Breakingviews - UK could tax wealth, via a degree of stealth
Last October's tax increases, primarily to British companies' social security contributions, aimed to plug a 22 billion pound hole left by the previous Conservative government. Since then, the economy has worsened. Miserly 0.3% second-quarter GDP growth makes it even harder to hit Reeves' self-imposed target that current spending and revenue should balance by 2029/2030. The National Institute of Economic and Social Research reckons that the deficit, excluding any buffer, could be as large as 41 billion pounds.
Reeves' pledge not to raise taxes on 'working people' explains current calls, opens new tab for a levy on assets above 10 million pounds. But similar attempts, such as in France, suggest wealth taxes are complex and vulnerable to avoidance measures. While the impact of her abolition of 'non-dom' tax perks is unclear and may even be bearable, opens new tab, she is unlikely to further anger a mobile elite.
In contrast, there are large reserves of UK pension and property assets that are untaxed and un-mobile. Brits currently benefit from generous perks to encourage savings for retirement. This cost the government some 52 billion pounds, opens new tab last year. Reducing the proportion of a pension that can be withdrawn free of tax would free up some 5.5 billion pounds, the Institute for Fiscal Studies said in 2023.
Meanwhile, some 7 trillion pounds of value is stored in British housing, Savills, opens new tab reckons, of which nearly two-thirds is held by homeowners. The zero-taxation rate on gains for property they live in costs around 30 billion pounds a year, according to the government. Taxing property more aggressively, as happens in the United States, might encourage investment in more productive areas.
Reeves could also drill down on death duties. Britain's inheritance tax system is riddled with exemptions, which mean on average estates only pay 13%, rather than the headline 40%. One move would be to pare back former Chancellor George Osborne's allowance for property, which allows up to 350,000 pounds of a home to be passed down tax free, and costs the state 2 billion pounds of tax every year.
The big risk is such a raid adds affluent middle-class voters to the ranks of Reeves-haters. Yet targeting them would make it politically easier for her to cut welfare spending. Especially if she does so with a degree of stealth.
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