'Labour’s next bright idea is a wealth tax – but it won't work'

A wealth tax used to be an idea restricted to the battier fringes of the far left. It might be championed by the people who sell Socialist Worker on the high street on Saturday mornings. But it has no place in mainstream politics. In the last few weeks, that has started to change. Recently, Neil Kinnock, the former Labour leader who in many ways represents the soul of his party, and still has a loyal following among members, advocated a 2% annual levy on anyone with assets of more than £10 million. Lots of backbenchers are calling for a wealth tax, and so are many of the Labour-supporting newspapers, magazines and think tanks. It is becoming normalised. And that is a big step towards it being implemented.

In her first Budget, chancellor Rachel Reeves imposed a hefty £40 billion of taxes and authorised an extra £30 billion of borrowing. Even that is nothing like enough to cover the spending of the British state. The tax rises have raised less money than was planned – surprise, surprise, it turns out people don’t like paying extra tax – while a series of U-turns on issues such as welfare reform and the winter fuel allowance, coupled with big pay rises for the public sector, have sent spending way up. The result? Another £40 billion or more in tax rises will be needed by the time of the Budget in the autumn.

Reeves does not have many options. During the election campaign, she promised not to raise any of the three main taxes – income tax, national insurance and VAT – and it is hard to raise any of the minor taxes by enough to fill the gap. She could put up corporation tax, perhaps in the form of a “temporary surcharge”, as France did last year, or she could put up fuel duty. But otherwise, she is out of options. That is where the wealth tax comes in. It is one of the few measures that might raise some proper money, and it would appeal to the left of the Labour Party, especially on the backbenches. The 2% annual levy supported by Kinnock would, at least according to its advocates, raise an extra £11 billion a year. If the threshold were lowered and the rate raised, it would bring in more.

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'A wealth tax will drive the wealthy out of the UK'

The problem is that it would also accelerate the exodus of the wealthy. It is already well underway. A report earlier this month by the relocation consultants Henley & Partners found that the UK topped its league table of the countries that millionaires were leaving; it topped both Russia and China for the first time. Almost every day brings fresh news of someone leaving. Goldman Sachs’s vice-chairman Richard Gnodde left London for Milan earlier this year. Steel billionaire Lakshmi Mittal is reported to be leaving now that non-dom status has come to an end. The billionaire founder of the fintech unicorn Checkout has left for Monaco. The list goes on and on. From established billionaires, to tech entrepreneurs, to City power brokers, the UK is driving the wealthy away.

A wealth tax is only going to make that a lot worse. A 2% rate may sound modest, but year after year it starts to add up very quickly. Even more seriously, it eats into returns. If inflation is running at 3% a year, a normal rate for the UK, and you are also paying a 2% wealth tax, then you need to be generating 5%-plus on your assets just to maintain the wealth you have built up.

As any investment manager will tell you, that is not always possible.

So why wouldn’t you leave? Anyone with £10 million in assets – even if some of it is in the form of a house or a pension fund – by definition has plenty of options. They can move to one of the countries, such as Italy or Greece, now offering a flat-rate tax deal. They can head to tax-free Dubai, or one of the traditional tax-free islands of the Caribbean. There are plenty of flights, and the internet has made it easier to run a business remotely than ever before. Anyone who thinks they won’t leave is kidding themselves. Labour think tanks said that about the non-doms, and they left in droves. The same will be true of the wealth tax. The reality is that the Labour government is intent on driving out wealth and talent. They will take money, jobs and investment with them. Wealth taxes will make the UK poorer and poorer – until the electorate wakes up and realises they just don’t work.

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