IFS warns UK wealth tax could backfire with loopholes and unfairness
Annual wealth taxes would create 'complexity, distortions and unfairness', a new Institute for Fiscal Studies report has said, as policymakers have been advised to consider the trade-offs involved in addressing forms of inequality.
The IFS's Deaton Review, which involved research conducted over six years, found that an annual levy on wealth would have 'serious drawbacks' and lead to problems across policymaking.
Researchers at the non-partisan think tank warned that politicians would need to better define inequalities they seek to tackle before introducing radical policies.
The new report will serve as a fresh warning for thinkers across the soft-left flank of British politics. Last year's Budget was mired by wealth tax speculation amid widespread calls from Green Party campaigners and Labour MPs for a new levy to be introduced.
Green Party leader Zack Polanski claimed before last year that a wealth tax of one per cent on assets over £10m could raise tens of billions of pounds a year. He recently added he would make the policy a 'day one' priority.
Labour MPs including Clive Lewis and Bell Ribeiro-Addy separately wrote to Reeves to introduce an 'extreme wealth' tax in the Budget.
IFS researchers said addressing inequalities in wealth was a 'complex' task given the varying measures of distributions and asset ownership. IFS researchers also added that factors that can influence wealth inequalities such as age, inheritance and savings, are also difficult for officials to fully understand.
The report said that valuing wealth would be a 'huge undertaking' for the government.
'Wherever the boundary was drawn between what did and did not constitute taxable wealth, any feasible annual wealth tax would inevitably create complexity, distortions, and unfairness around the boundary,' the report said.
'These problems would be especially acute at the very top of the distribution, where wealth is less likely to take the form of arm's-length assets that can readily be identified and valued - though of course the aggregate administrative and compliance costs of a tax would be lower if it applied only to a very small group of taxpayers.'
One-off wealth tax has its own problems
While a one-off levy would 'in principle be an economically efficient way to raise revenue', it could prompt households and businesses to change behaviour and undermine other streams of tax receipts.
The IFS warned that savers would be penalised as a result of a wealth tax while existing taxes on capital income, pensions, profits and inheritance were already 'deeply flawed'.
The think tank added that a broad-based tax on land would have 'practical advantages'.
Helen Miller, the director of the IFS, advised policymakers to better focus on specific forms of inequality, whether it might be in income, opportunity or health.
'Progress starts with being clear-sighted about the nature of inequalities, the range of policy options - which extend far beyond the tax and benefit system - and the inevitable trade-offs that policymakers will face,' she said.
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