The Illusion of Liquid Wealth: Why Public Finance Must Distinguish Between Value and Realisability

Wealth looks simple on paper. But in practice, it rarely behaves the way policymakers expect. Not all assets can be sold quickly. Not all valuations hold up under pressure. And not all owners can be replaced without consequence. Yet fiscal strategies are increasingly built on the assumption that wealth, regardless of form or context can be readily mobilised to fund public programs.

This article explores why that assumption often fails. By revisiting fundamental accounting concepts, particularly the distinction between value in use and fair value less costs to sell. It examines how illiquid, contingent, or control-dependent assets are routinely misread in public finance. The argument is straightforward: if we don’t understand how value is actually realised, we risk designing tax systems around wealth that isn’t truly there.

Introduction

Calls to increase taxes on wealth have grown louder in recent years, especially as governments look for ways to fund ambitious public programs, address inequality, or stabilise post-crisis budgets. These proposals often draw on aggregated net worth data—highlighting the scale of private holdings in property, business equity, or financial assets—as the foundation for wealth-based taxation.

But here’s where the problem begins. Much of this conversation treats wealth as if it were liquid—easily converted into public revenue without friction or loss. In reality, this overlooks the mechanics of valuation, ownership, and realisation. When those distinctions are ignored, policies risk drifting into fiscal overreach, market distortion, and disappointing outcomes.

Accounting as the Basis of Measured Wealth

Modern financial systems depend on accounting not only to report economic performance but to define taxable positions. The frameworks that underpin accounting, often invisible in public debate, shape how value is measured, how wealth is reported, and ultimately, how it is taxed.

Two concepts are especially relevant here:

• Value in Use: Defined under IAS 36 (Impairment of Assets), this represents the present value of future cash flows expected from using the asset within the business. It reflects internal utility not market resale value.

• Fair Value Less Costs to Sell: This is the price the asset would fetch in a market sale, minus the direct costs of selling. It assumes external realisation through disposal.

These aren’t interchangeable. Their application rests on assumptions about intent, time horizon, control, and market conditions.

For example: a manufacturer owns a specialised piece of machinery worth £2 million in use because it enables ongoing production. But if the company were forced to sell the asset, it might only recover £500,000 because the resale market is thin, and buyers would discount the price to account for dismantling, relocation, and unfamiliarity. The accounting system recognises this gap. Fiscal policy often does not.

Understanding this difference is not academic, it’s essential. Public finance that taxes assets as if they are instantly realisable ignores the risk that value may collapse the moment liquidity is forced.

The Role of the Asset Holder in Determining Value

An often overlooked dimension in wealth taxation is the role of the asset holder in sustaining value. In many cases, an asset’s worth is not just in its physical form or financial returns it’s in the relationship between the asset and the person who stewards it.

• A founder-led business may carry strategic, relational, or reputational value that disappears once the founder exits.

• A property may hold greater worth under a long-term lease to a trusted tenant than it would if put on the open market.

• A factory or farm may only reach full productivity under a seasoned operator with generational knowledge.

Consider a family-run farm that generates steady income through a mix of crop cycles, local supplier networks, and water rights. On paper, its net asset value might appear substantial. But if that land were taxed heavily and the family forced to sell, the new owner, lacking those relationships or knowledge might produce far less. The “wealth” has been transferred, but much of the real economic value has been lost.

This interdependence between ownership and value challenges the idea of wealth as a detached, fungible stock. When fiscal policy attempts to extract value from control-dependent or illiquid assets, the result can be not just diminished returns but the net destruction of the underlying value itself.

Fiscal Planning and the Mirage of Wealth

Policymakers often lean on net worth calculations to justify new spending programs or wealth-based taxes. But these figures are frequently built on mark-to-market assumptions, even for assets that are not liquid, not readily priced, and not structured for realisation.

Building fiscal plans on this kind of wealth accounting introduces significant risks:

• Liquidity mismatch: Tax obligations may arise even when the underlying assets cannot be sold without triggering loss.

• Market distortion: Forced sales, especially in thin or specialised markets can drive down prices, compounding the impact.

• Asset erosion: In some cases, the act of taxation itself disrupts the asset’s value, breaking the conditions that made it productive in the first place.

A valuation may suggest solvency but solvency on paper is not the same as capacity in practice.

The failure to distinguish between valuation and realisability creates a fiscal illusion. One that encourages overcommitment, misalignment of revenue and expenditure, and ultimately, policy fragility.

Toward a Coherent Framework

A more sustainable approach to wealth and taxation begins with a simple principle: public finance should be grounded in what can be accessed without destroying its source.

That requires rethinking how we define and measure wealth in the policy arena. Specifically, it calls for three shifts in emphasis:

• Flow-based taxation: Focus on income, realised capital gains, and dividends, sources that are already liquid and do not require asset disruption to extract.

• Liquidity-adjusted valuation: Recognise that an asset’s value is not fixed. It depends on timing, market depth, and whether the asset must be sold under pressure.

• Stewardship-informed policy: Understand that many assets derive their value from ongoing use under skilled or embedded ownership. Tax policy must reflect that continuity.

In short, not all wealth is spendable. And not all value survives conversion. The closer fiscal policy comes to reflecting this reality, the stronger and more stable its outcomes will be.

Conclusion

The call to tax wealth is not without merit. But it must be tempered by a clear understanding of what wealth actually is, how it is measured, how it behaves under pressure, and whether it can be realised without destroying the conditions that gave rise to it.

Accounting is not just a technical discipline. It is the structural infrastructure through which value is defined, regulated, and brought into the public sphere. Fiscal policy cannot afford to ignore the logic it provides.

When illiquid, contingent, or control-sensitive assets are treated as immediately available revenue, we enter the realm of fiscal illusion. Expectations rise, but delivery falters. In an era of asset-heavy inequality and public pressure for redistribution, coherence depends not on ambition, but on grounding in value, in time, in control, and in liquidity.

These fundamentals are not barriers to good policy. They are the conditions for it.

#TaxPolicy #Wealth #PublicFinance #Accounting #Governance #FiscalStrategy #Liquidity

Disclaimer

The views expressed in this article are my own and do not represent the views of any organisation I am affiliated with. This article is for informational purposes only and does not constitute financial, tax, or legal advice. Readers should seek professional counsel before making decisions based on the content herein.