In reality, a one-off capital levy would be set at a rate much lower than 10%. Not just because parsimony would trump the generosity Conway outlines, but because we wouldn't need anywhere near that amount to deal with the immediate costs of Covid-19. Of course, should the effects of the pandemic stretch into 2021, then our estimate of that cost would have to be revised upwards, but there is good reason to believe that the cost will be front-loaded anyway. The lockdown is a very deliberate over-reaction and we can expect costs to be mitigated over time as society and the economy adjust to the new normal, both in any transitional easing phase (which is what the government now seems to be preparing for) and once we're out of the other end. So what is the likely cost? UK GDP is roughly £2.3 trillion. The OBR predicts a loss of 35% of GDP in the second quarter and a gradual but relatively quick bounceback thereafter. If we take a pessimistic case of a 50% loss over two quarters (25% annualised), that would amount to about £580 billion.
The government's emergency measures aren't going to make that up in full: some businesses will fold, rather than seek state support; wages are only being covered at 80% up to a threshold, while many workers and the self-employed are falling through the cracks and must now rely on Universal Credit; and there are suspicions that the state's institutional aversion to giving out money will mean some people and firms will simply forgo their entitlement. This explains why the Chancellor's emergency package, launched in mid-March, was priced at £350 billion, or 15% of annual GDP, though there have been some subsequent additions to this in the form of new targeted schemes. Much of this is made up of loans to business, but at least £225 billion in gilts (government debt) is expected to be issued in addition to the normal offerings, increasing the national debt from £2 to £2.3 trillion. This will in turn increase the debt-to-GDP ratio from 86% to close to 100% (it will probably spike higher because of 2020's reduced GDP - i.e. a lower denominator - but 100% is likely to be the post-crisis benchmark).
This isn't a problem, despite the infamous claims made in 2010 about unsustainable ratios that were used to justify a decade of austerity, not least because this uplift in debt is happening globally and there is no reason to expect the cost of servicing it will be pushed up for a monetary sovereign like the UK. It will be fragile developing economies and the southern EU states who will be most vulnerable (albeit for different reasons), though the non-appearance of the bond vigilantes in recent years suggests they may not have too much to worry about either. We still have a global glut of savings, or, to put it another way, too much wealth chasing too few investment opportunities (one reason why a capital levy or even a recurring wealth tax would be opportune). Those savings aren't necessarily liquid. Much of the wealth in the developed world is now bound up in property and its associated tangibles (cars, household goods, fixtures and fittings etc), which in the UK in particular means residential housing more than industrial or commercial buildings.
The UK's aggregate net household wealth is £15 trillion (this includes property, finance and pensions but not offshore holdings). Conway's back-of-an-envelope calculation is that up to £1.5 trillion could be raised by a 10% capital levy, which would be roughly three times as much as we'd likely need to cover the actual total of government expenditure in respect of the crisis (i.e. pessimistically assuming that total ends up being closer to half a trillion). If we assume that Conway would like the debt-to-GDP ratio to fall to around 50%, this would actually leave little to contribute to the NHS. A more modest target of a 70% debt-to-GDP ratio would leave roughly £300 billion for healthcare. In practical terms, that would allow annual increases in NHS spending to return to the levels achieved under New Labour, which averaged 5% and briefly peaked at 10%, but this time sustained for a decade or more. That would certainly be transformative, but it wouldn't be unprecedented.
I suspect Conway has inflated his figure to 10% to avoid the risk of advocating a levy of only 2 or 3%, which might prompt some to wonder why we couldn't simply have an annual wealth tax of 1% anyway. That would raise approximately £150 billion, which is about 18% of UK government spending (£850 billion). To put it another way, we could notionally abolish income tax and all other taxes and substitute a flat wealth tax of 6% to meet current commitments. In reality, income tax would remain in place, if only to avoid capital assets being converted via obscure financial mechanisms into nominal income. But existing (albeit inadequate) taxes on capital gains and dividends, plus stamp duty, could be replaced by a wealth tax. As these currently contribute relatively little to total government income, due to their low rates, a wealth tax that substituted for them, raised additional revenue to pay down the national debt and increased health spending in real terms would probably be in the order of 1%. That might seem ridiculously modest, but bear in mind that a hypothecated wealth tax of 0.12% alone would allow us to send an extra £350 million a week to the NHS.
Of course, taxing illiquid wealth presents greater practical problems than taxing liquid income. This has always been a chief defence against a wealth tax, conjuring the image of the cash-poor but property-rich widow, or imagining stock market routs come tax bill time, but there is a solution. This is to simply convert tax obligations into debt instruments that are redeemed (i.e. the individual or company pays their tax due) when wealth is liquidated or inherited (or transferred in any other way). Unlike a transaction tax, such as stamp duty, this obligation would accumulate year-on-year. Assuming an annual rate of 1%, if you sold an asset after eight years, you'd pay 8% on the sale price (you would still be making a profit if the annual growth rate were over 1%, as it has been in most years). The challenge then is one of preventing tax avoidance, but that becomes much easier in a regime that treats all wealth as taxable by default. Also, bear in mind that close to a half of the UK's net wealth is made up of land (including housing) or UK-domiciled finance (shares, securities etc), which is pretty easy to track and trace. In other words, much of a wealth tax would actually comprise an LVT (land value tax) and an aggregated financial transaction tax.
