What is a wealth tax – and would it work in the UK?
Pressure is mounting on Rachel Reeves to find new ways to stimulate the struggling economy as economists warn the Treasury may need to find at least £22bn in the upcoming Budget.
Many now predict that the Chancellor will have no choice but to raise taxes to find more funds for government coffers, as rising borrowing costs and weak growth forecasts significantly reduce his room for manoeuvre.
This tough economic environment will require funds to be found somewhere, and why has the chancellor refused to rule out the possibility of Labor breaching its manifesto pledge not to raise taxes for workers? This could mean a rise in the income tax rate is on the table, as Ms Reeves warned she would not choose “easy answers”.
But a growing number of campaigners say a “wealth tax” could bolster government funding and is unlikely to force ministers to backtrack on promises. This is an economic policy focused on the ultra-rich that few countries have adopted.
Cabinet ministers have so far rejected calls for a wealth tax; Ms. Reeves stated that she did not want to impose the measure in its strongest form. But the chancellor also said in October that higher taxes on the rich would be “part of the story” in the Budget, leaving the door open for some wealth-targeted taxation.
Here’s everything you need to know about the wealth tax argument and what experts say:
What is wealth tax?
A wealth tax is a tax applied directly to an individual’s total net assets (such as property, investments, cash, and other property). Unlike most regular taxes, the goal is to target accumulated wealth, not just the income earned that year.
In addition to being a new way to raise revenue for the exchequer, this policy is also designed to redistribute wealth to reduce economic inequality.
The UK currently has some taxes focused on assets, such as inheritance tax, capital gains tax and council tax. Changes to any of these could also be on the table for the chancellor later this year.
A capital gains tax is most similar to a wealth tax in that it sees a tax levied on the sale of an asset. However, most wealth tax models charge an annual fee based on the value of assets held, even if they have not been sold.
The idea of a wealth tax has proven divisive among economic experts, with debates ongoing around its fairness, revenue-raising potential and economic impact.
Could a wealth tax work in the UK?
Campaigners say a wealth tax could generate significant sums for the Treasury but would affect a small number of people who are less likely to feel the pain of higher incomes.
Tax Justice UK is calling for a 2 per cent tax on individuals with assets worth more than £10 million. They say this would affect 0.04 per cent of the population and raise £24bn a year.
The calls come at a time when the wealth of the UK’s ultra-rich has risen sharply in recent years, while the living standards of low- and middle-income earners have fallen.
Sunday Times The rich list noted that the number of British billionaires will be 171 in 2023, up from 15 in 1990. At the same time, there are record numbers of children in the UK living in poverty and in precarious living conditions such as temporary accommodation.
The report’s author and host said a wealth tax should be seriously considered by the chancellor. macrodosis podcast, James Meadway: “The idea that we will allow wealth to accumulate in a few hands forever is starting to disappear.”
Responding to criticism that a wealth tax would threaten investment in the UK, the economist said: “Investment has fallen off the cliff between Brexit and the financial crisis. Sixty per cent of wealth in Britain is inherited. This is not something built by someone going and starting a new business.”
“If these people were any good, our economy would be better. It’s not better, so they’re not that good, so it’s not that big of a deal.”
He added: “This won’t solve every single economic problem, but if you’re the government currently thinking about how to continue to fund the NHS, how to pay to avoid massive benefit cuts, how to get rid of the two-child benefit cap, 24 billion is no small figure.
“There are a lot of things we could do with this money that can’t be done right now because it’s sitting in the hands of very, very rich people.”
What are the problems with the wealth tax?
One of the most difficult factors in calculating the benefits of any wealth tax is predicting what the behavioral response will be. While a wealth tax would raise sizeable sums in each scenario, this uncertainty means it is difficult to model.
One common concern raised is the risk of “capital flight” as wealthy individuals, who tend to be more globally mobile, leave the UK or at least move some of their assets.
Wealth can also be held in a wide variety of assets, from cars to works of art; This means it can be difficult for tax authorities to know exactly how to apply the tax.
Dan Neidle, founder of Tax Policy Associates, said it was highly uncertain how much could be raised by implementing a wealth tax. While it is difficult to predict exactly how many wealthy people will leave the UK if the measure comes into force, the tax expert points out that the departure of just 10 people could reduce income by billions of dollars.
This is because 15 percent of the projected income comes from just 10 ultra-rich people, while 80 percent comes from fewer than 5,000 people.
Apart from the risk of capital flight, Mr Neidle argues that the economic damage a wealth tax would bring to the UK would be huge.
He explained: “If you tax something, you always get less. All taxes are a trade-off; you need to be clear about what they are. With a wealth tax, you tax savings and investments, so you get less savings and investments.”
The tax expert points to the wealth tax model in the US and Germany; this model suggests that the long-term impact is a reduction in GDP of 2 percent and 5 percent, respectively. This both harms the economy and negatively affects employment.
“We need to respond to what policies actually do, not what we want them to do,” Mr. Neidle added. “There are many ways to reform taxes and tax the rich fairly in a way that doesn’t hurt the rest of us.” These could include land tax, capital gains tax and inheritance tax reform.
Any of these is probably a more likely option for Labor than introducing a wealth tax. But as the Budget approaches, calls for further redistributive measures are likely to grow louder.
