What is wealth tax? The Scottish perspective

As a new session of the Scottish Parliament gets underway, both the SNP and the Scottish Greens have indicated wealth taxation is an area of high priority. While no specific proposals have been announced, we take look at what wealth taxation means, how it operates in other countries and how it might work in Scotland.

What is wealth tax?

Wealth tax can mean several different things: it can mean a net asset tax (the most common understanding of wealth tax), or it can be a tax on specific forms of wealth (taxes on wealth). The aim is to tax accumulated wealth rather than just income or labour.

In most cases when wealth tax is discussed, it means a net asset tax that applies to all (or nearly all) assets of an individual. There is therefore a distinction between wealth tax and taxes on wealth.

In the UK, there’s currently no wealth tax, but we do have some taxes on accumulated wealth – inheritance tax, capital gains tax and council tax are all examples. These are also taxes on specific types of income, assets or transactions, rather than an overall net asset tax. So, while targeting the wealth of individuals, it’s more limited than a wealth tax.

How are wealth taxes designed?

The characteristics of a wealth tax are open to policy design, including how often it should be levied, who should be taxed and at what rate.

Recent discussion on wealth taxes has involved both an annual levy and a one-off levy. The 2020 Wealth Tax Commission report concluded that a one-off wealth tax could be feasible in the UK, but suggested that an annual wealth tax would involve greater administrative costs and could encourage behavioural change.

One of the biggest challenges for the design of a wealth tax is defining who’s considered ‘wealthy’. Is it the superrich or is it mean a broader base of society?

Once that threshold is defined, you must then value the assets. This can be challenging. The recent EU report Wealth taxation, including net wealth, capital and exit taxes - Publications Office of the EU found that asset valuation is a key challenge for wealth tax, as it is resource intensive for tax administrations and relies on information which may not be readily available or high quality. The report also highlights that any benefit of wealth taxation relies on integration with the existing fiscal framework. It’s important for any wealth tax design to consider the existing framework of tax on wealth, the tax base and the administrative capacity.

The International Monetary Fund supported prioritising the reform of existing taxes, rather than creating new taxes, such as a wealth tax in its How to Tax Wealth report. It noted that wealth tax in practice was rare and didn’t often generate significant revenues due to the difficulty enforcing it and high exemption thresholds.

Current wealth tax regimes

Among Organisation for Economic Co-operation and Development (OECD) countries, there are only four which still have wealth taxes: Colombia, Spain, Switzerland and Norway.

In Europe, there has been a steady decline in wealth taxes, and those that still exist generally produce very little revenue. The only exception is Switzerland, which has a high wealth concentration by international standards.

Outside the OECD, most countries with a wealth tax are in Latin America.

Below is a comparison of the OECD wealth taxes that exist today.

Country	Wealth tax
Colombia	Net assets above a threshold: rates of 0.5 -1.5% but proposal to increase to 5%
Switzerland	Worldwide net assets above a threshold: rate and threshold vary by canton (0.01% - 0.4%)
Norway	Worldwide net assets above a threshold: municipal and federal rates apply with total rate of 1%/1.1%
Spain	Worldwide net assets above a threshold: rates vary by autonomous community (up to 3.5%)

Global direction of wealth tax

Wealth tax is of great interest to policymakers and academics, as evidenced by the growing body of research on the subject across the EU, UN, OECD and other bodies.

The resurgence of interest in wealth taxation coincides with widening wealth inequality and challenging fiscal outlooks. However, as a mechanism it has been in decline particularly across the EU and OECD countries.

Debates on wealth tax often conflate net asset taxes with other forms of taxing wealth. The importance of the existing tax framework is also often overlooked when considering wealth tax design.

A recent report prepared for the G20, which was commissioned to tackle the issue of taxing ultra-high-net-worth individuals, proposed using international standards.

Under this proposal, a minimum 2% tax would be imposed on dollar billionaires, estimated to raise around $200 – 250 billion annually.

This relies on the existing framework for international co-operation which can be seen in Pillar II, where a minimum corporate tax rate is applied. However, it’s clear from this that there are challenges in aligning the international community around minimum taxation.

Wealth tax in Scotland

The Scottish government stated its intention in its 2024 Tax Strategy to explore wealth taxation in Scotland. Specifically, it stated that local and property taxes would be under consideration as part of any reform.

Any wealth tax in Scotland would have to be designed and implemented with consideration of the devolved powers and the fiscal framework. Holyrood doesn’t have the power to implement new national taxes without approval from the UK government. However, local taxes and property taxes are devolved matters. 

A property tax would not be considered a wealth tax in the sense of a net asset tax. Local taxes could operate more like a wealth tax, depending on how they were designed. For example, this could be similar to the Swiss model of cantonal wealth taxes. This would need to consider which assets of a Scottish taxpayer are included and how to identify them. However, local authorities would be responsible for the administration of a local wealth tax, and this would be both difficult and expensive.

There are significant practical issues and associated costs with both assessing and valuing the asset types for a wealth tax. Most proposals from Scottish political parties seem to suggest that any considerations are for a tax on wealth (so on specific assets), rather than a net wealth tax.   
Another important consequence of a Scotland-only wealth tax to be considered is the behavioural response. Individuals affected by such a tax may choose to leave Scotland for the rest of the UK. The consequences to the tax base and public finances would need to carefully address any behavioural changes.

Next steps

We're working with our tax committees to develop our policy position on wealth tax. This will help to set our direction for any future discussion with the Scottish or UK government on wealth taxes.