The Wealth Tax: silver bullet or left-wing fantasy?

The idea of a tax on individual wealth has been around for decades, and every so often it creeps into the mainstream. However, as the energy crisis has highlighted the excess profits of energy companies and the disastrous “Kami-Kwasi” budget has left the UK government scrambling to balance the books, the wealth tax has gained real momentum. I focus on two things: (1) how much support does a wealth tax have politically and publicly in the UK? And (2) could a wealth tax be a silver bullet for the fiscal “black hole”? 

Firstly, before answering these questions, it’s useful to know exactly what people mean by a wealth tax. A wealth tax is a broad base tax on all forms of financial wealth. Its proponents argue it could be levied as a one-off tax or at regular intervals, and apply to either individuals or household units. Policy makers can decide on the wealth thresholds to use. For example, supporters argue a wealth tax could apply to wealth greater than £500,000, or perhaps £1m, or even £10m. Some also argue that primary homes should be exempt. For instance, if someone owned (without any mortgages) two properties worth £1m, but lived in one of them, then a 1% wealth tax would leave that individual liable to pay £10,000 on the £1m of wealth held in a second-home (assuming that they don’t own any bonds, stocks, or other financial assets). The critical point is that a true wealth tax applies to all wealth, so for a good introduction to what is wealth, see this video from former city trader Gary Stevenson, who has recently been putting out some excellent stuff on the UK economy. 

Turning back to the question of political feasibility, Rishi Sunak was asked at PMQs (26th Oct) whether he would introduce a tax on wealth. As he has done on many occasions when asked about the topic, he dismissed the question and gave a generic answer about fairness.  Also, although the question came from a Labour MP, the top of both major parties are in agreement on this issue; Kier Starmer has rejected the idea of introducing a wealth tax if he came to power. For now, it seems senior politicians view a wealth tax as a non-starter. 

Disclaimer, I wouldn’t usually share anything from GB News but surprisingly this was the best tweet I could find about the PMQ question on wealth taxes.

But what about the public – what do they think of wealth taxes? After all, on some level, politicians should reflect the average view of the British population. The Wealth Tax Commission conducted the first UK empirical study on public support for wealth taxes in 2020. They found that 75% of respondents supported a new tax on wealth, with 41% putting it as their most preferred option. Surprisingly, they also found that people on incomes below £20,000 were less supportive of wealth taxes – perhaps pointing to a lack of understanding on who would actually have to pay. Nonetheless, the report concludes that wealth taxes do have broad based support in the UK.  However, YouGov polls appear to suggest that many view wealth taxes as a less fair way of taxing: 59% of people think income taxes are fairer than wealth taxes.  The wording of this question isn’t great, since wealth taxes can work alongside income taxes to deliver a fairer system overall – rather than being a substitute for each other. Yet, this does imply that people feel somewhat more attached to the wealth they have accumulated than the income they have earned. 

Source: If the government decides to raise taxes in order to fund public services, which of the following measures, if any, would you most strongly support? Evidence Paper 2, Wealth Tax Commission 2020, p.11

So, if the public in general are not opposed to wealth taxes, and they agree that the gap between the rich and poor is too wide, what accounts for the lack of political will to push wealth taxes? One explanation is the ideology of ownership at the top of British politics, and generally within the establishment as a whole. In a previous blog, I wrote about how Thomas Picketty, an academic economist who has proposed a global wealth tax, describes the current ideology of our time as “neo-proprietarian” – a belief that private property is sacrosanct. This ideology justifies inequality on the basis that wealth has been accumulated by individuals due to their own merits, thus ownership of that wealth shouldn’t be taxed. 

A secondary factor at play could be the intergenerational transfer of wealth implicit in a wealth tax. It’s a statistical fact, and also obvious in everyday life, that most wealth is held by older generations usually over the age of 50. Although not surprising, since older people have been here longer, and therefore have had more time to accumulate assets, it is not so obvious that this is fair. For instance, older generations were able to get on the housing ladder much easier, they also had access to free university education, as well as lived during a time of exceptional economic growth. Yet, since older generations are more represented in politics and more likely to vote this could greatly reduce the probability of any political will to impose taxes on wealth. 

How much would a wealth tax raise: silver bullet or not?

On the latter question of how effective a wealth tax could be, The Wealth Tax Commission assesses that a one-off wealth tax levied on wealth above £500,000 at a rate of 5% would raise £262bn. To put that in perspective it would fund the NHS for almost 2 years. If an annual wealth tax could raise that kind of revenue on a regular basis, the gains are potentially huge. However, the commission concludes that the administrative costs of an annual wealth tax would be too onerous, therefore they support a one-off wealth tax over a regular one. 

