Taxing Personal Wealth

An Analysis of Capital Taxation in the United Kingdom—History, Present Structure and Future Possibilities

C.T. Sandford

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351107037
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1971, presents an analysis of the taxes levied on wealth or capital – death duties, annual wealth taxes and capital gains taxes. It provides a comprehensive study of these taxes, and recommends a series of measures, including the replacement of certain taxes, that would promote equality. The book also provides a masterly historical summary of death duties in the UK.

Part I

THE TAXATION OF WEALTH

Chapter 1

Why Tax Wealth?

DEFINITIONS AND SCOPE

What do we mean by a wealth tax? A learned judge in a famous judgment once defined an income tax as a tax on income; similarly a wealth tax is a tax on wealth; more usefully, it is a tax levied on the capital value of wealth which may or may not be paid out of wealth, i.e. it may be met from a person’s accumulated saving or from his income.

But what is wealth? It is used in this volume to mean the whole generality of net assets, i.e. assets minus liabilities. Our definition thus excludes property taxes of a kind levied on gross value or/and on one kind of property only (for example, real property). True, some kinds of assets may be excluded from the scope of any particular wealth tax—but they figure as specific exemptions to a tax which is intended to be general in its application.

Our concern is with personal wealth taxes, i.e. taxes levied on the value of the net assets of individuals not corporate bodies. A few of the annual wealth taxes in existence are levied both on corporations and on individuals, but this is a form of double taxation usually condemned because the same assets are taxed both in the hands of corporations as real capital and in the hands of individuals as share values. Also capital gains tax may be paid on gains in the assets of corporations. But we shall not here be analysing wealth taxes on corporate bodies. The dividing line in practice is not entirely clear cut. It is in accordance with the principle of a personal wealth tax to supplement an annual levy on the net wealth of persons with a tax on undivided estates, and on the corporate assets held by foreigners in a country. In neither of these cases does the levy of a wealth tax other than on persons result in double taxation.

The term capital could be substituted for wealth in our usage. There is perhaps a marginal preference for wealth because wealth is more often thought of as a store to be drawn on for future consumption and is associated more with persons, whereas capital is more often regarded as a stock for future production and is associated more readily with corporations. But both are different ways of looking at what are essentially the same assets. Another reason for preferring ‘wealth’ is that most of the recent discussion in the United Kingdom about this form of taxation has tended to use wealth rather than capital and it is convenient to keep to current usage unless there is a good reason to overthrow it. But essentially in this volume we use wealth and capital synonymously.

By taxes on personal wealth we mean, then, taxes which are levied on the capital value of personal net assets of all kinds; unless specifically exempted, the assets subject to tax thus include stocks and shares, quoted and unquoted; the business assets of partnerships and unincorporated businesses; bank balances; real property including houses and the capital value of rights in property; personal chattels such as cars, furniture, works of art, boats, horses, jewellery. It is normal for the state to specify some minimum sum below which wealth tax is not levied.

Forms of Wealth Tax

Forms of tax sometimes referred to as wealth or capital taxes are annual net wealth tax (which Britain does not have but which has been the subject of much recent discussion); death duties (currently taking the form of estate duty in the UK); gift taxes; capital gains taxes; stamp duties and capital levies.

