Rachel Reeves urged to reject ‘bad tax’ that charges 2% but actually takes 80% of wealth.uk
“Chancellor Rachel Reeves must resist calls to introduce a wealth tax. It would be a total disaster.”
Labour activists are pushing Rachel Reeves to declare a tax war on wealth (Image: Getty)
That stark warning comes from Tom Clougherty, executive director at the Institute of Economic Affairs (IEA). He’s the latest expert to contribute to our debate on whether the UK should adopt a new levy that three quarters of Brits claim they would favour over more state benefit cuts.
Tax campaigners are pressing for Chancellor Rachel Reeves to raise billions from the super rich, by making them pay an annual wealth tax.
They claim that a 2% tax on wealth would raise £24billion for the Treasury, and spare Reeves and PM Keir Starmer from having to slash state benefits.
But Clougherty warns a wealth tax would backfire by making everybody poorer, and not just the wealthy. Here’s his argument:
“Wealth taxes are a bad idea, economically and practically, and have no compelling justification.
The thing to understand is that they’re much more significant than they sound.
Say you have shares that grow 5% in one year. A 2% wealth tax would actually take 40% of that.
Put that together with existing business and personal taxes, and a wealthy investor could easily face an effective tax rate on their investment returns of 80% or more.
All from a supposed 2% tax.
If you tax returns that heavily, who is going to want to invest or grow a successful business in Britain?
Tom Clougherty at the Institute of Economic Affairs says a wealth tax would make everyone poorer (Image: IEA)
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We may already be losing millionaires at a faster rate than any country except China. A wealth tax would accelerate that trend.
The UK depends on the well-off for the revenue that funds public spending. The top 0.1% of earners alone pay around £34billion of income tax each year.
Yet people keep demanding they pay more.
Then there are the practicalities of implementing a wealth tax. The taxman doesn’t always know what wealth rich people have.
Nor does he necessarily know how to value it fairly, since many valuable assets rarely trade on the open market.
Wealth taxes therefore have huge administrative and compliance costs. That’s another reason why so many countries have abolished them.
Today, only four members of the OECD, a group of 38 democratic, market-based countries, levy a wealth tax.
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The supposed rationale for wealth taxes is that we tax wealth too lightly, inequality has skyrocketed and this has caused our economy to stagnate.
None of these things are true.
Only four OECD countries raise more (as a percentage of GDP) from taxing capital gains than we do.
Only five raise more from taxing capital transactions. Only six raise more from taxing inheritances. None raise more than us by taxing real estate. Meanwhile, wealth inequality in Britain has been roughly stable since the 1980s.
We certainly have a stagnant economy, but that has little to do with the distribution of wealth.
By driving capital out of Britain, a wealth tax would itself reduce growth, investment and employment. And leave all of us even worse off.”
That’s Clougherty’s view. I’m also sceptical about the merits of a wealth tax.
However, Tax Justice UK says taxing the super-rich is only fair and will raise billions So who’s right? And who will Rachel Reeves listen to? See the final contribution to our debate tomorrow.
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