Wealth tax will penalise savers, Labour warned
Introducing a levy on the assets of the rich would not be 'sensible', the IFS said, in a rebuff to Labour backbenchers.
Taxing the same wealth each year would 'penalise' people for saving and making investments, leaving the country poorer in the long run. It would also likely hit the middle classes once property and pension wealth are factored in, the think tank warned.
'It is difficult to make the case that an annual tax on wealth would be a sensible part of the tax system even in principle,' said Stuart Adam, a senior economist at IFS.
No 10 repeatedly refused to rule out introducing a new levy on wealthy taxpayers on Monday after Lord Kinnock, the former Labour leader, said the party was 'willing to explore' the idea.
Some of Labour's biggest union paymasters have also called for the Government to introduce a 2pc tax on people's assets above £10m.
A YouGov poll published on Tuesday found 75pc of the public supported the idea of a tax of 2pc on wealth above £10m.
But the IFS cautioned that a range of countries had previously introduced a wealth tax but ultimately abandoned the policy, including Sweden, Finland and Luxembourg.
'International experience of annual wealth taxes is not encouraging,' Mr Adam said.
'There are strong reasons to radically reform how we currently tax the sources and uses of wealth; this includes reforming capital income taxes in order to properly tax high returns. An annual wealth tax would be a poor substitute for doing that.'
'Less attractive place to live'
In a 2021 paper, the IFS concluded there were 'economically superior' ways of targeting the assets of the wealthy, including reforming capital gains tax.
A new wealth levy would lead to a raid on Britain's middle class, the IFS warned. Mr Adam said: 'An annual wealth tax would need to apply broadly to all assets to ensure that it was not easy to avoid. Such a tax could raise significant revenue if it applied to the bulk of the UK's wealth – that would include the homes and pensions of the middle class.'
The influential think tank also cautioned that trying to raise large amounts of revenue from only the very wealthy would make the country 'a less attractive place for those people to live'.
The comments add to warnings from business chiefs that a new levy would drive people abroad and trigger a fresh exodus of the rich from Britain.
Many wealthy residents are already moving abroad after Rachel Reeves scrapped non-dom status and introduced inheritance tax on overseas trusts earlier this year.
Hotelier Sir Rocco Forte told The Telegraph earlier this week: 'Labour has already seen a huge exodus of wealthy people which is ongoing, with many more due to leave before the Budget. A wealth tax will further exacerbate the problem.'
Growing Labour unrest
Pressure to consider a wealth tax has been mounting after a series of costly U-turns by the Government that have left the Chancellor scrambling to find billions of pounds.
Cabinet ministers have been told that the Chancellor will have to raise taxes in her autumn Budget.
Last week's rebellion over the welfare cuts package has forced the Treasury to find new savings and emboldened hard-Left Labour backbenchers to push for more policy changes.
A Treasury spokesman said: 'Tax decisions are taken at the Budget and, as you would expect, we are not going to comment on tax speculation.
'We have made our manifesto promises to protect working people and we took the decision last autumn to deliver the change the British people voted for.'
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