Last year, long before July’s election, the chancellor Rachel Reeves ruled out introducing a wealth tax. In September, at a Financial Times event, she was heckled by protesters carrying a “tax wealth now” banner. Today, the issue continues to divide opinion. Proponents argue that, given Britain’s vast wealth inequalities, introducing a new levy on wealth is the right thing to do, and the right way to help fill the £40bn “black hole” that the Starmer government says the Conservatives left behind. Detractors say that a wealth tax rarely does what a government intends, and instead has unintended consequences that include loss of revenue for the Exchequer. Weeks away from the Budget on 30th October, Prospect invited the Labour MP Liam Byrne and the tax expert Dan Neidle to present the arguments for and against such a measure.
Liam Byrne: If done right, a wealth tax can reverse inequality—and beat populism
I was a card-carrying member of New Labour. I co-founded the thinktank Progress in the 1990s and rose to office under Tony Blair. Today, I’m convinced it is time for windfall wealth taxes. The way to raise the cash to rebuild Britain is to restore fairness to our tax system. If we fail, my new analysis of the 2024 election shows the demand for the snake-oil of populism will simply grow.
Over the last 14 years, austerity has devastated communities like mine in east Birmingham, which has some of the worst child poverty levels in the country. Yet, for a lucky few, the years since 2010 have been not the worst of times but the best of them.
According to the World Inequality Database, Britain’s richest 1 per cent have grown their wealth since 2010 by over £1trillion. Over the long, hard years of austerity, a lucky 1 per cent-er has experienced a £2.2m boom in their fortunes. That is 41 times more than the rise in the average wealth of the bottom 99 per cent.
Were the richer just smarter than everyone else? Did they work harder? No. The key to their success was the £895bn of quantitative easing (QE) poured into the monetary supply. This held down interest rates by almost 1 per cent, and these low rates account for perhaps three-quarters of the once-in-a-century boom in wealth driven by soaring asset prices, according to analysis by the Resolution Foundation.
Yet, QE is not free. It will cost the taxpayer a fortune. The Office for Budget Responsibility (OBR) forecasts that the great unwinding of QE now underway will cost us all £104bn. So we all paid for QE—but its prizes went disproportionately to the wealthiest.
Those lucky enough to draw their income from capital enjoy a rate of tax that is much lower than everyone else. Almost 60 per cent of UK investment income goes to the richest 10 per cent of households. The crazy economics of cheap cash and low tax helps explain why we have today’s moral emergency of a country with record queues at food banks, alongside record sales of private jets and super-yachts.
The unfairness of it all shows up on election day. My new analysis of the election results shows that it is in those regions where the 16-year growth in aggregate wealth has been weakest—the northeast, and the East and West Midlands—that the Reform vote has been biggest. In the southeast, where wealth growth was greatest, the Reform vote was lowest.
A look at constituencies confirms this. Political scientists often examine house prices as a proxy for wealth. In the 20 seats with the highest Reform vote (where the party received around 30 per cent of the vote) average house prices are a third lower than the national average. What is more, these 20 seats have higher levels of deprivation, a much lower proportion of residents with Level 4 qualifications (and therefore have lower earning power)—as well as a much smaller ethnic minority community. Analysis shows, very roughly, that a 10 per cent decline in the proportion of residents wrestling with at least one dimension of deprivation comes with a 10 per cent fall in the Reform vote in that seat.
These basic truths take us to one inexorable conclusion. To defeat populism, we have to fix wealth inequality. Keir Starmer put wealth creation at the heart of Labour’s manifesto. But wealth creation for the many not the few means an ambitious plan to level up Britain and Britain’s people. We need to help ordinary working families buy a home and build up their skills, their short-term savings and their pensions pots. Never forget that a quarter of Britain’s adults have savings of less than £100.
None of this free. But the investment we need should come from wealth taxes. Thanks to the work of a host of experts, like the Wealth Tax Commission, Demos, Patriotic Millionaires, the Tax Justice Network and Tax Watch, we now have a host of options on the table.
These range from closing the loopholes enjoyed by Britain’s 37,000 “non-doms” to equalising capital gains tax and income tax, closing inheritance tax loopholes, reforming tax breaks for the richest pension savers, charging national insurance contributions on investment income, a wealth tax of 1-2 per cent on the 22,000 fortunes worth over £10m, and many more. This last proposal learns from the flaws of net wealth taxes, which cast the net too wide and proved impossible to audit. By taking aim at a very small number of very large fortunes, it is much easier for tax inspectors to bring in the full harvest. The estimated tax take? Somewhere around £22bn a year. Such a tax is supported by nearly three-quarters of the British public.
