Wealth taxes are currently all the rage. Over the past few years, a massive hype has built up around the idea: 75 per cent of the public say they support the introduction of a wealth tax, two thirds of them strongly so, with only 13 per cent opposing. It is probably the single-most popular policy measure of our time. The economist Gary Stevenson has amassed a cult following on the basis of his advocacy for wealth taxes: his YouTube channel has more than 1.5m subscribers. Zack Polanski, who is by quite a margin the most popular politician among millennial and zoomer voters, has made the wealth tax the central plank of his policy pitch. You can even buy T-shirts expressing your support for wealth taxes, something I’ve never seen for any other tax.
Like a lot of bad ideas, this one spilled over from America, where Senator Elizabeth Warren launched her “Ultra-Millionaire Wealth Tax Act” in 2021. It makes a bit more sense in the US, where wealth inequality really has increased quite noticeably in recent decades. In the late 1970s, America’s wealthiest one per cent held about 22 per cent of the country’s total wealth. By the early 2010s, that share had gone up to about 35 per cent, where it remains to this day. The US is also an economy which does not need to worry too much about emigration or capital flight. That still does not make a wealth tax a good idea, but in that context, you can at least see where the political demand for it comes from.
The British context is different
The British context, though, is radically different. For a start, contrary to popular belief, wealth inequality is not especially high in Britain, and it is not rising. The 20th century saw a dramatic long-term decline in wealth inequality, which, unlike in America, has never been reversed. Britain’s wealthiest one per cent own about 22 per cent of the total wealth, which is still about the same as it was in the late 1970s, and less than it was at any point before then. It is a bit less than the European average, and much less than the North American one. Why would a country like that need a wealth tax?
Britain is also a country where wealth is already heavily taxed – just not specifically in the form of a wealth tax. Britain raises close to four per cent of GDP in inheritance tax, property taxes and transaction taxes, which is a higher share than in any other OECD country. None of these are wealth taxes, but they are its first and second cousins, and if a wealth tax proper joined that family gathering, it would get a little crowded.
Curiously, Britain’s wealth tax hype did not take off during a period of fiscal retrenchment, but at a time when public spending was already rising sharply. Government expenditure has grown from less than 40 per cent of GDP before the pandemic to more than 44 per cent today, and there are no plans to reverse that. Some of it is deficit-financed, but the tax burden is also a peacetime record high. Should a country in that situation really be thinking about introducing any new taxes? Given Britain’s fiscal and economic context, even someone who is sympathetic to wealth taxes in principle could conclude that this is the wrong place and the wrong time for it.
We haven’t even touched upon all the practical problems with wealth taxes, and the reasons why so many other countries that tried them in the past have abandoned them in the meantime. I discuss all that in my new paper Fool’s Gold: The Case Against The Wealth Tax, And Suggestions for Alternatives, published by the Institute of Economic Affairs.
For now, suffice it to say that Britain’s problem is not that wealth inequality is too high, or that taxes are too low. Britain’s problem is that the economy is not growing, and that it has not been for quite some time. The way to address that is not to conjure up new taxes. It is to remove the barriers to the formation of new wealth. This can be done in a way which would benefit the less wealthy disproportionately. First and foremost, Britain needs to start building things again: houses, business premises, infrastructure, power stations, the whole lot. We have given the likes of the Community Planning Alliance veto rights over the country’s prosperity, and they have used it to strangulate growth.
We could, almost literally, build wealth. Lots and lots of it. That strikes me as a lot more worthwhile than haggling over the distribution of the meagre wealth we currently have. Kristian Niemietz is the IEA’s Editorial Director and Head of Political Economy at the IEA.
