What happened to a Wealth Tax?
There are few issues which animate both the super-rich and the political Left more than the notion of a wealth tax. The idea has been championed by the French Left: a 2% levy would be levied on the roughly 0.01% of household assets worth over 100m Euros. Britain’s Green Party has also adopted it as a signature policy. There is a global version of the same idea promoted by Brazil’s President Lula.
For populist politicians, a wealth tax has a double appeal: it can, in theory, promote greater equality and ‘fairness’, and, also in theory, raise a lot of money for public services. Theory and practice have however diverged.
A wealth tax is unlikely to be in the coming UK budget despite advocacy by Neil Kinnock, leading trades unions and others. Indeed, it is being abandoned by governments including those with a social democratic, redistributive agenda: Austria, Denmark, Finland, France, Germany, Iceland, Sweden. They found that the tax was difficult to operate, easily avoided and raised disappointing amounts. Only Norway, Spain and Swiss cantons retain a comprehensive wealth tax.
Political demands for wealth taxation are energised by extreme and growing inequalities at global and national level. The world’s wealthiest man is Elon Musk, and his personal fortune appears to be around $500 billion. He has recently negotiated a pay settlement which could earn a further $1000 billion (a trillion) over the next decade: equivalent to the combined salaries of all primary school teachers in the USA.
Britain’s billionaires are almost down-at-the heel by comparison. The Forbes list identifies 55, the 10th largest number in the world, and the richest man -Michael Platt of Bluecrest Capital Management- is worth $18 billion, a little more than better-known names like Jim Ratcliffe, James Dyson and Denise Coates. By way of comparison, the USA has over 900 billionaires, China (under the Communist Party), almost 600 and India over 200. Britain’s wealth inequality is comparable to Denmark, Canada and France and far less than the USA or even Sweden.
That said, the share of the top 0.1% accounts for almost 10% of our net wealth, a share that has doubled since the mid-1980’s, whilst the 50 richest families have net assets worth more than those of half the population, many of whom have no wealth and are indebted.
So what? Defenders of wealth inequality will argue that personal wealth is the consequence of wealth creation from which we all benefit as a society. How else are innovators to be persuaded to take all the risks involved in founding and then developing a business?
Those are genuine concerns. We do need wealth creators. But that is not an excuse for extreme inequalities of wealth. First, the very wealthy can distort the democratic process through political donations to protect and amplify their wealth as we can see with the brazen greed of today’s American oligarchs. Second, much personal wealth is not earned through risk taking and innovation but through inheritance, passive investment, or property inflation. And extreme inequalities, with rewards unrelated to risk, destroy any sense of a wider social contract.
Taxation should correct some of these imbalances. There are already partial wealth taxes – inheritance tax, capital gains tax mainly- and progressive taxes on salaried and investment income. But the very wealthy have access to advice and techniques to minimise liabilities: exploiting loopholes and international arbitrage opportunities. Dubai beckons. The very wealthy almost certainly pay lower rates of tax than many people of modest means.
Would a comprehensive wealth tax help? With difficulty. Some assets like jewellery are difficult to value and easy to hide. Stocks and shares fluctuate in value daily in public markets and much wealth is in private, unlisted, companies. Tax authorities do not have the necessary data and skills to value complex portfolios – though the Register of Beneficial Ownership which I introduced as Secretary of State makes data on the wealthy more transparent.
For the very rich, such a tax is a hassle rather than a burden -liquidating assets to pay the taxman annually – and many would easily switch their tax domicile. The Swiss wealth tax, levied by the cantons, is the only one which appears to work – raising 5% of Swiss tax revenue. It works because the rates are very low: well under 1%. The hassle of avoidance exceeds the hassle of paying it.
An alternative approach is to focus on assets which can’t migrate overseas or be easily hidden, and which play no role in promoting innovation and economic growth. High value property is the most obvious candidate. That is the logic behind the so-called ‘mansion tax’, first advocated by the Lib Dems either in the form of an annual levy for properties above a threshold of, say, £1.5 million or by creating additional tax bands in the council tax system.
Rachel Reeves’ budget will contain a version of this idea. There will be howls of protest from party donors and some voters. Protests will centre on the asset-rich and income-poor though there is a simple solution in the form of equity release products which convert capital to income. And those who under-occupy family sized houses (like me) will have an incentive to down-size, freeing up property for families. What is not to like?
Sir Vince Cable is a former Secretary of State for Business, and led the Liberal Democrats from 2017-19.
