What are wealth taxes?
Taxes that make you pay a levy based on your assets – typically your net wealth – rather than your income from work. Such taxes used to be far more common globally than they are now. Sweden charged an annual levy on net assets for the best part of a century, with a top marginal rate that peaked at 4% in 1984; it was abolished in 2007. France had a wealth tax (riddled with loopholes) that was scrapped in 2017. As late as 1990, 12 OECD nations (advanced economies) still had wealth taxes, though they raised a paltry 1.5% of all tax revenues, on average. Today, only three countries still levy a tax on net wealth, namely Switzerland, Norway and Spain. Several European countries – France, Italy, Belgium and the Netherlands – do still levy wealth taxes on selected assets, but not on an individual’s overall wealth.
What are typical rates?
In Switzerland, which first introduced a net wealth tax in 1840, the level varies by canton between about 0.3% and 1% of a taxpayer’s net worth above a threshold typically in the low six figures. In Norway, where the tax dates back to 1892, the government currently charges 1% on individuals’ wealth exceeding a threshold of NKr1.76 million (£130,500). So if you lived in Norway and you had £250,000 in investments and £500,000 equity in your house, you’d pay an extra £6,190 a year in taxes. Above NKr20.7 million, the rate ticks up fractionally to 1.1%.
Why did wealth taxes fall out of favour?
In part, because wealth taxes are hard to introduce and administer, and are inevitably accompanied by a thriving cottage industry to help the truly wealthy avoid them. The only time a UK government was elected promising to introduce one was Labour in 1974. But over the course of his five years as chancellor, wrote a rueful Denis Healey in his memoirs: “I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.” The value of some assets is fairly easy to record, but for others – property equity, say – valuations are expensive, subjective and wide open to legal challenges. HMRC does not currently have an overview of the wealth of every citizen, and no way of doing so without a big investment of time and resources, and political will. All that makes wealth taxes a giant headache.
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Why else are wealth taxes unpopular?
Bluntly, because wealth taxes don’t work. Calls for wealth taxes are readily understandable: governments everywhere – not least in the UK – are facing vast fiscal challenges in an era of low-growth and ageing populations. Meanwhile, in recent decades, the very wealthy have got much wealthier. In 2010, the combined wealth of the top 100 people on The Sunday Times Rich List was £172 billion. Last year, it was £594 billion. At the same time, the rich have remained as canny as ever about mitigating their tax liabilities (ie, paying as little as possible). The problem, though – even for fans of big government who think it’s fine for the state to tuck into individuals’ private assets – is that wealth taxes end up raising less than hoped and do so much collateral damage to the economy that they are self-defeating in fiscal terms. If that was true in Healey’s day, it’s even more so now.
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Why’s that?
Because wealth, and the wealthy, are far more mobile. Dan Neidle, the Labour-supporting tax lawyer turned campaigner, recently published a 16,000-word essay “explaining why a wealth tax is a really stupid idea”, says Robert Colville in The Times. Executive summary: if you tax something, you get less of it, and wealth is no different. Neidle examines a model backed by campaigners and some Labour backbenchers, which posits that a 2% wealth tax on those with assets of more than £10 million would raise at least £24 billion a year. But he calculates that, under this system, 80% of the revenue would come from just 5,000 people and 15% from just 10. “So the entire thing could be scuppered if a dozen people got on a private jet.” Neidle favours, instead, a wholesale reform that scraps several existing taxes – including stamp duty, council tax and business rates – with a land value tax.
What are other arguments against wealth taxes?
Not only do wealth taxes not work, but they also distort the economy. Since debt is tax-deductible, wealth taxes tend to encourage the rich to avoid the tax by borrowing to invest in exempted asset classes (farmland or woodland, say), thus shrinking the tax base and distorting incentives. Alternatively, they might simply leave the country for a lower-tax jurisdiction, as did thousands of wealthy French citizens who set up in Belgium, or the thousands of the richest Norwegians who live abroad. Opponents argue that a wealth tax would only work if it were adopted globally – in practice, that means never. Another argument against wealth taxes is that rather than diminish billionaires’ political power, they would increase it by encouraging them to spend their money on nefarious political causes.
But we will get them anyway?
It’s unlikely, given that Rachel Reeves has ruled it out. But she may well be looking at more stealthy ways of taxing assets. Indeed, this summer has seen almost constant Treasury kite-flying in the press, with tales of various different property and inheritance taxes the government is said to be mulling over. There’s certainly significant wealth there, and it would be possible to tax it, says Neil Unmack on Breakingviews. Some £7 trillion of value is stored in British housing, making the full capital gains tax exemption for primary residences look tempting to target. Inheritance tax exemptions mean the average taxed estate pays 13%, not the 40% headline figure. The risk is that any such raids would add “affluent middle-class voters to the ranks of Reeves-haters". "Yet targeting them would make it politically easier for her to cut welfare spending. Especially if she does so with a degree of stealth.”
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