Even after years of so-called ‘austerity’, government spending as a percentage of national income just prior to the pandemic in 2019 was still higher than every single year from 2001 to 2007. This insatiable appetite for government spending under both parties has led to a shortfall in the public finances.
In order to pay for this, the Government has set its sights on your wealth. Having ruled out increases to income tax, national insurance and VAT in their manifesto, speculation is mounting of a tax raid on assets. While the Government is almost certain to raise capital gains and inheritance tax, more worrying are calls for a broader annual tax on wealth, meaning a certain percentage of all wealth above a certain threshold would need to be paid to the treasury.
Some 28 MPs have urged the chancellor to impose an ‘extreme’ wealth tax of 2% on assets over £10 million. The Chancellor has had enough sense to resist these calls so far, but there is no guarantee this will continue to be the case, as Labour’s spending commitments are set to add another £47 billion to day to day spending by 2028-29. As Keir Starmer said in a speech on Monday, ‘I can’t give you a cast iron guarantee that never again in any Budget will there be any adjustment to tax because we just don’t know what is round the corner’. Under Labour, the threat of a wealth tax remains real.
The problems with wealth taxes are well documented. As a landmark report from the TaxPayers’ Alliance points out, in almost every instance where they have been tried wealth taxes were either watered down or scrapped entirely as they did not work. The French wealth tax, for example, raised €3.5bn a year, but cost the government €7bn a year in other tax revenue due to capital flight. The evidence shows that when you tax wealth, you don’t get more tax, you get less wealth.
But putting aside a cost-benefit analysis, the more fundamental issue with wealth taxes is that they are deeply immoral, an admission by the state that it has the power to arbitrarily seize your property above a certain amount. Unlike income tax or VAT, which are applied when you actively participate in the economy through purchasing and employment, and are taxes, at least to some extent, on voluntary behaviours, wealth taxes are a tax on what you own. As such, they chip away at the principle of private property.
This moral case can of course be applied to existing taxes on wealth like capital gains and inheritance tax. Or to the savings tax. Those with portfolios built up over years of careful saving will rightly wonder why they are now expected to pay for the state’s own chronic inability to balance its budget, while punitive inheritance taxes are an attack on the basic human ambition to give one’s children a better life. But there is a key difference between these taxes and the sort of a wealth tax many MPs and think tanks are pushing for. With capital gains tax and savings tax, they only apply to gains, or profits. With inheritance tax, you are only taxed once you die, and even then only once (although that’s undoubtedly bad enough).
As damaging as these levies are, a bona fide wealth tax would be far more pernicious. A wealth tax, as has been proposed, would mean the state directly confiscating a part of your property every year. Not profits, or gains. Rather, the state would be staking a claim to a part of everything you own above a threshold, regardless of whether you were better or worse off that year. Where the value of assets grows by less than the tax rate, owners will see their net worth gradually wither away over time. It’s a tax not to limit the increase in people’s wealth, but to directly reduce it. A tax explicitly designed to make people poorer.
It is a basic principle of the market economy that once you purchase an asset it belongs to you. It is what enables trade and motivates production and consumption. Having already paid taxes on the money used to purchase an asset as well as any other transaction taxes, we ought to be able to enjoy it without the state or anyone else interfering. It’s one thing to tax any gains realised, or to tax the asset when it’s passed onto someone else. It’s another thing entirely to argue the state should be entitled to a share of that asset in perpetuity. That is antithetical to the very idea of ownership, and can only mean undermining the incentives that the market economy relies on to function.
Wealth taxes are designed to diminish aspiration. They punish those who have been responsible with their money and turn us from property owners to eternal debtors of the state. Even if some of these changes do not materialise in the upcoming Budget, they will hang over taxpayers like a sword of Damocles for the rest of Labour’s term.
Labour need to learn to love aspiration, otherwise the future looks bleak.
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