The first three meet our definition without question. Capital gains taxes are more borderline; we shall examine in chapter 7 whether capital gains taxes should not properly be considered as taxes on income. In the United Kingdom short-term gains are treated as income for tax purposes, while long-term gains are taxed on a separate basis; however regarded, long-term gains taxes are so bound up with the other wealth taxes—death duties, annual wealth tax, gift tax—that no attempt to consider the structure of wealth taxation in a country could be complete without an examination of them. We shall therefore briefly examine gains taxes; particularly the tax on long-term gains. Stamp duties are different; in the United Kingdom those relating to capital consist of a motley variety of duties levied on the gross value of various properties at the time of transfer. In many ways they are more akin to taxes on outlay than on capital. They are not an essential part of the fabric of the system of capital taxation of a country and we do not consider them here. Capital levies have more claim to inclusion. The genuine capital levy (as distinct from the pseudo levy on investment income like the ‘special charge’ in the 1968 UK budget) meets our definition: it is intended as a once and for all levy on the value of the whole generality of net assets. After the First World War, serious consideration in Britain and elsewhere was given to the idea of a capital levy, especially as a means of reducing the national debt. But a levy has lost most of whatever attraction it had for this purpose. High rates of income tax have much reduced the extent to which a levy would relieve debt charges as there would be such a loss of income tax from interest on the debt; meanwhile the burden of debt interest has in turn been reduced by inflation. A major levy with the uncertainties it would cause, the depressing effect on asset prices, and the immense problems of a valuation which would have to be carrried out with great rapidity if changing asset values were not to cause gross inequities, is not now being advocated in the UK by any major interest. This is one reason for omitting it; another is that we do consider an anuual wealth tax of such a size that it must necessarily be paid from capital; and, although in a milder form, the considerations which apply to such a heavy annual wealth tax are almost precisely similar to those applying to a once and for all levy.

Thus, in this volume we are concerned with death duties, annual wealth taxes, gift taxes and taxes on long-term capital gains.

We first examine and analyse most fully, death duties. This prior and most detailed treatment of the death duty is justified both because our particular concern is the capital tax system of the United Kingdom and as there has been a continuous history of death duties in the UK since 1694 there is much material to consider; and because death duties are likely to continue to form the core of any new structure of wealth taxation. Despite difficulties and disadvantages death duties have singular merits as a form of wealth tax. Payment is easier because they are levied at a time of transfer of wealth. The taxation of inherited wealth has a special moral attraction as compared with the taxation of wealth which is a result of the taxpayer’s personal accumulation. Death duties are probably more readily acceptable to taxpayers and less damaging to incentives than an annual wealth tax of equivalent yield. The problems of administration associated with wealth taxes are minimized because death duties are levied at a time when an inventory of the property is required anyway for other purposes than taxation and only a proportion of wealth falls liable for death duty in any one year;¹ thus the problem of valuation is reduced to manageable proportions.

Some clarification on the terminology of death taxation is necessary. We use the term ‘death taxes’ or ‘death duties’ to apply to any taxes levied on the transfer of properties as result of a death. An ‘estate duty’ is a form of death duty levied on the total property left by the deceased regardless of its distribution amongst heirs. The term ‘inheritance tax’ is used in its strict rather than its general sense to mean a tax on what is inherited, i.e. a tax on what the beneficiaries receive, regardless of the size of the estate from which it comes. A ‘legacy duty’ and a ‘succession duty’ are generally used synonymously and are inheritance taxes; but when we consider the British legacy duty (1780–1949) and succession duty (1853–1949) we have to distinguish between them because, broadly speaking, the legacy duty applied only to personal property and the succession duty to real property.

Along with death duties we consider gift taxes. A form of gift tax grew up with death duties in this country and first appeared in 1881, under the name of account duty, as an adjunct to the death duties, applying initially to gifts made within three months of death. At the time of writing, since the 1968 budget, gifts made within seven years of death are taxed as part of the estate duty provisions. There has also been another element of gift taxation in the UK since the introduction of the long-term capital gains tax in 1965 by which gifts counted as ‘realization’. Thus, the capital gains element, if any, in gifts is now taxed. Because of the way the so-called gifts inter vivos provisions have been linked historically with death duties in the UK, and because we shall argue that no reform of death duties would make sense without a comprehensive gift tax, we shall examine gift taxes mainly in chapter 4 when we consider the possibilities of death duty reform.

From death duties and gift taxation we turn to consider the annual wealth tax. To try to give realism to our study we look not only at the theoretical considerations for and against an annual wealth tax, but also at the tax in practice, examining closely the Swedish wealth tax, the example most often quoted by advocates of a wealth tax in the UK.

