Wealth taxes will starve the economy

With each passing year, the oil industry has to keep searching for fresh energy reserves in ever more remote and dangerous places. In a similar way, politicians determined to preserve and even expand an already massive state sector are now having to search out new territories they can raid for revenues. The latest target? The huge deposits of accumulated wealth stored by British families.

Some form of wealth tax now looks like a real possibility in Britain. The trouble is that, if it happens, it will be a catastrophe. It will quickly end up being imposed on all middle-class families, and it will deter the small businesses that need to be encouraged if the economy is ever to start growing again. If we tax wealth, we'll just end up having less of it.

We might think of wealth taxes as the preserve of high-spending nations, such as Franois Hollande's France. But they are creeping ever higher up the agenda. The idea of a mansion tax started with Vince Cable and the Liberal Democrats, but it has now also been adopted by the Labour Party, which is calling for a levy on properties worth more than £2m. Now the Lib Dems are suggesting a tax on other assets as well such as buy-to-let property, jewellery or, indeed, anything else that people happen to own.

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It is not hard for the left to see the attraction in taxing wealth. It has less to do with equality although that will no doubt be the public reason for advocating them and more to do with the fact that wealth is one of the very few things left to tax to support an ever-expanding state.

The UK's budget deficit is still running at more than 8% of GDP. Right now, that is being sustained by the Bank of England printing money and the government borrowing it. But that cannot last forever. At some point either the state will have to spend less or taxes will have to go up, otherwise the books will never balance. But there is not much left to tax. Most of the wells have been exhausted.

A rise in VAT? That would decimate what little is left of the high street. A rise in income tax? The top-rate was already so high by international standards at 50% that it had to be cut to 45% and even that is hardly competitive.

The standard rate can't be raised: financially squeezed families can't afford to pay more and won't vote for anyone who asks them to. Corporation tax? A higher rate will just deter companies from basing themselves here and send those already in the UK abroad.

Other taxes like capital gains tax or stamp duty or the airport levy have already been raised and, anyway, you can't collect 8% of GDP by putting a few quid on every Ryanair flight.

Wealth is the obvious target. As a mature economy, the UK has a lot of it so why not tax that? According to the Office for National Statistics, British households have total assets, including property, savings and pensions, of £10.3trn. The top 10% of households have average assets of nearly a million, while the top 1% have £2.8m. That is a big target.

There are three big problems with wealth taxes, however. First, don't believe that they will only be paid by the very rich. They will inevitably fall on the general population. When income tax was introduced, only a few people paid it. Even by the start of World War I, the rate was only 6% and most people didn't pay it.

Gradually, it was extended until now when just about everyone except the poorest pays income tax, even if it means they need benefits to make ends meet. A wealth tax will be the same. Within a generation, every home owner or anyone with a pension or a few shares in an Isa will be paying it.

Secondly, it will starve the economy of much-needed investment. Most entrepreneurs rely on family money or their own wealth to start a business. There is much talk about getting the banks to lend more to entrepreneurs. But they have never been willing to do so, and even if they do, it is only when they have the security of a house as collateral.

The seed capital that is so vital to get businesses started nearly always comes from family money or personal resources. If that is taxed away, new enterprises won't get started. And if that happens, then soon the economy will be in even worse shape than it already is.

Finally, wealth taxes punish aspiration. When we wanted people to smoke less, we put big taxes on cigarettes the same with alcohol. Likewise, when we want to encourage something, we offer it a tax break like saving into a pension or giving money to charity.

It is a simple trick you reward good behaviour and punish bad but it works. If we punish people for accumulating wealth, then we shouldn't be surprised if they do less of it. It is the desire to get wealthier that drives a free-market economy take that fuel out of the tank, and it won't run.

The UK's real problem is that it is impossible to raise enough tax to support a state sector that now consumes 45% of GDP. The money simply isn't there, and the more taxes are increased, the less cash is actually raised. The debate should be about shrinking the state not squeezing yet more money out of a battered economy.