We have to be careful. How do we make sure the money comes in and the taxpayers do not simply leave the country? How do we avoid being a real outlier internationally? How do we preserve incentives for entrepreneurs to take risks and invest? How do we avoid a hit to the returns to pension funds, and thus pensioners? It is important to get these answers right. But the bottom line is that taxes on capital income need to go up. If we do it in the right way, we can use that money to help reverse the extraordinary growth of wealth inequality that now deeply divides our country. If we don’t, the snake oil of populism will be with us for many years to come.
[Read more: Hand-me-down economics]
Dan Neidle: A new wealth tax will make us poorer. We should reform existing taxes instead
Wealth taxes have a legacy of failure. In the last 25 years, 11 European countries repealed their wealth taxes because they raised trifling amounts, mainly hit the upper middle class and became hugely unpopular.
There are now only three countries in Europe that have such a tax: Norway, Spain and Switzerland. And the only one which raises significant sums is Switzerland (a unique case given that Switzerland has no tax on capital gains or inheritance).
But there are activists pushing a new kind of wealth tax they say is different. It only applies to the very rich, has no loopholes and promises to raise vast sums. Oxfam says a 5 per cent tax on the mega-wealthy could raise $1.5 trillion worldwide. These sums are a fantasy.
Spain recently tried a new wealth tax along these lines, aimed at the super-rich. It raised a derisory €630m. It was full of loopholes. Many wealthy Spanish left and fled to Portugal. Those are the two reasons why wealth taxes keep failing: loopholes and leaving.
All wealth taxes to date have had exemptions which in practice are used as loopholes by the very rich, leaving the upper middle class to carry the can. That reflects how legislation is made in practice, where the complications of the real world ensure that taxes are rarely implemented according to purist blueprints. That means that most taxes are flawed; but for the wealth tax, these flaws undermine the entire point of such a levy.
“Leaving” is the pretty obvious response that the super-rich would have to a tax they would (rightly or wrongly) view as confiscatory. Some people doubt the rich would leave. But we know that they would, because we can see what happens already. A large number of British entrepreneurs who are about to sell their businesses move to a tax haven like Monaco, and then sell—escaping UK capital gains tax at 20 per cent.
At first glance, a 2 per cent annual wealth tax, say, might not seem like enough to make someone move. But the real financial impact of paying 2 per cent of your wealth every year is much bigger than it seems. Over time, the cost of paying 2 per cent each year adds up—it’s economically equivalent to paying a one-off tax of about 30 per cent. This is because when you look at the long-term cost of those yearly payments, their combined value (using a reasonable “net present value” calculation) equates to about 30 per cent of wealth today.
Another way of looking at this: say that you receive a 7 per cent return from your wealth. A 2 per cent wealth tax means that two-sevenths of that return, or 29 per cent, is paid in wealth tax. That is on top of existing income tax at 39.35 per cent (the top rate of tax on dividends). So, in this example, a 2 per cent wealth tax creates a 68 per cent effective rate of tax on income.
For Oxfam’s 5 per cent wealth tax, the figures are much higher, equating to a one-off tax of 71 per cent, or an effective tax rate on income of 110 per cent. When people sell wealth taxes as “just a tiny tax” they are engaging in populism. The real impact is much higher, and therefore the real response would be much more dramatic. Anyone who thinks people don’t respond to a 110 per cent tax rate has never met a human being.
There are two recent proposals to solve these problems. The first, from the academics and practitioners on the Wealth Tax Commission, is a one-off retrospective wealth tax. Retrospective, so it can’t be escaped or avoided. One-off, to avoid an exodus of the wealthy afterwards. As the Commission’s report says: “If such a tax is unexpected and believed to be one-off—daunting requirements—it does not create economic distortions.” The requirements are indeed daunting; I fear they are impossible.
The other proposal, from the economist Gabriel Zucman, is a coordinated international wealth tax, introduced by every country simultaneously. But the countries with the largest number of billionaires—the US, China, India and Germany—show no sign of signing up to such a plan. Tax havens certainly won’t. And if billionaires can safely live and invest in countries without a wealth tax, then the idea fails.
A wealth tax is, therefore, a dead end. That certainly doesn’t mean we shouldn’t tax wealth. The UK already taxes wealth more than most of the rest of the OECD, but there is plenty we could do better. We could close the holes in inheritance tax, which make it essentially optional for the very wealthy. We could reform capital gains tax, preventing people from “converting” income (taxed at 39 per cent plus) into capital (taxed at 20 per cent).
We could reform land taxation, which at present consists of the rightfully unpopular stamp duty and business rates, and the inequitable council tax. A £100m penthouse in Mayfair pays less council tax than a £300,000 semi in Bolton, and that can’t be right.
Reforming existing taxes on wealth would be easier, fairer and more effective than creating a wealth tax. In fact, creating one will likely make us all poorer.