The need to tax wealth has been recognised for years. It is the inevitable consequence of the continuing growth in aggregate wealth coupled with increasing inequality in the ownership of that wealth. The hostile reaction to Thomas Piketty emanated from polemicists in the media whose career has been built on defending wealth, not from the economics community itself. Politicians are only too well aware of the pitfalls of advocating wealth taxes when their support has been so dependent on homeowners, but they are also acutely aware that it is those who can't afford to buy property and have little prospect of a decent pension who will increasingly determine elections. In this context, Conway's proposal is a plea-bargain, offering a substantial one-off hit not only to reduce debt but to partially rectify the damage of a decade that enriched the already rich. But it's clear he doesn't expect the idea to fly. What he's tentatively exploring is higher taxes on capital gains, dividends and perhaps treating inheritance as income, because higher taxes on income and consumption are politically toxic and austerity would be both inadequate and counter-productive. What matters in this pitch is that the imposition on wealth is temporary.
This isn't a problem, despite the infamous claims made in 2010 about unsustainable ratios that were used to justify a decade of austerity, not least because this uplift in debt is happening globally and there is no reason to expect the cost of servicing it will be pushed up for a monetary sovereign like the UK. It will be fragile developing economies and the southern EU states who will be most vulnerable (albeit for different reasons), though the non-appearance of the bond vigilantes in recent years suggests they may not have too much to worry about either. We still have a global glut of savings, or, to put it another way, too much wealth chasing too few investment opportunities (one reason why a capital levy or even a recurring wealth tax would be opportune). Those savings aren't necessarily liquid. Much of the wealth in the developed world is now bound up in property and its associated tangibles (cars, household goods, fixtures and fittings etc), which in the UK in particular means residential housing more than industrial or commercial buildings.
The UK's aggregate net household wealth is £15 trillion (this includes property, finance and pensions but not offshore holdings). Conway's back-of-an-envelope calculation is that up to £1.5 trillion could be raised by a 10% capital levy, which would be roughly three times as much as we'd likely need to cover the actual total of government expenditure in respect of the crisis (i.e. pessimistically assuming that total ends up being closer to half a trillion). If we assume that Conway would like the debt-to-GDP ratio to fall to around 50%, this would actually leave little to contribute to the NHS. A more modest target of a 70% debt-to-GDP ratio would leave roughly £300 billion for healthcare. In practical terms, that would allow annual increases in NHS spending to return to the levels achieved under New Labour, which averaged 5% and briefly peaked at 10%, but this time sustained for a decade or more. That would certainly be transformative, but it wouldn't be unprecedented.
I suspect Conway has inflated his figure to 10% to avoid the risk of advocating a levy of only 2 or 3%, which might prompt some to wonder why we couldn't simply have an annual wealth tax of 1% anyway. That would raise approximately £150 billion, which is about 18% of UK government spending (£850 billion). To put it another way, we could notionally abolish income tax and all other taxes and substitute a flat wealth tax of 6% to meet current commitments. In reality, income tax would remain in place, if only to avoid capital assets being converted via obscure financial mechanisms into nominal income. But existing (albeit inadequate) taxes on capital gains and dividends, plus stamp duty, could be replaced by a wealth tax. As these currently contribute relatively little to total government income, due to their low rates, a wealth tax that substituted for them, raised additional revenue to pay down the national debt and increased health spending in real terms would probably be in the order of 1%. That might seem ridiculously modest, but bear in mind that a hypothecated wealth tax of 0.12% alone would allow us to send an extra £350 million a week to the NHS.
Of course, taxing illiquid wealth presents greater practical problems than taxing liquid income. This has always been a chief defence against a wealth tax, conjuring the image of the cash-poor but property-rich widow, or imagining stock market routs come tax bill time, but there is a solution. This is to simply convert tax obligations into debt instruments that are redeemed (i.e. the individual or company pays their tax due) when wealth is liquidated or inherited (or transferred in any other way). Unlike a transaction tax, such as stamp duty, this obligation would accumulate year-on-year. Assuming an annual rate of 1%, if you sold an asset after eight years, you'd pay 8% on the sale price (you would still be making a profit if the annual growth rate were over 1%, as it has been in most years). The challenge then is one of preventing tax avoidance, but that becomes much easier in a regime that treats all wealth as taxable by default. Also, bear in mind that close to a half of the UK's net wealth is made up of land (including housing) or UK-domiciled finance (shares, securities etc), which is pretty easy to track and trace. In other words, much of a wealth tax would actually comprise an LVT (land value tax) and an aggregated financial transaction tax.
The need to tax wealth has been recognised for years. It is the inevitable consequence of the continuing growth in aggregate wealth coupled with increasing inequality in the ownership of that wealth. The hostile reaction to Thomas Piketty emanated from polemicists in the media whose career has been built on defending wealth, not from the economics community itself. Politicians are only too well aware of the pitfalls of advocating wealth taxes when their support has been so dependent on homeowners, but they are also acutely aware that it is those who can't afford to buy property and have little prospect of a decent pension who will increasingly determine elections. In this context, Conway's proposal is a plea-bargain, offering a substantial one-off hit not only to reduce debt but to partially rectify the damage of a decade that enriched the already rich. But it's clear he doesn't expect the idea to fly. What he's tentatively exploring is higher taxes on capital gains, dividends and perhaps treating inheritance as income, because higher taxes on income and consumption are politically toxic and austerity would be both inadequate and counter-productive. What matters in this pitch is that the imposition on wealth is temporary.
"The lockdown is a very deliberate over-reaction"
ReplyDeleteTotal and utter bullshit on stilts.
«Politicians are only too well aware of the pitfalls of advocating wealth taxes when their support has been so dependent on homeowners, but they are also acutely aware that it is those who can't afford to buy property and have little prospect of a decent pension who will increasingly determine elections.»
ReplyDeletePerhaps they won't as the plan is already clearly the same as in 1997 to 2010: it is the "There Is No Alternative" plan where the leadership of all parties that matter is thatcherite (plain or hard or ultra) and “those who can't afford to buy property and have little prospect of a decent pension” have only the options of abstaining or voting for those who represent share and property rentiers. See Keir Starmer.