going to believe that it will not be done again.96

88.Though those who gave evidence were sceptical of an annual wealth tax, there was more support for a one-off wealth tax. It could be used to raise significant revenue. However, amongst witnesses there were significant reservations that a tax imposed once can be imposed again, and that such a tax might be seen as retrospective.

70 Oxfam GB (TAC0014), para 26

71 Resolution Foundation, Unhealthy Finances (11 November 2020)

72 Resolution Foundation, Unhealthy Finances (11 November 2020) p10

73 Tax Justice Network, State of Tax Justice 2020, 20 November 2020

75 For example see: “Sainsbury joins rush to return business rates relief”. The Financial Times, 3 December 2020

78 Chartered Institute of Taxation (TAC0074) paragraph 9.5

79 Devolved to Scotland which has introduced a similar Land and Buildings Transaction Tax and Wales which has introduced Land Transaction Tax.

80 Council tax is based on 1991 valuations except in Wales where the tax was revalued in 2003 and Northern Ireland which still has domestic rates

81 Staff calculations based on Office for National Statistics (ONS), National balance sheet estimates for the UK: 2020, 1 December 2020. This estimate of wealth is based on the UK national accounts. The ONS’s Wealth and Assets Survey returns a higher estimate of net wealth, at over 6x GDP (Office for National Statistics, Total wealth in Great Britain: April 2016 to March 2018, 5 December 2019). However, the national accounts-based measure is used here because it has a longer historical time series.

83 Staff calculations based on Office for Budget Responsibility, Public Finances Databank, January 2020. These figures include Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax and Council Tax, but not do include the Income Tax derived from capital arising from income.

84 Emma Chamberlain, “Wealth taxes in foreign countries.

86 Wealth Tax Commission. Sponsored by LSE, Warwick University, CAGE research centre and IFS

92 Wealth Tax Commission. Sponsored by LSE, Warwick University, CAGE research centre and IFS

93 Arun Advani, Emma Chamberlain and Andy Summers, “A wealth tax tor the UK”, final report of Wealth Tax Commission 9 December 2020, paragraph 6.1 page 106.

94 Arun Advani, Emma Chamberlain and Andy Summers, “A wealth tax tor the UK”, final report of Wealth Tax Commission 9 December 2020, page 106.

Published: 1 March 2021 Site information    Accessibility statement