Over the last century, a number of countries have tried to introduce one-off wealth taxes or capital levies in response to major crises, with varying degrees of success. These examples offer valuable lessons for policy-makers exploring such an option in the wake of the pandemic.
In the wake of crises that have caused national debts to grow rapidly beyond ‘normal’ levels, the idea of drawing on private wealth in order to pay down those debts has sometimes gained currency. As the name suggests, a ‘one-off wealth tax’ involves a one-time charge (albeit one that might be paid in instalments over several years), based on the value of the assets held by private individuals. This could include assets such as investments, savings, property and pensions, minus liabilities such as credit card debt or mortgages. A tax-free allowance could exempt the majority of households from such a tax altogether.
Following the First and Second World Wars, one-off wealth taxes (also known as ‘capital levies’) were widely debated, and somewhat less widely adopted, as countries sought to rebuild in the aftermath of conflict.
The global financial crisis of 2008/09 also prompted a resurgence of interest in this form of fiscal policy. Although no developed democracy responded to the financial crisis with a capital levy comparable in scope and ambition to those adopted post-conflict in the twentieth century, some of the taxes introduced following the crisis can be seen as species of one-off wealth taxes, offering interesting variations on the conventional capital levy format.
These historical examples offer valuable insight into the design and administration of one-off wealth taxes today.
Should policy-makers consider new taxes?
It is as yet unclear when tax rises might be necessary to pay off debts incurred by the government in dealing with the pandemic. Indeed, it is not clear whether tax rises will be necessary at all, given debt service costs look likely to remain lower for longer, due to the maturity profile of UK public debt, wider market conditions and the Bank of England’s willingness to buy gilts via quantitative easing.
Related question: Should the government be planning tax rises and public spending cuts?
Related question: Who has financed higher government spending during the pandemic?
This does not mean, however, that tax policy changes have no role to play in the recovery. New taxes do not necessarily imply austerity – tax rises may be offset by cuts elsewhere in the tax system, and/or increased public spending. In addition to raising money (which may not be necessary), a policy such as a one-off wealth tax might be used:
- To rebalance the tax system – for example, enabling policy-makers to shift the burden of taxation away from people with a higher marginal propensity to consume, thereby stimulating demand and supporting recovery.
- To rebalance the wider economy – if, for example, quantitative easing inflates the price of assets that are predominantly held by wealthier households, thereby increasing wealth inequality (Bank of England, 2012).
Why are one-off wealth taxes attractive in theory?
From a purely theoretical perspective, a well-executed one-off wealth tax has much to recommend it. If we are concerned about taxes distorting the decisions of individuals or organisations – for example, encouraging them to accumulate less wealth, or to relocate themselves and/or their assets to jurisdictions with lower taxes - then an unheralded one-off wealth tax is highly attractive.
The fact that the tax is unheralded means that it will not alter taxpayer behaviour in the run-up to its announcement, as taxpayers cannot act differently in anticipation of it. The fact that the tax is a one-off means that taxpayers should not change their behaviour after the tax is introduced either, as their decisions after that point should have no bearing on their tax liabilities. The success of a one-off wealth tax thus hinges on taxpayers not receiving advance notice of it, and on the credibility of government promises that it is a one-off (O’Donovan, 2020).
How have one-off wealth taxes worked in practice?
Post-war one-off wealth taxes in the twentieth century
Both the First and Second World Wars inspired policy-makers to experiment with one-off wealth taxation. Many governments involved in the fighting had incurred unprecedented levels of debt in order to fund military efforts. Meanwhile, much private sector wealth had been consumed in the conflict - whether requisitioned by government or destroyed by the enemy. What private wealth remained was even more arbitrarily distributed than in the past: chance played a large part in determining whether your house had been shelled, whether your town had found itself on the frontline, whether your factory or warehouse had been ransacked, repurposed for military ends and/or razed to the ground.
Under these circumstances, one-off wealth taxes seemed to offer both an equitable and an effective way of funding the reconstruction effort. Following the First World War, one-off wealth taxes were levied in countries including Italy, Austria, Hungary and Czechoslovakia (Rostás, 1940; Eichengreen, 1989); and Italy even repeated the policy in 1937, this time to arm itself in anticipation of future conflict.
Finland instituted a one-off wealth tax following the first Russo-Finnish war in 1941. In the aftermath of the Second World War, capital levies played a role in the reconstruction efforts of France, West Germany, Japan, Belgium, the Netherlands (twice), Finland (again), Luxembourg, Norway and Denmark (Carroll, 1946; Robson, 1959; Shavell, 1948).
In reality, many of these levies proved to be less effective than their supporters had hoped. The levies in Germany and Austria after the First World War triggered substantial capital flight (Eichengreen, 1989). In 1920s Hungary, the levy provoked opposition from a coalition of big landowners and smaller-scale farmers, and was rapidly repealed. The Czech law of 1920 only raised around half of the tax receipts originally anticipated, due to administrative challenges in assessing and enforcing the tax, as well as wider economic volatility that left many taxpayers struggling to pay their liabilities (Rostás, 1940).
The capital levies introduced following the Second World War were rather more successful. In many cases, they raised substantial revenues for the governments in question. At the same time, the fact that these taxes were often spread over several years (generally three to seven years, though as many as 30 years in the West German case) meant that affluent business owners could afford to pay even high tax rates (up to 50% in West Germany) without these costs derailing the post-war economic recovery.
High post-war inflation and rapid post-war growth meant that the significance of these taxes was generally frontloaded, contributing a higher proportion of national income to government funds when first introduced than they did in subsequent years (Robson, 1959; Bach, 2011).
