A wealth tax is the only fair way to pay for pandemic spending
As Britain emerges from the pandemic and finds itself now dealing with the sizeable debt brought about by pandemic spending, Lucy Bushill-Matthews argues that a wealth tax, whilst seemingly controversial, is nothing new, and should be seriously considered.
It is almost inevitable that there will be increased taxes post-COVID. For too long, Britain has relied on incomplete – and sometimes unfair – ways to raise taxes. Income tax, National Insurance contributions or VAT can all unfairly place the heaviest burden on the poorest in society.
In the wake of a 'once in a generation' experiment in public spending, we should be just as daring in our taxation. We can create a fairer tax system, and get money pumping through the economy again, with a wealth tax. The idea behind a wealth tax is very simple; you tax people based on their total wealth, not just on their income. Wealth taxes are popular after crises, and post-Covid should be no different. Following the First and Second World Wars, 'capital levies' were successfully implemented in Japan, France and Germany.
But wealth taxes are not a 20th century invention. For much of human history and in many civilisations, they were the norm not the exception. In ancient Greece, a wealth tax known as the eisphora was levied on the richest Athenians. Within Islam, the concept of Zakat is an essential part of the religion, levying 2.5 per cent on assets. Key to their success was the consent of those it was levied upon.
Wealth taxes are the old normal, and one we should return to. The current reliance on income tax creates real unfairness. Two people earning £30,000 a year should not pay the same tax if one is a trust fund kid and the other has zero savings. If you wanted to design a tax system that extracts capital fairly from those who can afford it, our current system is certainly not the one you'd come up with.
Many politicians have flirted with this, even before the pandemic: prominent democrats like Bernie Sanders and Elizabeth Warren had been recommending a wealth tax years ago. After Covid, it is clear that something must change. In the tax year between 2020 and 2021, the British government collected approximately £793 billion, and spent £1.094 trillion; a deficit of £303 billion. This is hardly unique: The US is running on a deficit of $3.1 trillion, the greatest deficit since 1945.
One model is Senator Warren's wealth tax, where she proposed a 2 per cent annual tax on wealth over $50 million, rising to 3 per cent for wealth over $1 billion. In the US, only 0.05 per cent of people would have to pay this tax, however it could have raised approximately $200 billion dollars. This would be enough to cut child poverty by 60 per cent, or pay for Bernie Sanders free college tuition plan three times over.
There is no question that our taxes will go up. The only question is which taxes, and for whom. The Wealth Tax Commission, established in the UK in the spring of 2020 provides a lower threshold recommendation that taxing people with a net worth of over £1 million at 1 per cent could raise £260 billion over five years. Through wealth taxes, relatively small contributions by an infinitesimally small number of people can have transformative effects on entire societies for generations to come.
But perhaps the biggest benefit of wealth taxes – and the one that can create cross-party support – is that they help stimulate economic growth. Wealth taxes turn liquid capital into a hot potato, you're incentivised to move it on, lubricating the veins of the economy. Less capital would be left to collect dust in savings accounts and more would flow to the businesses and communities that need it.
Another differentiator about wealth taxes is that they are simple and logical. Emma Chamberlain, Barrister at the Pump Court Tax Chambers, and visiting professor at LSE said
"My experience is that [rich people] are happy to pay, as long as the tax is simple to operate… The trouble is that our current way of taxing the wealthy is far too complicated leading to avoidance and resentment."
We may find it's not such an unpopular tax, even amongst the rich. In July 2020, a group of 83 of the world's wealthiest people formed a group called Millionaires for Humanity, which urged governments to tax them in response to the pandemic. New conditions require new thinking, and COVID-19 has torn up the rule book. The pandemic has triggered the biggest public spending experiment of our generation. It's time to experiment with the taxation that will fill that hole in our finances. We may find that a clear, logical and transparent wealth tax could prove to be both effective and popular, even amongst those who have to pay it.
