Why wouldn't a wealth tax work in Britain?

Independent

a day ago

Not so long ago, when Labour was in opposition and still popular, there was no question of introducing a wealth tax. Yet today, influential figures such as former leader Neil Kinnock and ex-first minister of Wales Eluned Morgan, and some trade unions, are advocating just such a change.
More tellingly, ministers simply refuse to rule out a wealth tax as they might have done before. The latest to do so is the transport secretary, Heidi Alexander, who was asked if the topic had come up at last Friday's cabinet away day and enigmatically replied: 'Not directly.' Teased at Prime Minister's Questions on the subject, even Keir Starmer couldn't bring himself to issue a flat denial. Some wonder if a wealth tax could actually happen...
What did Labour promise?
There's nothing in the manifesto to rule out a wealth tax, but in an interview in August 2023, Rachel Reeves was unequivocal: 'We have no plans for a wealth tax. We don't have any plans to increase taxes outside of what we've said. I don't see the way to prosperity as being through taxation. I want to grow the economy,' she said, adding: 'We won't be doing that. It's a denial.'
And as recently as her spring statement in April, she declared: 'We're not interested in a wealth tax. Our priority is to grow the economy, and that's the way that you make working people better off and secure better public finances.'
What does the left want?
It's usually stated as a 2 per cent levy on assets – property, shares, art etc – owned by individuals in excess of £10m. For example, someone worth £12m would pay a levy of 2 per cent of £2m – a bill of £40,000. It could be paid immediately, or deferred to disposal (or death). Figures such as Richard Burgon, a left-wing MP who believes in it, says it would raise 'up to' £24bn.
What does the chancellor say?
As little as possible at the moment, suspiciously sticking to the 'working people' line (though some working people are worth £10m, and more). No denials, then.
What are the arguments for a wealth tax?
It's said that the country shouldn't balance the books on the backs of the most vulnerable, and that fairness demands that those with the broadest shoulders bear the greatest burden.
Recent controversies about disability benefits and children with special needs have heightened the arguments. It's also true that wealth in the UK is undertaxed compared with income, and that we live in an unequal society, at least by some European standards.
Economists warn about what might happen as wealth accumulates through inheritance over the very long run. As Thomas Piketty puts it: 'Inheritance will eventually matter a lot pretty much everywhere – as it did in ancient societies. Past wealth will tend to dominate new wealth, and successors will tend to dominate labour earners.' The present debate about 'intergenerational fairness' is one artefact of this phenomenon.
And against a wealth tax?
It has been tried, and failed. Comparable nations such as France, Germany, Switzerland and Norway have more or less abandoned wealth taxes, or found them to be unproductive. Almost half a century ago, a previous British Labour government issued a green paper on a proposed wealth tax, but then the chancellor, Denis Healey, concluded it would be impractical and too costly to administer.
The wealthy have always found ways to avoid such taxes and protect their assets, while the super-rich simply skip the country altogether. Tax expert Dan Neidle judges: 'The idea that we can do something different is naive. It's arrogant to think that we in the UK can achieve a holy grail everyone else has been too stupid to find.'
What wealth could be taxed?
An uncomfortable truth is that the easiest wealth to tax would be the most politically difficult – and arguably, the least fair: homes and pension pots belonging to individuals worth far less than £10m, and who would fall into the category of 'working people' that Labour has pledged to look after. After all, you can't take the house in which you live and move it overseas. And many of the assets in question will have been taxed already.
Any government that tried to tax a capital gain on a principal private residence would place itself in opposition for a generation.
What are the practical problems with a wealth tax?
Imagine obliging everyone to declare an accurate value for the property (and everything else) they own, along with how much they paid for it, or when it was inherited and its value at the time, and then employing HMRC officials to undertake checks and audits on such a mass of information.
Should theoretical, unrealised gains be index-linked to allow for inflation? Any allowance for, say, renovating a derelict building? What counts and what doesn't? Wedding rings? A classic car? The family business? And how about offsetting capital losses on bad investments or failing companies? It would take years to process.
What could Reeves have her eye on?
It could be large, uncrystallised capital gains on assets such as rental properties, bonds, pension pots and shares at death, which mostly escape inheritance tax (IHT). It would basically be an extension of inheritance tax, itself a deeply unpopular levy (albeit few pay, and the thresholds are generous).
Anything else?
Capital gains on virtually anything except a main home are already taxed, as are pension pots in certain circumstances, and there isn't that much room left to hike these tax rates. Stamp duty on mansions has already been increased substantially, and of course 'non-dom' status was abolished by the previous government. The 'family farm tax' – the removal of the IHT exemption for agricultural property – is another recent, and unwelcome, change for many. They've even specifically taxed private jets.
Beyond a certain level, heavy disincentives to save and invest start to kick in, which would be bad for the economy. For example, Neidle shows how this can depress investment: 'A 2 per cent wealth tax doesn't sound like much, but for someone earning an 8 per cent return on their assets, that plus existing dividend tax creates an effective rate of 60 per cent – and on a year when assets decline, an effective rate of over 100 per cent. That creates an incentive to avoid the tax out of all proportion.'
Tax rates set too high on savings mean that people are unduly encouraged to consume rather than make provision for their old age or any periods of unemployment, with dire long-term effects on the Exchequer and on economic growth. It might therefore not raise much revenue for long. Politically, it makes a government look desperate, as if it's constantly looking for new things to tax rather than getting the economy to grow.