Dr Nick O’Donovan Senior Lecturer in the Future Economies Research Centre at Manchester Metropolitan University explains how a one-off windfall tax on wealth could cover the costs of the Coronavirus crisis

On April 14, the UK’s Office for Budget Responsibility forecast that the public deficit could balloon by £218 billion in 2020 as result of higher spending to contain the economic and human costs of the Coronavirus (COVID-19) pandemic and lower tax revenues linked to the lockdown.

Fears are already mounting that the resulting debt burden will hamper the post-crisis recovery, with the additional spending that all major UK political parties deemed necessary in their 2019 manifestos now in question.

Yet it is difficult to see how the British public will tolerate further squeezes on public spending post-crisis, particularly where health and social care are concerned.

Tax rises have proved so toxic in recent years that parties have shied away from pledging broad-based rate increases in the levies that generate the largest revenues, and there are concerns in some quarters that higher tax rates might stifle the recovery.

The combination of global secular stagnation and the more localised fallout from Brexit mean that economic growth seems unlikely to come to the rescue of the public finances either.

Under the circumstances, renewed interest in modern monetary theory – the idea that governments in control of their own currencies can directly create money in order to fund their spending – is unsurprising.

Yet there is an alternative way in which the government could choose to pay for the pandemic: through a one-off windfall tax on net wealth (including property net of outstanding mortgages, financial assets, businesses, savings, pensions and so forth).

It is difficult to see how the British public will tolerate further squeezes on public spending post-crisis, particularly where health and social care are concerned.

Wealth taxes have garnered a great deal of attention in developed democracies over recent years, in light of the widening gap between the richest and the rest, as well as the fiscal austerity that followed the global financial crisis.

However, to date the proposals of prominent commentators such as French economist Thomas Piketty have centred on a recurring annual tax on wealth, targeted at the very wealthiest individuals.

The merits and flaws of such ideas have already been extensively debated. But it is worth noting that many of the objections levelled at them (for instance, that they incentivise consumption rather than investment, or encourage wealthy individuals to migrate) are unlikely to apply, or apply as strongly, to a one-off charge.

And unlike conventional capital levies, wealthy people cannot avoid wealth taxes simply by shifting their assets abroad: they need to move their selves and their households too, making capital flight far harder.

How much could such a one-off wealth tax raise? The most recent data from the Office for National Statistics estimates the net wealth of UK households at almost £15 trillion.

A broad-based one-off levy could thus raise a significant amount at a very low rate – over £350 billion could theoretically be generated at a tax rate of 2.5%.

Wealth is so unevenly distributed in the UK that the poorest 50% of the households could be excluded from the scope of such a tax entirely, and the revenue yield would fall by less than 10%.

A tax-free allowance for the wealthiest 50%, pegged to the wealth of the median individual, would cause a larger reduction in receipts, but still leave the Treasury with more or less enough to cover the fiscal costs of the crisis as currently forecast – depending, of course, on how far asset values have fallen since the ONS conducted its research.

Just as the banks enjoyed tacit public support in the run-up to the financial crisis, the pandemic has revealed that the NHS and the economy as a whole are too big to fail.

It is true that the Exchequer might not receive all of this money instantly – tax charges arising from property wealth might be postponed until the sale of the assets in question (though they could also be tacked on to existing mortgages).

In the case of other illiquid or indivisible assets, the Treasury could offer taxpayers options for deferral, or government could take some form of equity stake in lieu of cash. Nevertheless, such a tax would still make a substantial contribution towards paying for the pandemic.

There are strong ethical arguments in favour of such a solution too. If the costs of the crisis are added to the public debt, to be serviced out of conventional future tax revenues, we are essentially saying that those who engage in economic activity after the crisis should pay for the emergency healthcare spending and economic bailout enjoyed by taxpayers today.

This is what happened with the financial crash of 2007-2008: incomes earned in the long boom that preceded (and in many ways precipitated) that crisis contributed comparatively little towards the cost of the economic rescue package required in the wake of the crash.

By contrast, those who sought to enter or progress in the labour market post-crisis bore the brunt of the consolidation effort, in the form of reduced public services.

Just as the banks enjoyed tacit public support in the run-up to the financial crisis, the pandemic has revealed that the NHS and the economy as a whole are too big to fail.

It follows that previous generations of taxpayers were undertaxed relative to the medical and social insurance they were implicitly receiving. To the extent that today’s wealth is yesterday’s undertaxed income and gains, a levy on individuals’ net wealth offers a fair way of correcting that imbalance.

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