In our penultimate chapter, we consider in somewhat less detail the capital gains tax. The brief history of this tax in the UK gives us little experience on which to draw in this country and features of gains taxes elsewhere will be considered.

In the earlier chapters we suggest ways in which death duties might be reformed, consider the desirability of an annual wealth tax and how it might be introduced, and suggest modifications to the capital gains tax. In the final chapter, we examine the wealth taxes together and present a more radical scheme for reform which not only requires the integration of wealth taxes but develops the idea of a negative wealth tax. Taxation is a branch of political economy in which practical suggestions almost inevitably involve value judgments. Proposals to improve the individual wealth taxes may be accepted by some who may find the more radical proposals of the final chapter too much to swallow or who may consider them, though desirable, too difficult to implement. Hence, the dual approach to the issue of reform.

PURPOSES OF WEALTH TAXATION

Equity, Efficiency and Equality

Why tax wealth at all? Is it not sufficient for a State to confine its taxation to income (including corporate profits) and expenditure?

There are three main arguments for taxing wealth and one subsidiary argument. The latter is that of administrative efficiency; a wealth tax, by providing information on capital values, can act as a cross-check to the accuracy of the returns of that part of income derived from property and even as a check on income from all sources (e.g. is the taxpayer’s income enough to have enabled him to have increased his assets as much as he has since the previous assessment?). It thus supports the income tax and helps to protect it from evasion.

The main arguments can be summed up under equity, efficiency and equality. By equity we mean what the tax economist generally refers to more precisely as ‘horizontal’ equity—the equal treatment of those of similar taxable capacity. Under efficiency we are concerned with the effectiveness with which resources are used—in particular minimizing the price distortion of taxation. Under ‘equality’ we consider the question of ‘vertical’ equity—how differently should people of different taxable capacity be taxed. At this point we shall consider the first two only briefly because subsequently we analyse their application in detail to the various kinds of wealth tax.

The equity argument is that we need a wealth tax to supplement income tax. Wealth yields benefits over and above the income derived from it. It gives its possessor security, a source of spending power to meet contingencies, or the opportunity for a spending spree. It provides additional economic opportunities to its possessor. In short, whether or not the wealth yields a money income, it confers upon its possessor an additional ‘taxable capacity’ which equity requires to be taken into account.

The second argument is that of efficiency in resource use. Briefly a wealth tax is likely to result in less disincentive effect than an income tax of equivalent yield because the tax base is related to past and not present effort. At the same time, to tax wealth irrespective of its yield (especially when the alternative to wealth tax is a higher income tax) may provide a stimulus to use capital as productively as possible.

Equality is here used as a convenient shorthand for a reduction of inequality. Perhaps the main argument for taxing wealth is to reduce inequalities in its distribution. These inequalities may arise from different rates of saving out of earned income. But, especially when rates of income tax are high, the biggest reason for inequality of wealth holding is differences in inherited wealth. Many of the inequalities in the distribution of wealth, perpetuated by inheritance, stretch far back into history, some with their origin in acquisition by conquest—which would not nowadays be thought to constitute a morally strong claim!

The argument for reducing inequalities in wealth distribution is moral rather than economic. It thus rests on a value judgment which not all would accept. Nevertheless, in principle, this purpose was accepted with Sir William Harcourt’s estate duty in 1894, which was the first consistently progressive tax in the United Kingdom; and though not all Conservatives at that time agreed with the principle of progression, or graduation as they more generally called it then, all the main political parties today would accept that taxation should be used to diminish the inequalities of wealth and income in the community, though they differ in how far the process should be pushed and what form the redistribution should take.

There is no clear-cut theoretical formula to determine how far the process of evening out the distribution of wealth by taxation or other means should proceed. This is a matter of moral judgment and political and economic expediency. What is not open to doubt is the high degree of inequality in the distribution of wealth in the UK today. There is a long way to go before we n...