Glen Loutzenhiser

Liquidity issues: Solutions for the asset-rich-cash-poor

In this short interview Glen Loutzenhiser, Associate Professor of Tax Law, tells us about his recent paper published by the Wealth Tax Commission in October 2020 - Liquidity issues: Solutions for the asset-rich-cash-poor.


1. What was the problem that you were looking to address? What was the existing wisdom at the time?

The Covid-19 pandemic unquestionably has had a serious negative impact on public finances, with the latest estimate showing the UK government on track to run a £400 bn deficit. The pandemic has also deepened existing levels of inequality in the UK. The Wealth Tax Commission brought together academics from a range of disciplines including law and economics, as well as policy makers, business people, tax practitioners and former government officials to evaluate the role a wealth tax could play in helping the UK government (and other governments) address the largest public finance crisis since the Second World War, and target inequality more generally.

The project output consisted of thirteen evidence papers plus a large number of background papers, leading to a final report suggesting a one-off wealth tax payable on all individual wealth above £500,000 and charged at 1% a year for five years would raise £260 billion; at a threshold of £2 million, it would raise £80 billion. In all, over half a million words of work have been made freely available on the website, comprising the largest repository of research on wealth taxes anywhere to-date.

My contribution to the project was to co-author two of the thirteen evidence papers — on liquidity (with Elizabeth Mann) and valuation (with Stephen Daly and Helen Hughson). Those two papers also have been submitted to the journal Fiscal Studies and are expected to form part of a special edition on wealth tax to be published in late 2021.

The existing literature on wealth taxes is either fairly superficial in treatment or quite dated. Prior to this project, the most recent detailed work on wealth taxes was done in the 1970s, around the time that the Labour Chancellor Denis Healey issued his 1974 Green Paper on a wealth tax, which in the end was not pursued. The two most problematic issues with wealth taxes generally highlighted in the tax literature are the two my co-authors and I targeted, namely (1) liquidity concerns (how to pay the tax) and in particular for the ‘asset rich / cash poor’, and (2) valuation of assets. We set out to update the conventional understanding of these two issues in the current economic and social environment. We also wanted to better understand the scope of liquidity and valuation issues, and use that information to examine a range of possible solutions for addressing the issues.

2. What was your argument?

Our research identified certain groups as most susceptible to liquidity issues under a wealth tax, principally farmers and business owners. We also highlighted the categories of assets that are most difficult to value, principally defined benefit pensions, property, private businesses and art. We then outlined a series of possible measures to manage these issues. We provided a number of potential solutions to address liquidity issues, including recognising a wealth tax can be paid out of income or by sale of assets, by withholding tax (e.g. by pension providers), by borrowing/financing, deferred payment arrangements, and, possibly, payment in specie. On valuation, we concluded that open market value was the preferred basis for valuation and that options are available for arriving at an open market value even for the most problematic asset types. We also provided estimates of valuation costs for those assets requiring professional valuation, which we concluded could be contained to 0.1% or less of total chargeable assets.

3. How did you make your argument?

Our arguments were based on an interdisciplinary approach to the issues of liquidity and valuation under a wealth tax and involved a combination of comparative, doctrinal and empirical work. We reviewed the existing legal and economic literature on wealth taxes as well as existing and historical wealth taxes in Europe and elsewhere. We also considered how the issues were dealt with in the legislation and case law of related UK taxes including capital gains tax and inheritance tax. On valuation, we also commissioned a series of technical background papers from experts in valuing businesses, pensions, property, and art. The empirical work in both papers used data from the Office for National Statistics’ (ONS) Wealth and Assets Survey (WAS), the most comprehensive data source on wealth in the UK.

4. Why is this research important?

This research is important because it is the most comprehensive study of these issues in fifty years. It provides policy makers in the UK and elsewhere a detailed analysis of the valuation and liquidity problems with wealth taxes, the likely scope of these problems, and concrete options for overcoming them. We believe this research provides a more positive assessment of the merits and practicality of wealth taxes than previous work. It also considers the merits of both an annual wealth tax and a one-off ‘emergency’ wealth tax, whereas the previous literature has focused on annual wealth taxes.

The role of wealth taxes in restoring public finances post-Covid 19 pandemic and reducing wealth inequality generally is highly topical. The Secretary-General of the United Nations and the International Monetary Fund recently have called on countries to consider implementing wealth taxes, and Argentina introduced a one-off wealth tax in December 2020. Our research represents a rich and long-lasting contribution to this wider policy debate.

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