Why a wealth tax is a terrible idea

For Britain’s ‘progressive’, leftish elites, the idea of a wealth tax has become a panacea for all our social and economic woes. Levied on the total value of an individual’s asset, a prospective wealth tax could be aimed at the ultra-rich minority, they say. It would supposedly generate enormous amounts of tax revenue, correct the British state’s finances and help create a fairer society.

Chief among its proponents is former City trader turned leftist posterboy Gary Stevenson, who has put taxing the rich at the centre of his crusade for a more equal society. Stevenson has been joined by many on the left of the governing Labour Party, including former leader Neil Kinnock. And now, after he refused to rule out a wealth tax during a recent Prime Minister’s Questions, it seems prime minister Keir Starmer himself is coming round to the idea.

Among the bourgeois left, it is a very voguish idea. It is also a very bad idea. Not only does it illustrate the intellectual shallowness of our political and cultural elites; it also shows the barriers standing in the way of economic growth.

The suggestion that taxing the super-rich can fill the UK government’s fiscal hole is wishful thinking. It allows the political class to continue to avoid the tough decisions required to tackle Britain’s deep-seated economic malaise. As far as our elites are concerned, there is always some other group who can pay for their privileges. Who can sustain the failing status quo.

Many criticise the sense of entitlement of so-called welfare scroungers. But there are few things more damaging to society than the sense of entitlement of a craven elite. They kid themselves that their own wealth and position can continue without ever having to face up to the very real problems this country now faces.

It’s this sense of entitlement, this conviction that the status quo must be maintained, that underpins our elites’ support for a wealth tax. Members of this detached, credentialed class think they have found another way to preserve the world as it is without having to sacrifice anything themselves. Indeed, Stevenson himself thinks that if the super-rich are effectively forced to sell some of their assets to the rest of society, taxes for everyone else can fall.

Yet the reality of the dire state of Britain’s public finances cannot be denied forever. As it stands, the UK is spending far more simply on servicing its existing debts than it does on defence or on educating schoolchildren. Indeed, debt-interest payments for the next fiscal year are estimated to amount to over £111 billion.

Our elites know that the government can’t continue to borrow extravagantly to fund spending. They also know that taxation levels are reaching record levels – tax revenue as a share of national income will this year reach the highest level since the immediate aftermath of the Second World War. Putting up general taxes is therefore getting harder and harder. The usual tax-raising routes would also probably be onerous for the very people supporting a wealth tax, who are already on above-average incomes and paying the higher rates of tax.

Indeed, the top five per cent of earners in the UK pay almost half of all income tax, up from a third in 2000. The top one per cent contribute over a quarter of income-tax revenue, up from one-fifth since 2000. Proponents of a wealth tax talk of the UK being dominated by an ‘ideology that is hostile to progressive tax reform’. Yet it already has one of the more progressive income-tax systems, with the tax rate increasing sharply as the taxable amount increases.

In fact, over the past few decades, more and more people have fallen into higher-rate tax bands. In the early 1990s, less than one in 20 adults (1.6 million) – the ‘very rich’ as they used to be called – paid higher rate taxes. By 2019 it had risen to about one in 12 (4.6 million). By 2028 it is expected that one in every eight adults will be paying a higher rate of income tax.

This is not a good sign. The growing numbers of people paying high rates of income tax are not better off than they were before the 2008 financial crash. Rather, they find themselves in higher tax bands because of so-called fiscal drag. This is when nominal tax thresholds are frozen over long periods, leading to more and more people falling into a higher rate of tax as incomes rise with inflation. This is a deceitful policy that allows the government to increase people’s taxable income, without actually raising tax rates.

As The Sunday Times’s data editor Tom Calver explains, these ‘stealth taxes’ mean that by 2028, about one-third of the full-time working population could be paying the higher rates of income tax. These higher rates are supposedly targeted at the richest – at those with the ‘broadest shoulders’, as Starmer calls them. But they now cover most full-time workers on above-average earnings, including a third of nurses and four out of 10 secondary-school teachers.

Thanks to the growing number of people paying the higher rate of income tax, our ruling elites are now shifting their sights to what they perceive is an easier target. Not the richest ‘one per cent’ of Occupy Movement fame, but the 0.04 per cent – the ultra-rich. That’s the target group of about 20,000 people that advocates of a wealth tax now have in mind.

Some ‘fair tax’ campaigners say these very-high-net-worth individuals ‘would be able to pay [a wealth tax] without having to sell property or experiencing a significant change in their financial situation’. The implication is that these people are so rich that they would barely notice a significant tax on their assets.

That is inconsistent with the tax campaigners’ rhetoric about the need to ‘squeeze’ the wealthy in order to make society fairer. On the one hand, proponents want to ensure the wealthy remain rich in order to be able to continue bankrolling the rest of society and fix public services. On the other hand, they also want to make the wealthy less rich in pursuit of ‘economic justice’. These objectives are fundamentally at odds with one another.

There are further serious problems with a wealth tax. First, if nothing else changed, the plan to impose a two per cent tax on wealth above £10million, promoted by the tax’s proponents, would on paper raise about £24 billion a year.

That may sound like a big number, but it’s actually less than one per cent of Britain’s annual GDP. Wealth taxers seem to think that the funds raised will transform a society with an economy one hundred times bigger. Yet £24 billion would struggle to meet just this autumn’s forecast budget shortfall, which the Institute for Fiscal Studies has estimated could be between £20 billion and £40 billion.

