The Economic Impact Of Covid-19 Creates “Clear Burning Platform” For Wealth Tax

The prospect of a UK wealth tax is looming larger than ever, according to the former head of the civil service, as the government struggles to cope with the economic damage wrought by Covid-19.

Lord O’Donnell, who served as cabinet secretary under David Cameron, Gordon Brown and Tony Blair, said the crisis has created “a clear burning platform” for tax reform by exposing and widening the gulf between the rich and the poor.

He said this, combined with the shift in the political sands seen at the Conservatives’ resounding election win in December, significantly raises the specter of a wealth tax.

Speaking at an Institute for Fiscal Studies (IFS) event last night, Lord O’Donnell said: “We know that Covid has a very unequal impact. The economic impact is particularly hard on the young, women, and those on lower incomes — that is going to create a feeling of “it’s not fair”.

“You’ve got a Conservative party and prime minister talking about the red/blue wall. How to get to the forgotten man. We’re talking about FDR [Franklin D Roosevelt]. One nation conservatism. Lots of different things suggest to me that there might be more of an appetite for [a wealth tax] than you might have thought politically from a Conservative government that came in with a manifesto that basically said no to all sorts of different tax changes.”

Wealth taxes have long been a political hot potato. Governments have typically opted to increase the top rate of income tax or reduce tax breaks that favor the wealthy, such as entrepreneurs’ relief or dividend allowances, instead. However, Lord O’Donnell argues that the combination of ballooning national debt due to Covid-19, an administration with a large majority early in its term and a popular chancellor, makes the prospect of a wealth levy likely.

Data from the Office for Budget Responsibility (OBR) released last month revealed the UK’s debt mushroomed to more than 100% of GDP. This was the first time borrowings have exceeded the size of the economy since 1963.

The government borrowed a record £55 billion ($69 billion) in May, pushing total debt to £2.009 trillion, equivalent to 100.9% of GDP.

The OBR has warned that the full cost of the pandemic remains unknown. Prime minister Boris Johnson is also advocating a significant increase in infrastructure spending, which commentators have dubbed his “new deal”, to stimulate economic growth. This will put further strain on the public coffers.

A wealth tax would in one sense be a radical departure for a Conservative government that was voted in on a mandate of low tax and ending a decade of austerity.  

But the pandemic has shifted the goalposts. The surge in unemployment has exacerbated inequalities, with the lowest-paid workers bearing the brunt of the vast bulk of job losses across the retail and services sectors.

There is a growing feeling that this pain should be shared.

A targeted wealth tax has long been advocated by City University professor of political economy Richard Murphy, who believes it could potentially raise up to £174 billion.

“This has massive implications for the forthcoming debate on who, if anyone, should pay for the coronavirus crisis,” he said. “What is clear is that the only fair answer will be that those on the highest incomes, and those with wealth, are the only people who could afford to pick up that bill.”

Labour would be very unlikely to vote against a wealth tax and the move would be popular with the wider public. A YouGov poll in May found that 61% approved of a wealth tax on those with assets of more than £750,000.

Johnson has repeatedly spoken about repaying the trust placed in him by those traditional Labour voters who migrated over to the Tories at the election to back Brexit. A wealth tax would be offering a bone to the so-called “red wall”, the Labour heartlands in the Midlands and North that turned blue in December.

Lord O’Donnell said: “Quite often wealth taxes have been attacked because people say they are too leftie, what socialists do. If the debate is put in terms of “we want to increase spending on the NHS, but we don’t have any money”, then tax increases become more acceptable.”

Structuring any wealth tax would bring its own problems. The IFS is currently researching how wealth assets, such as property, pensions, investments, and art, could be charged.

An asset tax is an approach favored by Murphy. But the Conservatives scrapped plans for a “mansion tax” on high-value homes in February after facing a backlash from the party’s backbench MPs and grassroots supporters.

Svenja Keller, head of wealth planning at Killik & Co, a London-based high-end financial adviser, warned taxes on fixed assets risked causing liquidity problems for individuals who are “asset-rich, but cash-poor”.

“It’s unlikely main homes would be included as this would also cause so many cash flow and liquidity issues for people, and it would be politically very difficult. Investment properties and second homes, however, may well be a valid option to “wealth tax” – and it’s certainly a possibility that they will raise stamp duty again,” she said.

All eyes will be on Rishi Sunak on 8 July, when the chancellor is set to announce an update to his plans for navigating the economy back into growth territory. The smart money is probably on him delaying any decision on the introduction of a wealth tax until the Budget in autumn, but the affluent and their advisers will be poring over his words closely, looking for any clues.