Workshop on wealth, housing, and taxation
12th March 2024
This year’s annual Stone Centre public lecture by Gabriel Zucman was set against a solemn backdrop of clouds and rain. Though a few hours before the lecture, a workshop on wealth inequality enlivened the atmosphere. The timing of the discussion is fitting: after the announcement of a recession, before a general election, and in the midst of a cost-of-living crisis.
As we see living standards plummet in the developed world, it is reasonable to consider redistributive solutions, but how effective are these in improving economic welfare? And how can we simultaneously tackle issues of housing and tax evasion? Furthermore, are the associated reforms politically feasible?
To delve into these questions, Professor Wendy Carlin, Co-director of the Stone Centre at UCL, commences the workshop with two panels of speakers on economic and political issues regarding wealth redistribution, followed by a policy session by UCL Policy Lab.
Facts and economic arguments about wealth, housing and taxation
Fixing faulty tax systems is a daunting task. From welfare effects to evasion loopholes, the obstacles are abundant, so forming fundamental economic arguments is crucial. The first panel of speakers do this and tackle these issues head on.
What has been the effect of the large increase in asset prices on the distributions of wealth and welfare? What do these findings imply for policy? - Benjamin Moll (LSE)
Addressing economic shocks often means asking the question of who benefits and who loses out. Besides shifts in income and wealth, it is most important to consider the welfare effects of such changes. Hence, Professor Benjamin Moll draws from welfare economics to examine the impact of rising asset prices, asserting that they chiefly benefit their sellers. Contrastingly, holders see a rise in wealth but not necessarily welfare since they fail to benefit from the unrealised capital gains. Accordingly, equating wealth gains with welfare gains is a misstep, and the latter must be considered for redistribution. Moll concludes his talk by suggesting that a combination of realisation-based capital gains tax as well as dividend taxes would be optimal for this.
Why do we need a green land value tax and how can we design it? – John Muellbauer (University of Oxford)
Still, more than welfare improvements, an effective tax reform should also assist elsewhere, namely with housing affordability and the net-zero target. In addressing this, Professor John Muellbauer starts his talk with a darker tone by presenting a candid outlook on the UK economy: low national savings and investment rates, served with a side of dire productivity and declining living standards, all topped with worsening inequality, housing affordability and commuting times.
Contemplating the root of these issues, Muellbauer sheds light on a perhaps under-discussed factor of production, land. A recent record rise in UK land prices has disproportionately benefited landowners over other citizens, yet this imbalance can be traced back further to the 1961 Land Compensation Act, which reimburses landowners not only for their land value, but also for the value of its potential uses.
Attempting to resolve the conflict between equity, housing and the environment, Muellbauer proposes a 3-part policy package. First, rises in land values should be fairly split between landowners and local authorities to enable land value capture and benefit the taxpayer. Any reform must be well-planned, so second, Muellbauer recommends a flexible zoning code, guaranteed planning permission for plan and building regulation-compliant proposals, and an integration between infrastructure and housing.
Finally, at the heart of Muellbauer’s package is a property tax reform. The current system is highly regressive, especially in regard to council tax which London astonishingly pays the least as a % of house price. As a solution, Muellbauer proposes a Green Land Value Tax (GLVT), which is levied on both land and the building on it minus a discount regarding energy usage. A particular emphasis is also put on the importance of the right to defer tax, which would protect cash-poor but land-rich households.
Progressive tax reform – what should we tax? – Gabriel Zucman
But tax reforms will only improve wealth distribution if those on its upper end decide to pay their fair share. This often does not happen, as Zucman discusses in his talk on the same topic as the Stone Public Lecture.
Our tax systems stand on three pillars: income, inheritance and wealth, but only the first two have a strong theoretical backing. Things get trickier when it comes to taxing the rich. In particular, given that the notion of income is ill-defined, income taxes are easy to avoid. Wealth, however, is well-defined as the net of debt, and therefore deserves more attention as a channel for improving tax progressivity. Zucman proposes a 2% tax on the wealth of the “super-rich”: a supposedly modest figure which would generate close to $250 billion annually, enough to push the developing world halfway ahead in its fight against climate change.
Still, this is not without its obstacles: Clara Martínez-Toledano, Assistant Professor of Financial Economics at Imperial College Business School, suggests that unlisted wealth is difficult to measure, whilst Michelle Meagher, Senior Policy Fellow at Centre for Law, Economics, and Society at UCL, considers how interactions between a wealth tax and corporation tax can encourage billionaires to further shift around their wealth. Nevertheless, Zucman remains optimistic: income tax doesn’t work at the top of the distribution, and so a wealth tax is required, he states confidently.