That figure could be even higher if chancellor Rachel Reeves adopts the proposal from Charlie Bean, the former Bank of England deputy governor. Like many observers, he says that Reeves should give the government far more fiscal headroom – £30 billion instead of £10 billion – to cope with any unforeseen financial challenges. Otherwise she could be ‘neurotically’ fine-tuning public spending or tax plans every half-year or so.

So to meet this autumn’s anticipated budgetary shortfall and potentially increase fiscal headroom would cost in the region of £50 billion. That’s more than double the best-case return from a proposed two per cent wealth tax. There would certainly be nothing left over to pay for Stevenson’s tax cuts for everyone else.

A second serious problem with the wealth-tax plan is that the ‘relatively small number of people’ advocates are targeting are more than capable of moving their tax liabilities elsewhere. There are several pleasant countries they could move themselves and their tax affairs to within Europe, some with close-to-zero wealth taxes. Italy, for instance, operates a 0.2 per cent rate on most overseas financial assets.

The ultra-rich may well be able to ‘afford’ a two per cent asset tax. But that doesn’t mean they would accept that rate annually in perpetuity. The rich can also afford smart tax advisers to explain to them how to reduce their tax bills.

So as some of those being targeted for a wealth tax migrate abroad, HMRC’s potential tax take will clearly fall. It’s not as if the wealthy aren’t prepared to move. Even without a specific UK wealth tax, residency advisers forecast a net reduction of 16,500 millionaires from Britain this year, up from 10,800 in 2024. The increase in millionaires leaving the UK was partly motivated by the other tax increases on the rich in last year’s budget.

Proponents of a wealth tax may present it as some sort of cure-all. But it won’t even provide a fix for Britain’s public finances. Those claiming it will transform the UK are living in cloud cuckoo land.

In fact, even those pushing for a wealth tax sometimes admit that it won’t actually solve the British state’s far-reaching financial problems. Such an admission is telling – it betrays the real purpose of a wealth tax. Kinnock let the cat out of the bag when he explained the non-financial reasons for imposing the tax. He said that it would show British voters that Labour is ‘the government of equity’. A wealth tax is important, he continued, as a ‘gesture or a substantial gesture in the direction of equity and fairness’.

This is the real reason why the wealth tax has shot up the political agenda over the past few months. It is the economic equivalent of a virtue-signal. Introducing one may barely buy Starmer and Reeves even a few months of financial respite, before the next budgetary squeeze. But its main impact would be symbolic. It would supposedly send a message to the public that, despite all appearances, the government is really on their side. Labour and other members of our political and cultural elites may well be rich, but they’re not like them – namely, the filthy ultra-rich. And just to prove their dislike of this moneyed minority, they will mete out some punishing taxation.

The wealth tax is a truly desperate, dispiriting proposal. People across the UK are crying out for genuine political and economic change. They want cheaper energy, secure borders, economic growth and better public services and infrastructure. And yet the best our liberal-leftish establishment can come up with is a ‘gesture’ with little real substance.

The public is increasingly tired of the political and economic status quo. They’re fed up with wasteful public spending and the excessive taxation and exorbitant borrowing that it takes to sustain it. And they’re angry at our ruling elites’ constant determination to evade their responsibilities.

This government, like most of its predecessors from the 1970s onwards, is operating well beyond its means. There is no spend, tax and borrow merry-go-round that can fix the public finances. The only lasting solution lies not in a punitive, symbolic wealth tax, but in durable productivity growth. Only this will generate the economic resources capable of rejuvenating the UK.

Healthy economic growth would give the state the means and scope to restructure its operations. It would allow it to establish a slimmed-down welfare system that incentivises people to work; create a simpler tax-code that doesn’t disincentivise businesses from investing in new technologies; and fund a long-term plan for building a transport, water and energy infrastructure fit for the 21st century.

A government that was genuinely progressive – in the sense of being freedom-loving, forward-thinking and accountable to the public – would be honest with the electorate. It would explain that there is no easy, painless, stable path out of today’s economic and social malaise. It would accept that until the disruptive process of creative destruction generates a flourishing economy, it would be feckless to create even bigger problems through additional taxing, borrowing and spending.

It would acknowledge that public spending has to be reduced. This includes making significant inroads into the runaway welfare bill that the government has so far chickened out of moderating even slightly – evidenced by the gutting of its flagship welfare bill earlier this summer.

We don’t need a wealth tax to partially prop up the failing welfare system. We need a new welfare system entirely. The effort to build one could start with reducing the £140 billion in non-pensioner benefits received by almost one in every four working-age people. Indeed, one in three Universal Credit recipients – 2.7million people – are in employment. This is a public subsidy for low-paying employers, rather than a valuable safety net for times of difficulty. It is both crippling the state and entrapping millions of recipients.

All this change will only be feasible when we ditch the dependency cultures that are holding back people and businesses. And this means killing the sense of entitlement of our elites. The political and economic system on which they’ve come to depend, providing them with wealth and status, is broken.

The idea of a wealth tax is a barrier to the economic transformation we so desperately need.

Phil Mullan’s Beyond Confrontation: Globalists, Nationalists and Their Discontents is published by Emerald Publishing. Order it from Amazon (UK)