The world’s richest 1% saw their wealth increase by a staggering £1 trillion in 2017. Britain’s richest 1% currently own more than twenty times as much wealth as the poorest 20% of the country. All of this is part of a trend of widening wealth inequality in the UK, with such inequality among the worst in the West. To top that, rising inequality is having negative effects on growth, social mobility, child well-being and quality of life. This injustice is more glaring than ever, yet our current government has offered next to nothing to remedy the situation.
To begin to tackle this increasingly Dickensian state of affairs, we need to intervene and ultimately to tax wealth at the top. With growth ever more skewed away from the majority, the case for checking accumulation of huge amounts of wealth is stronger than ever.
So it is heartening to see Richard Leonard, the new leader of the Scottish Labour Party setting out his stall and making the case for a wealth tax. This is no Venezuelan-style politics, the cluster of European nations who levy such a tax includes Norway, Switzerland, the Netherlands and France, most of which are renowned for their high quality of life.
Unfortunately as much of Europe has shifted toward a more market-focused, New Right approach to their economies, many countries have dropped this form of tax. Denmark, Sweden, Finland and Austria have all abandoned wealth taxes since 1995, a failure which may have played a part in the surprisingly large wealth gaps in these countries renowned for their lower levels of wage inequality.
Despite the perceptions from its critics that a wealth tax would be a messy, economically dangerous policy, a tax on the wealth of the very richest would challenge the idea that high inequality ought to be the norm and promote more productive use of the rich’s assets.
A wealth tax could be levied on the minority of very rich people whose net personal wealth, which does not include debts, exceeds £750,000. This is approximately the richest 3%-4% of the population (it’s particularly difficult to find detailed and definitive data on wealth, rather than income). This would not include money owed, including mortgages, nor would it include a home owned by a couple. It could also be tailored to exclude most or all business assets and contain a non-taxable allowance for a private pension.
If levied at a fairly modest 0.5% (with a potential higher rate of 0.75% or 1%), a wealth tax could have a huge impact in checking our rampant levels of wealth inequality. Eligibility could be on people’s declared assets, just as self-employed people pay their taxes on the basis of self-declaration. If someone opts to deliberately undervalue their property, the obvious consequence would be that they end up driving down the financial value of an asset. For those who genuinely could not afford, payments could easily be deferred until they can either afford to pay or ownership of their assets pass to someone else.
Writing for Conservative Home back in 2012, Professor Philip Booth argued that such a tax was unjustified because “over half of millionaires have only between £1 million and £2 million excluding their home and a huge number of millionaires will be people in the South East with a three bed semi-detached house”. These people seemly hardly hard-done by, especially when we are talking about millions of pounds of wealth besides their main residence.
Social democratic critics have instead typically opted to argue that a wealth tax will only raise relatively modest revenue, at least by the standards of state spending and that the admin costs of a new tax would make the idea borderline redundant. After all, France’s wealth tax only yields approximately €5 billion a year, goes the argument. But this ignores two things: first that the policy’s key objective is to rein in the gap between the rich and everyone else, second that no tax levied at less than 1% is likely to raise as much as National Insurance, Corporation Tax or VAT.
The final pragmatic argument against such a tax, or any extra charges on wealthy individuals is that it would provoke capital flight. Britain’s richest would sell their homes, move abroad and take as much of their assets with them as they can. Yet the wealthy have lower than average rates of migration and after Brexit there will likely be greater scope to regulate capital flight. The experience of corporation tax, which has been cut to promote private investment at the expense of billions a year for public services, is also worth keeping in mind. Carrying on this race to the bottom approach is toxic. It will widen inequality, will continue to harm public services and has yet to produce rising wages.
A wealth tax offers considerable benefits and in our current state of rampant economic inequality, has become more necessary. But that is not to say there are no alternatives. Inheritance tax (IHT) currently constitutes a form of one-off taxation on wealth, but the current Conservative government have used the tax’s relative unpopularity to push through changes to IHT, which by 2020 will lead to most of the entrenched upper-middle class being exempt, while the 1% will pay less. The key beneficiaries of recent growth will also be the beneficiaries of changes to IHT and the most likely to be handed large volumes of wealth unearned.
That’s why as Trump is pushing to scrap IHT’s American equivalent, there is a case to significantly raise IHT either as an alternative to, or better as a complement to a new wealth tax. With IHT too often avoided via trust funds and gifts, it’s also worth considering replacing it with its cousin, the capital transfer tax. This would be levied on large gifts of wealth in life or in death. Given inheritances are among the least meritocratic ways of becoming affluent, we need to question the logic of cutting rather than raising IHT. The lottery of birth is no way to run an equitable economy.
We too need to question the kind of economic relations which have got us here, including weak bargaining power for the majority of workers and the dominance of shareholders. A more equitable and inclusive model of growth would give workers a better chance to bargain for higher wages, see far more co-operatives and include meaningful employee participation in the running of large companies. All of this could be considered, and all of this could be implemented with or without a new levy on the richest, but a wealth tax could be a key plank of a strategy to rebalance the economy and improve distribution.
So why not go the whole hog and challenge the idea that Britain should be a world leader in economic inequality, rather than a leader in fairness, community and justice.