Is it time for politicians to start discussing a wealth tax?

Rishi Sunak, the chancellor, is looking at ways to raise funds to repair the damage of coronavirus to the public finances. Last week the Wealth Tax Commission, set up by academics at Warwick University and the London School of Economics, proposed a one-off tax on personal wealth at a rate of 5 per cent that could raise £260bn. How realistic is this plan?

Gus O’Donnell, the former cabinet secretary who wrote the foreword to the report, quoted Sunak, who said in July this year: “I do not believe that now is the time, or ever would be the time, for a wealth tax.” Nevertheless, Lord O’Donnell urges ministers to keep an open mind, pointing out the lack of alternative good options. 

He wrote that “it is broadly accepted” that taxes will eventually have to rise, and that the Conservatives are bound by manifesto promises not to raise income tax, national insurance contributions or VAT. If they are to put up taxes, he said, it means breaking those pledges, “or it means thinking seriously about new taxes”. 

Sunak himself conspicuously avoided all such questions when he presented his Spending Review last month, setting budgets for government departments (apart from health and defence) just one year ahead. 

But there will undoubtedly be tough choices in the years to come, and it is not surprising that one of the zombie policies of the past has been resurrected as a possible solution. A wealth tax was considered by the Labour government in the 1970s, but it didn’t get far. Harold Wilson set up a commission headed by Jack Diamond, a former Treasury minister, which improved the collection of statistics on personal wealth in the UK but got no further. 

The idea returned to British politics in the form of proposals for a mansion tax on more expensive property, pushed by the Liberal Democrats in the coalition government and adopted by Labour in opposition. At one point it seemed that George Osborne, the chancellor, would accept the idea, but David Cameron flatly refused, saying “our donors would never put up with it”. 

Now the Wealth Tax Commission is proposing the full-spectrum version, a levy on all assets above £500,000, or £1m for couples – including homes and pension funds – and payable in five instalments over five years. It seems unlikely that Sunak would contemplate anything of this kind, although some tax advisers suggest that he finds the report useful in that it would allow him to present other tax increases as avoiding the stringency of what many Conservatives regard with horror as confiscatory taxes. 

Indeed, it may be that the wealth tax proposal acts as a gateway to a return of the mansion tax. There is a strong economic argument for taxing more expensive property more heavily – not least that council tax is still levied on valuations dating from 1991 – and a strong practical argument in that it is hard to avoid. 

One of the problems with wealth taxes generally is that capital is mobile and can be moved elsewhere. The French wealth tax, for example, was abandoned two years ago and replaced by a tax on real estate. 

If Sunak does need to raise taxes – and the consensus among economists is that he will, but not for some time yet – the logic of manifesto promises and practical economics will drive him towards higher taxes on more valuable homes.