Executive summary
Wealth taxes are levied on personal capital, the stock of what people have versus the flow of their income or consumption. Within that broader category, net wealth taxes (annual charges on people’s net wealth) have been tried in many economies, but most have been scrapped. They are inefficient, unpopular and unfair. The OECD reported in 2018 that the number of countries with net wealth taxes fell from 12 in 1990 to 4 in 2017.
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Wealth taxes have repeatedly failed
The last serious attempt to introduce a wealth tax in Britain came in the 1970s. With concerns in HM Treasury that the tax would undermine economic confidence and lead to a “possible exodus of UK capital”, and opposition from external interests and in Parliament, those plans were abandoned.
Many other countries have experienced similar practical and political problems taxing wealth:
- Numerous ‘tax revolts’ in the US against the property tax.
- Ireland’s wealth tax was first radically narrowed with numerous exemptions and then abolished after the party that introduced it lost power.
- After being watered down, Australian federal death duties contributed to a split in the governing Labor party which pledged to abolish them before a new Coalition government did.
- The Swedish net wealth tax was abolished in 2011 in response to concerns about capital flight.
- A French wealth tax contributed to a parliamentary landslide defeat in 1986 and subsequent abolition. A narrower form was revived in 1989 as the ‘Solidarity Tax on Wealth’ (ISF). The ISF was reduced and restricted several times before being abolished in 2017 by President Macron.
- The Dutch wealth tax was scrapped due to capital flight, according to its government.
Wealth taxes do not generate material revenue
Wealth taxes are more disruptive than other taxes. The OECD reports that wealth taxes have “generally accounted for a very small share of tax revenues”, ranging from 0.2 per cent of GDP in Spain and France to 0.4 per cent in Norway and one per cent of GDP in Switzerland.
Wealth tax design suffers from an inevitable dilemma.
- Broadly-based wealth taxes are less distortive and produce more revenue but include economically and politically sensitive activities, assets and people.
- Narrower wealth taxes avoid consequences such as breaking up businesses, forcing sales of family homes or capital flight but are more distortionary and raise less revenue.
Wealth tax revenue stability is a bug, not a feature. The requirement to keep paying in hard times generates additional risk for investors which deters investment.
Wealth taxes create serious economic harms
Economic risks from net wealth taxes include:
- Capital flight and other avoidance distortions. A UK wealth tax levied on the top one per cent with a threshold of £1 million would imply a reduction in taxable wealth of around £260 billion.
- Reduced economic growth and prosperity. Computable general equilibrium modelling found that wealth taxes produce reductions in long-run GDP of between four and over five per cent.
- Asset allocation distortions. Reliefs to mitigate problems cause over-investment in some assets, raising prices, supply, and under-investment and shortages in others.
- Reduced entrepreneurship. One study found that abolishing wealth taxes increases self-employment by 0.2 to 0.5 percentage points.
- Administrative and compliance costs. In Ireland, estimated compliance costs were equivalent to at least 20 per cent of the tax take. Administrative costs took the total to over 25 per cent and possibly 50 per cent.
These concerns are especially relevant to the British economy due to its dependence on non-fixed assets (e.g. financial services), the productivity of a small number of high-earning professionals; and an English speaking population likely better able to relocate internationally than others.
UK wealth inequality has not particularly increased in recent decades and is substantially driven by the life cycle. Wealth peaks at the 55 to 64 cohort where 58 per cent of households have wealth of more than £500,000 and 27 per cent have more than £1 million.
Income tax is highly progressive while measures such as liberalising planning constraints on land use, avoiding sustained periods of extremely low interest rates and not moderating universal pensioner benefits can reduce inequality more fairly and efficiently.
Wealth taxes are political risks
Industries threatened with particularly acute harms, whether bloodstock in Ireland or the financial services industry in 1920s UK, are liable to have a larger number of voters who depend on them. The same is true of assets that are personally important to people, e.g. family jewellery or family homes.
Perceived unfairness, arbitrariness, regression and surveillance also tend to aggravate voters beyond their immediate financial impact. High administrative costs also reflect a bureaucratic waste of time and effort that people resent beyond financial concerns.
The economic impacts of a wealth tax would be visible due to the prominence of the groups affected and repeated over years as wealth left the UK in response to the tax and/or the threat that it might be extended.
British voters (particularly younger voters) are much less ‘zero sum’ than in some of the countries that have implemented a wealth tax.
‘Class de-alignment’ since the 1970s means that the voters affected by a wealth tax would be more of a swing vote, not safe votes that parties should either write-off or take for granted. A wealth tax runs a real risk of being for UK politicians in the 2020s what the mining tax was for Australian ones, a mildly controversial reform that turns out to be politically toxic. Or what the wealth tax proved to be for Ireland in the 1970s, an idea that helps return to opposition, after only one election, a party that had just entered government after many years in the wilderness.