A wealth tax looks seductive to Labour but must be resisted

Times

3 days ago

Anyone switching on the radio yesterday will have heard Sharon Graham of the Unite union complaining bitterly about the failure of the government to adequately compensate her members in Birmingham, rejecting any suggestion that the state simply cannot afford her demands. Graham supports the increasingly fashionable idea of a 'wealth tax', as does Lord Kinnock, Labour's leader from 1983 to 1992, who popped up last week to suggest a 2 per cent levy on people with assets valued at more than £10 million, which would raise as much as £11 billion a year. He said it would 'secure resources' and allow Labour to declare that 'we are the government of equity'.
It must be hoped that Kinnock was freelancing rather than flying a kite on behalf of a cabinet member. Labour's left has been emboldened by Sir Keir Starmer's U-turns on more than £6 billion of winter fuel and welfare cuts. The reversals, combined with possible productivity downgrades from the independent fiscal watchdog, could leave Rachel Reeves scrambling to fill a £20 billion hole by autumn. Angela Rayner, the deputy prime minister, proposed up to £4 billion of extra taxes on high-earners and the wealthy before the spring statement. Starmer's spokesman refused to rule out a wealth tax when questioned last week, although Reeves is known to oppose it.
Labour, which still bears the scars of Kinnock's defeat in 1992, put itself in a straitjacket by promising not to raise taxes on 'working people' before last year's election. Starmer and Reeves were entitled to point out that the Conservatives left a dreadful fiscal legacy, having splurged during Covid and allowed borrowing to balloon. But it was Labour's pre-election pledge that guided the chancellor's decision to soak business in the October budget. That loaded £25 billion on to employers' national insurance contributions, imposed inheritance tax on farms and family-owned companies and increased taxes on capital gains and carried interest. It was also the chancellor who toughened up the Conservatives' measures on non-doms by making all their global assets liable for UK inheritance tax after 10 years.
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Labour's first budget has already sapped animal spirits. Although numbers are difficult to check and are often produced by vested interests — Henley and Partners, a relocation specialist, claims the UK will lose a net 16,500 dollar millionaires this year — anecdotal evidence, plus a newfound vibrancy in rival domiciles such as Italy, suggests the non-dom reforms in particular may be causing an exodus of the wealthy.
The Labour left prefers not to confront fiscal reality, committed to high taxation and redistribution. But make no mistake: a wealth tax, on top of last autumn's harsh medicine, would be arsenic for the UK's economy. In considering a new tax, it pays to look at past examples. According to the Organisation for Economic Co-operation and Development, 12 countries had wealth taxes in 1990. Just four still levied them by 2017. Spain introduced a wealth tax in 2022, broadly payable on assets over €2 million for a couple, which brought in €632 million in 2023 — 0.25 per cent of the government's total tax revenue for that year. The equivalent yield in the UK would be £2 billion, less than a third of the savings forgone by the Labour leadership in its recent U-turns on winter fuel payments and welfare.
Wealth taxes are not just economically harmful but burdensome to administer. The rich are more mobile than ever, so the biggest fish rarely get caught. Refusing to exempt assets such as principal resi­dences amounts to political suicide, but exemptions bring complications and opportunities for avoidance. A 'flash' wealth tax carried out once, without warning, would capture more revenue. But it would also destroy confidence in the rule of law. It is also worth remem­bering that the top 1 per cent of earners in the UK contribute almost 30 per cent of income tax revenue. The top 10 per cent stump up about 60 per cent of it.
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Starmer's failure to convince many of his backbenchers of the need for fiscal discipline has left the government caught between a rock and a hard place. Cuts to the welfare bill, although politically toxic, are still needed. Ministers will have to remake the argument but are unlikely to do so before the autumn budget. Reeves will inevitably look at a variety of stealth measures to try to square the tax-and-spend circle. But she should avoid a wealth tax that would accelerate the flight of entrepreneurs. The rich may appear to pay the price at first, but it is Labour's 'working people' who will eventually pick up the bill.