Opponents of these taxes did not succeed in delaying or overturning their introduction as they had done after the First World War, minimising anticipatory capital flight. In the formerly occupied countries of Europe, wealth was often viewed as an indication of either collaboration or black-market profiteering (or both), making a one-off wealth tax politically attractive. In West Germany, the fact that the monies raised were hypothecated for compensating citizens who had lost wealth and/or livelihoods on account of the war (through direct transfers, as well as public works schemes and social housing) helped to build political support for them (Hughes, 1999).
These capital levies were generally calculated on asset holdings as at a previous date (often the date of a preceding currency reform, as in France and West Germany), further limiting the potential for taxpayers to avoid or evade any charges. The capital controls of the nascent Bretton Woods system may also have restricted cross-border capital movements, which could have otherwise eroded the tax base.
Notably, there does not appear to have been any major issue around the credibility of claims that the capital levies introduced in the wake of the two world wars were one-offs. It seems to have been obvious to taxpayers that these charges were related to the extraordinary costs of conflict, which future governments would strive (if not always successfully) to avoid.
One-off wealth taxes following the global financial crisis
The global financial crisis of 2008/09 reignited interest in one-off charges on wealth. In practical policy terms, however, no developed democracy responded to the crisis by imposing a one-off wealth tax comparable in ambition to those adopted in the wake of the First and Second World Wars. Nevertheless, temporary wealth taxes were introduced in Iceland and Ireland, in 2009 and 2011 respectively, as part of an attempt to alleviate the fiscal pressures that followed the collapse of their banking sectors.
Both of these measures can be seen as variants of a one-off wealth tax (O’Donovan, 2020). The Icelandic levy was wide-ranging in its scope, effectively a time-bound revival of the recurring wealth tax that had been abolished in 2006. The Irish levy focused exclusively on private pension assets, taxing wealth held in pension funds and allowing funds to pass these charges on to their members (including reduced entitlements for defined benefit schemes).
These temporary wealth taxes were introduced for a set period of years (three years in Iceland and four years in Ireland), with the tax liability reassessed annually – unlike conventional one-off wealth taxes, where wealth is assessed only once, although the tax liability may be paid off over several years.
In theory, this meant that taxpayers could respond with avoidance or evasion, or simply by accumulating less wealth than they would otherwise have done. In practice, however, options for behavioural change were limited. Icelandic taxpayers would have struggled to relocate their wealth due to temporary capital controls, introduced before the new tax was created and enduring until after it had expired. For Irish taxpayers, pensions remained a tax-preferred form of saving, and existing pension savings could not be readily converted into other assets and/or transferred abroad without incurring additional costs.
The time-bound nature of these levies may also have minimised the potential for behavioural change. While it is true that both taxes were extended for longer than originally stipulated in legislation (for an additional two years in Iceland and one year in Ireland), in both cases the extension caused a political backlash and the taxes were subsequently allowed to expire. Taxpayers appeared to tolerate them as a crisis response, but not as a permanent fixture of the tax system.
The amounts raised were relatively modest by comparison with the capital levies of the twentieth century, though by no means insignificant. The Icelandic temporary wealth tax raised 0.5% of GDP in revenue per year at its peak; the Irish pension levy slightly less. There is no conclusive evidence that either tax prompted a substantial reduction in wealth accumulation, though it is unclear whether this is due to the credibility of government claims that the levies were one-offs, or due to the comparative modesty of the charges.
What are the lessons for today?
One-off wealth taxes are an unusual form of taxation – not least because they are most effective when taxpayers believe they are unusual and thus unlikely to happen, and unlikely to be repeated. To the extent that these conditions can be achieved, however, they constitute a highly efficient form of taxation that does not distort economic behaviour.
One-off wealth taxes are far from unprecedented, and examples of successful levies do exist. Following the Second World War, capital levies were introduced in many European countries, helping to combat post-war inflation and fund reconstruction. Following the global financial crisis, Iceland and Ireland introduced forms of time-bound wealth taxation. These taxes generated circa 0.5% of GDP in additional revenues per year at their peak, with payments spread over five years.
In the past, where the circumstances that prompt one-off wealth taxes are clearly exceptional in nature (such as major wars), taxpayers do seem to accept that these taxes are a one-off. Credibility thus appears to be less of an issue in practice than it does in theory.
One-off wealth taxes are less effective if taxpayers can anticipate them ahead of the assessment date – for example, by shifting their assets and/or their households overseas. This risk has been mitigated in the case of historical one-off wealth taxes by announcing tax assessment dates in the past, or focusing on asset classes that are difficult to transfer to other asset forms and jurisdictions, such as pension savings.
Unsurprisingly, given their unusual nature, the number of studies that examine how one-off wealth taxes have worked in the past is limited. More country-specific and comparative research into historical one-off wealth taxes would be welcome.
Where I can find out more?
- The final report of the Wealth Tax Commission.
- One-off wealth taxes: theory and evidence: Nick O’Donovan’s evidence paper for the UK Wealth Tax Commission
- The economics of a wealth tax: Evidence paper for the UK Wealth Tax Commission by Stuart Adam and Helen Miller of the Institute for Fiscal Studies (IFS).
- Paying for the pandemic: Report by Nick O’Donovan of the Future Economies Research Centre at Manchester Metropolitan University published in April 2020.
- A wealth tax on the rich to bring down public debt? Revenue and distributional effects of a capital levy in Germany: A 2014 study by Stefan Bach and colleagues published in Fiscal Studies.
- A unique contribution: Report by Nick Donovan for the Fabian Society, June 2016.
- A one-off wealth levy? Assessing the pros and cons and the importance of credibility: A Deutsche Bundesbank study from 2014.