> Listen to the public lecture
The politics of wealth and progressive property taxes
How does one pass the aforementioned ideas into policy? Economists are sometimes (often) unpopular in the eyes of the public, so more than just the economic arguments for reforms, the public opinion on them matters too. For the second panel, Political Science Professors Lucy Barnes and Ben Ansell discuss public preferences on taxation.
Public preferences about taxing the rich – Lucy Barnes (UCL)
Robin Hood is not an established figure without reason – The rich contributing more of their income than the poor is “fair”, and therefore progressivity is popular. Barnes emphasises this through the wide-spread support for progressive tax ‘levers’ such as corporation and income tax. Conversely and in line with Muellbauer, she also highlights the relative unpopularity of regressive tax ‘levers’ like council tax. Evidently, public opinion is not necessarily an obstacle for fairer tax reform.
Who wants a wealth tax – Ben Ansell (University of Oxford)
Ansell, on the other hand, sheds light on some differing public opinions. In particular, even though wealth inequality is far worse than income inequality, people still prefer to tax income over wealth. Results from his survey also show that many respondents don’t have an opinion on the matter, worryingly those who would benefit the most from a wealth tax (renters and owners of inexpensive property). Additionally, Ansell declares his favourite finding as MP John McDonell’s constituency, Hayes and Harlington, having the lowest support for a wealth tax.
Perhaps the average person finds the concept of a wealth tax is more difficult to comprehend than income tax. Zucman asserts that the notion of a wealth tax must be precisely communicated to the public to correctly infer their opinions. Helen Miller, Deputy Director of the IFS, further emphasises the importance of framing questions to voters, while Marc Stears, Director of the UCL Policy Lab, highlights the importance of considering political party stances in regard to a wealth tax on top of respondents.
Why wealth matters for progressive and dynamic tax policy reform – a policy discussion
Finally, Helen Miller, Deputy Director of the IFS, conducted a policy session which discussed other reforms to increase the progressiveness of the UK tax system. Proposals include aligning all combined tax rates with an adjustment to the tax base, scrapping the Business Asset Disposal Relief (a preferential capital gains tax rate for business assets), and instead introducing a new allowance for equity investment. Simulations of this reform suggest that it will boost aggregate investment and tax revenue.
Regarding property taxes, Miller agrees with Muellbauer on the regressive nature of council tax and proposes updating values and rates as a potential solution. Furthermore, she believes that stamp duty, an even less popular lever, should be abolished entirely and capital gains tax should also be levied on main homes. Onto another unpopular lever and in line with Ansell, Miller suggests adjustments to inheritance tax. With the wealthiest households paying proportionally less in inheritance tax, removing relief for agricultural land and business property, as well as applying inheritance tax to pensions, can help improve progressivity.
Discussion
As the workshop entered its final discussion phase, brisk suggestions started flying across the room. Robert Palmer, Executive Director of Tax Justice UK, boldly puts that all the main political parties are lying, and that politicians will be forced to increase both taxes and spending despite promises. He also highlights how journalism shapes public opinion about taxes, and hence the importance of economic training for journalists. Furthermore, Łukasz Rachel, Assistant Professor of Economics at UCL, expresses concerns about only relatively fair taxes, such as National Insurance, being cut, whilst Priya Sahni, Co-Executive Director for the Equality Trust, further emphasises the primary role of tax reform in dismantling inequality.
The discussion also featured a short debate between the political scientists and economists: Barnes states that Labour’s stance on tax matches public opinion, whilst the Conservatives understandably prefer the current status quo as the incumbents. She suggests that public opinion may not entirely pass into policy due to an efficiency-equity trade-off, and economists’ preference for the former. In other words, an overemphasis on “economists rather than economics proper”, a notion backed by Muellbauer.
Jabbing back, Miller reminds us of the declining real incomes and poor living standards, which necessitates a productivity boost alongside equity improvements. She also highlights the importance of considering the effect of tax on the underlying structure of the economy, with incentives for self-employment being greater than those for increasing productivity within employment.
Carlin connects the dots of politics and economists and suggests that the current poor tax/spending framework could be a Conservative incumbent strategy to “stock up the beast” for Labour to deal with. Still, despite all the issues discussed above, Carlin ends the workshop on an optimistic note: we have all the ingredients, so we can get the work done.
Authors
Aadesh Gupta
Department of Economics, UCL.