Taxing wealth is a start, but not nearly enough

By Adam Peggs

The United Kingdom is riven by wealth disparities, from wide regional inequalities to a substantial gap between the wealth of men and women and between BAME and white households. These injustices have further consequences down the line, contributing to negative effects on health, poor child well-being, quality of life and greater levels of precarity.

One notable aspect of Lisa Nandy’s campaign for the Labour leadership has been an emphasis on taxing income from wealth, a positive area of continuity with the policies of Labour’s 2019 manifesto. This is something Nandy has talked about in various debates and media appearances, and more recently in the Guardian last week. She has argued that taxing income from wealth is necessary to fund public services in the future, in line with much existing literature on the subject. With accumulated wealth becoming larger and larger compared to the size of the economy, greater taxation of wealth seems obvious.

Nandy correctly argues that that ‘a fair system must tackle extreme wealth inequality’ and that under her leadership the party would ‘put forward a bold programme of wealth redistribution… that does more to tackle the structural inequalities we face’. She also states ‘we can’t simply continue to squeeze income at the top’, although that is arguably what she is proposing to do. Nonetheless the proposals are welcome, in part a symptom of the leftward shift in the party and are couched in a denunciation of wealth inequality levels. If anything, they highlight the case for Long-Bailey doubling down on her left-wing politics.

On the repellent levels of wealth inequality in the United Kingdom it should be enough to point out the following. The wealthiest 1% in Britain own around a quarter of all wealth, the wealthiest 10% own over 50%, and the poorest half own just 10%. Wealth in the United Kingdom is distributed around twice as unequally as incomes are. And the gap between the average wealth of men and women is even larger than Britain’s gender pay gap.

A slow but steady decline in the wealthiest 10%’s share was effectively halted in the Thatcher-era when this trend essentially began to go into reverse. Wealth is also playing a larger role in economic life, with inheritance increasingly determining the degree of someone’s affluence both in the UK and across much of the world.

The last Labour manifesto was right to propose aligning capital gains tax and dividends tax rates with income tax, just like what Nandy is now proposing. It would end what is in effect a tax break for those deriving income from capital ownership. And it would reduce wealth inequalities whilst raising a particularly substantial amount of revenue for public services.

But does this necessarily go far enough? My answer would be no. Taxes on income and taxes in income derived from wealth were last aligned under Margaret Thatcher, and while the situation has clearly deteriorated now, going back to those tax levels is inadequate. That might raise the prospect of a dedicated annual wealth tax, rather than just greater taxation of income derived from wealth.

Across the channel in France, the country long had an annual net wealth wealth tax, the ISF (Solidarity Tax on Wealth). While France’s Solidarity Tax was not sufficiently effective, Macron’s move to turn the tax into a real estate tax has effectively gutted it, with the FT noting the reform would benefit the ‘super-rich will benefit most’.

Introducing a wealth tax would not be an act of pure radicalism. Mainstream and social democratic economists such as Emmanuel Saez, Gabriel Zucman and Thomas Piketty have long made the case for an annual net wealth tax. So, should the Labour Left not be demanding the same? Or demanding something bolder? The idea is already being advocated by Richard Leonard up in Scotland, and both Bernie Sanders and Elizabeth Warren.

Importantly such a tax would offer a challenge to the notion that somebody has the right to an unlimited accumulation of wealth. As Miranda Perry Fleischer suggests, such levels of wealth clearly allow individuals to exercise ‘power over others’. And more than 3 in 4 Labour members favour the policy idea, along with it seems the majority of voters too.

The policy could have more substantial implications than just being an equitable tax reform. It could quite substantially alter the balance of power in society in favour of working people and the poor, doing so by proactively redistributing wealth (and capital) from those at the very top, a wealth tax would challenge their preeminent economic power.

Wealth taxes have had their fair share of criticism. Existing annual wealth taxes have been described as suffering from high rates of avoidance and relatively low rates of revenue generation. And many have consequently argued that greater taxation of land, property or inheritance can generate a comparable (or larger) reduction in inequality. The scrapping of many countries’ wealth taxes, a consequence of a globalised, liberalised world economy, has in some cases been heralded as proof that wealth taxes inevitably fail. Yet as Zucman and Saez show, taxing wealth effectively is a policy choice and introducing such taxes under a framework intended to minimise avoidance can allow a wealth tax to achieve its purpose of cutting levels of wealth inequality. Unlike taxing real estate they do not encourage hoarding of other kinds of wealth, and unlike taxing investment income (which is far from undesirable) a wealth tax would tax ‘idle’ accumulations of wealth.

This is an idea that the Labour Party has considered before. In the 1960s a clamour for increased wealth taxation led to the imposition of capital gains tax under Harold Wilson rather than a dedicated net wealth tax, since the former had been seen to be of greater priority. And when Labour was returned to power in February 1974 promising a fundamental and irreversible shift the new government proceeded to draw up plans for such a tax.

Howard Glennerster’s examination of the ‘74 – ‘79 Labour government’s plans to impose an annual wealth tax shows that the Treasury did not expect the proposal to be easy to implement or to raise much tax revenue, but it also tells us some other things. Firstly, the policy was understood by officials to be feasible from the get go – with Treasury officials recommending that the government ‘move quickly’ to implement it. Secondly, that the reasons for the policy being publicly abandoned in autumn 1976 were motivated by fear of a major negative reaction from the markets, rooted in Britain’s precarious economic situation at that moment in time. This was circumstantial. Finally, it tells us that the Treasury did expect the tax to meet its own stated objectives – to markedly reduce wealth inequalities. There may well be equally good (or perhaps even better) alternatives. But nonetheless the idea continues to be worthy of serious consideration.