Nonetheless, despite the large revenue potential of even a one-off wealth tax, the Commission recommends that reforming the taxes already in place is a  1st best option over the introduction of any new ones. One potential reform is on share buybacks. Share buybacks are when a public company uses profits to buyback its own shares. This entails a significant cash transfer to wealthy shareholders who sell the shares back to the company. Recently, instead of investing profits in say green technology or new products, many companies have simply been shovelling cash back to their owners. Therefore, a tax on this behaviour is an easy way to target this wealth. 

The Biden administration has taken action on this already. They have just passed an exercise tax on share buyback schemes, which will come into effect at the beginning of 2023. The IPPR, a think-tank in the UK, has also recently published analysis which estimates a similar scheme in the UK could raise £225m a year, with a higher emergency rate on specific energy companies raising £4.8bn. Alongside a buyback tax, simply raising the tax on dividends to the same level as income taxes could raise £6bn a year. Both of these measures would go a long way to reducing wealth inequality in the UK. 

Overall, it looks like a new wealth tax is highly unlikely in the short to medium term, not least because it would require a dramatic change in the ideological principles of private property and wealth. However, the government has options aplenty to make meaningful changes to the current system. Following the US on a buyback tax is an obvious example. Yet, the UK government seems unwilling to implement these changes and the mainstream media doesn’t even present them as options. This is despite there being support from multi-millionaires to make the system fairer, and the evidence presented here on public support for re-distribution. Hopefully, a positive precedent develops from the current (ineffective) windfall taxes on energy companies, but the appetite for bigger leaps forward is clearly lacking. 

 

What has happened to aid? Brexit and the lie of “Global Britain”

The twin shocks of the Covid-19 pandemic and the subsequent global inflationary spiral have left the global economy on the precipice of recession. While the United States, the UK and the EU focus on the domestic implications of these global headwinds, developing countries in Africa, South-East Asia, Central Asia and Central America are faced with dire economic problems and an urgent need for development assistance. 

The latest UN Development Report found that its human development index (HDI) has fallen for two consecutive years for the first time ever. The risk to developing countries of another lost decade is palpable. 


In times past, foreign aid has supplied funds to support developing countries in situations of need, as well as provide investment to help foster the opportunities for growth. For instance, aid has helped fund education, health and infrastructure programs. As well as tempered the impact of conflict and the spread of infectious diseases, such as HIV and malaria. Moreover, aid was not only a financial phenomenon, primarily the concern of opaque funding institutions and central governments, but also a cultural phenomenon, supported by voters on both sides of the political spectrum. Most people can recall the Live 8 concerts of the mid-2000s. Hundreds of artists performed in those concerts to a global audience of of millions.  Aid was big, it was relevant, and it mattered. 

This momentum culminated in several pledges to increase global aid donations. The European Union committed to donating 0.7% of GNI every year by 2015. President Bush announced that the United States will double assistance to Africa between 2004 and 2010. And, under the Blair and Brown Labour governments, the former Department for International Development (DFID) grew into one of the worlds leading aid institutions. Of course, many pledges were not kept and criticisms of non-action and false promises were and have been made. However,  clearly aid was high on the political agenda, and more importantly it was making a tangible difference. 

But the 2000s are ancient history. Where are we right now? I focus on the UK here as I know more about the country.

The last decade was an extremely difficult period for UK aid, which ended in the dissolution of DFID, cuts to the aid budget, and open remarks by leading politicians criticising the very purpose of aid. In fact, today, aid barely gets a mention in public discourse. This point was brought up in the excellent “The Rest is Politics” podcast with Alistair Campbell and Rory Stewart (Oct 18th).  They mention the UK is committing a fraction of what it formally would have done and many countries are the verge of crisis. The bottom line is nobody in Westminster is talking about Africa right now and the Foreign, Commonwealth and Development Office appears to be a vacuum of leadership on the issue. 

Figure 1: Official Development Assistance (ODA) grew substantially between 2000 – 2010. However, with the exception of Germany, ODA donations have flatlined. In 2014 the UK was the largest ODA donor in Europe. It now sits with France in 3rd place, way behind Germany. In fact, donations from the UK have fallen sharply in the last 3 years (note this was happening before COVID and the COLC).

Source: ODA DAC1 Flows, my own analysis.

Yet, there may be a faint glimmer of light at the end of the tunnel. Kier Starmer has recently publicly committed to re-forming DFID and restoring the UK 0.7% commitment target on foreign aid, which was reduced to 0.5% by the Conservatives. This would be a very welcome improvement and a positive step. But, given the disastrous past few weeks in the gilt markets, any Labour government that comes into power, whether that be this year, next, or in 2025, may find its hands increasingly tied when it comes to spending. Also, the dark tunnel we are currently in may get darker still; this week there have been rumblings reported of a further cut to the aid budget down to 0.3%.

Regardless of what happens in the coming weeks in British politics it’s highly unlikely the new PM will make it his or her priority to reinstate the UK as a global leader in foreign aid. The promise of a “Global Britain” post-Brexit has failed spectacularly on so many fronts, just take the US trade deal for example, but in the sphere of development our fall from grace couldn’t be larger.