Is it time for a global wealth tax?

Labour is planning to implement wealth taxes if it wins the election. Will it pave the way for a global crackdown on the rich?

Targeted piggy bank
(Image credit: Getty Images)

If Labour wins the election, it plans to toughen the rules on non-doms further, and there’s widespread speculation about higher capital-gains tax. In March, chancellor Jeremy Hunt pinched one of Labour’s long-standing flagship policies by announcing the effective abolition of the UK’s “non-dom” regime. Under the rules, which date back to the 19th century, foreign citizens living in the UK, but whose permanent home (“domicile”) is overseas, can avoid paying UK tax on their foreign income and gains for up to 15 years provided they do not bring income or capital gains back into the country. Hunt’s March budget slashed the amount of time people can benefit from that status from 15 years to four, effective from April 2025.

What will Labour do on tax?

If elected, Labour says it will be even tougher, reversing the Tories’ plan to let non-doms who will lose benefits from next April permanently to shield from inheritance tax any foreign assets held in an offshore trust. Given the UK’s unusually high inheritance tax rate of 40%, this could be the clincher that sends the super-rich heading for friendlier climes, according to wealth managers. Labour has ruled out rises in the rates of income tax, national insurance and VAT (although sticking with the Tory policy of raising tens of billions by freezing thresholds). But in order to avoid massive spending cuts, or higher borrowing, it will need to put up taxes – and the very wealthy are likely to be in its sights.

Will there be a wealth tax?

The only party committed to a wealth tax (that is, a tax on rich people’s assets, rather than their income or spending) is the Greens. They propose a 1% annual levy on wealth above £10 million, and 2% on assets above £1 billion. Labour has ruled out a wealth tax (it didn’t even pledge one under Jeremy Corbyn), although not rises in capital gains or council taxes. The main argument in favour is that the rich have got much richer, says David Smith in The Sunday Times. In 2010, the combined wealth of the top 100 people in that paper’s Rich List was £172 billion. This year it was £594 billion.

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Do wealth taxes work?

Wealth taxes are hard to implement, damage entrepreneurship and you don’t end up raising much money. In 1990, 12 of the 38 countries in the OECD group of wealthy nations had a wealth tax, but they raised an average of only 1.5% of tax revenues. Now there are just three: Spain, Switzerland and Norway. Many countries abandoned wealth taxes “because they were perceived to be unpopular, economically damaging, administratively cumbersome and prone to avoidance and evasion, while not actually delivering much revenue," says Stuart Adam of the Institute for Fiscal Studies. If Labour wants to squeeze more cash out of the 1% – people earning more than about £180,000 a year, most of whom are employees or the self-employed – or indeed the 0.1% – the business owners and investors who earn more than around £700,000 – it will need to find other ways.

How the super rich avoid tax

If you’re a salaried employee, it’s hard to do and you’ll get into trouble. But if your income is in the form of capital gains or dividends, it’s much easier. For example, partners in private equity firms, and certain other investment managers, are typically taxed on the capital gain on so-called “carried interest”. In effect, it means they pay only 28% instead of the 45% additional rate of income tax. Labour has pledged to scrap that loophole. And there’s another odd law that they really ought to fix, argues Dan Neidle, the ex-City law firm partner who now campaigns for simpler and fairer taxes. People who have built up a business in the UK who take dividends, sell the business and move to Monaco just days later, are not liable for tax on their gains. The UK, unlike the US for example, imposes no exit tax on those heading off to tax havens. Such a tax was extremely hard to impose under EU law, but is a genuine Brexit opportunity. Labour should make the most of it.

What should Labour do?

Equalise capital gains and income taxes, argues Neidle. However, it would be unfair to tax gains that are merely the function of prices rising over time, and so there needs to be an “indexation allowance” to adjust for inflation. In other words, we need to return to exactly the tax regime introduced in the 1980s by that socialist firebrand Nigel Lawson, whose eminently sensible reforms – equalising CGT with income tax rates – were later reversed and made less fair by Gordon Brown. Another route to realising more taxes from the very rich would be to tax property more heavily. Council tax, for example, is capped at relatively low flat rates, rather than paid in proportion to properties’ values.

What about a global wealth tax?

US president Joe Biden is promising to find $500 billion over 10 years for social programmes by charging a 25% tax on the unrealised capital gains of the 10,000 Americans who are worth $100 million or more. That would be so “nightmarishly complicated” that it’s highly unlikely to work, even if it happens, says The Economist. But a global wealth tax on individuals’ existing assets could be an idea whose time is coming, says Martin Sandbu in the Financial Times. The global corporate tax reform known as Pillar 2 – instituting global minimum tax levels on large multinationals – is something of a “miracle”. But if one miracle, why not two?

An international scheme to tax the wealth of the world’s 3,000 billionaires – a 2% annual levy – would net up to $250 billion (£197 billion) a year in extra revenue, according to a report by the French economist Gabriel Zucman, which was commissioned by Brazil as current holders of the G20 presidency. And this is only from billionaires. Once in place, and secured by more onerous and universal exit taxes, it is “hard to see why fiscally squeezed politicians would decide to spare those with merely hundreds, or even scores of millions,” says Sandbu. “A global wealth tax could arrive sooner than you think.”

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Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.