Chancellor Rachel Reeves is short on options. She seems unlikely to meet her fiscal rules unless something changes, and with bond markets raising the cost of borrowing to new highs, not changing something doesn’t seem like an option.
The Government’s attempts to cut spending ended in tears, as many people predicted they would. Labour backbench MPs didn’t come into politics to cut spending. They entered into politics and built their political careers on the basis that the key problem with the Tories was that they didn’t spend enough. They simply weren’t prepared, intellectually or emotionally, for a situation in which Labour entered government after the Tories had spent too much.
So tax rises, then? But even some of the taxes Labour have already raised – such as their non-doms replacement scheme – have backfired and may have cost money rather than raised it as high earners are chased out of the country. Taxes on business seem likely to push a fragile private sector over the edge into recession, making tax revenues fall rather than rise. And rises in personal taxes such as income tax or NI were ruled out in terms in Labour’s manifesto.
What’s left? Some people think wealth taxes are the answer. If you can’t tax people on their income, tax them on their wealth instead. This idea has been popular on the Left since it was proposed in Thomas Piketty’s ‘Capital in the Twenty-First Century’ as not merely being a money-raiser but also as a way to partially address wealth inequality.
One might have thought Piketty would be a bit persona non grata just at the moment, having led 100 international economists to warn Argentina, in an open letter, that electing Javier Milei would cause ‘devastation’ to the Argentine economy – currently growing at over 7% per annum. But being spectacularly wrong about Argentina doesn’t appear to have held Piketty back at all and his wealth tax proposals now seem all the rage on the British Left.
Wealth taxes are, of course, a terrible idea. In the first instance, they are improper as a point of philosophical principle. Political philosophers have long recognised three key building blocks to society, three rationales for the existence of a state: promise (or contract); family; and property. States exist to defend these things, not to attack them. Taxing wealth is like taxing family or taxing promises – simply not something a state has any business doing.
They also create distorted incentives, encouraging people to consume more and invest less as they become wealthier, instead of providing capital to back those who have good ideas and the energy and discipline to pursue them. Wealth taxes thus destroy opportunity for those less fortunate. They also disincentivise those who have started to build wealth from investing in that second or third business that is the real big success (think of Elon Musk).
Wealth taxes are very complex to administer, since they require expert assessment of the value of assets that are not being bought and sold. That also means they are subjective, by nature. They are also unfair, because wealth is accumulated from income that has already been taxed, so extra tax is paid because people saved instead of immediately consuming.
In the UK context, wealth taxes are liable to chase internationally-mobile people abroad. The UK already has the largest exodus in the world of millionaires. Targeting their wealth will only chase even more of them away, robbing the country of the taxes they would pay in other ways.
Don’t let the fact Piketty has been wrong about so many other things tempt you to believe wealth taxes must be the one balancing time he was correct. He’s perfectly capable of maintaining his losing streak. They are a terrible idea – wrong as a matter of philosophical principle; unfair; undermining of personal and capitalist entrepreneurship; administratively complex and subjective; and liable to chase away many of the last few rich people still daft enough to have hung around.
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