Challenging the neoliberal narrative

AUGUST 5, 2025

Stealth tax, wealth tax, land tax, or reduce tax: these are just some questions facing the left. Steve Laughton offers his opinion.

Some us who grew up in the Keynesian era, when economic growth was higher and inequality far less than it is today, remember that income tax rates on the highest incomes were up to 90%. As a result of the post-war Keynesian consensus, taxes were used to achieve greater levels of equality than capitalism achieved before or since.

The thirty-year post-war epoch also enjoyed high levels of growth with those on median incomes experiencing rising living standards. From 1979 on, the era of fiscal dominance was replaced by the Washington consensus: taxes must be reduced, and interest rates must be used to control demand and inflation.

Unfortunately, much of the left in Europe and in UK has failed to reverse this neoliberal economic narrative. The result has been a steady drift to right wing populism.   

As illustrated by some articles on Labour Hub, the UK left has tended not to propose a return to these high marginal rates of tax and has also stuck with the narrative that governments need to issue bonds to cover deficit spending. For fear of bond markets, the left proposes wealth taxes to enable the government to spend.

The belief that governments are impotent to spend without persuading or forcing the wealthy to hand over their money persists. So, how much does the UK government need to spend to end poverty?

Figures vary depending on how poverty is measured, but let’s take a figure of an extra £90 billion per year, which has been calculated to end pensioner poverty and child poverty, and rebuild the health service.

How much could a wealth tax raise?

Here the economists diverge. John Trickett’s wealth tax report estimated that when coupled with a policy of equalising capital gains tax rates to income tax rates and closing tax loopholes, around £100 billion a year might be raised!

Which brings us to the question, will wealth taxes be avoided? Summers and Sarin (2020) suggest estate taxes have a 60% rate of avoidance. Others argue they will encourage capital flight which will reduce our real wealth. Some countries, such as France and Spain, repealed their wealth taxes because they didn’t work. They are administratively complex and therefore expensive and thus a costly way of ‘raising revenue’.

Richard Murphy opposes a wealth tax on the grounds that wealth is notoriously difficult to measure, that some aspects of it would meet huge resistance, not just from the wealthy but householders, and points out it would create costly disputes creating income for lawyers and accountants.  Labour Hub published an extract from his 2024 Taxing Wealth Report, in which he suggests a raft of achievable proposals, that could raise £90 billion per year, and I’d recommend reading the full 2024 Taxing Wealth Report.  

Özlem Onaran suggests wealth taxes might raise between £46 billion and £78 billion per year, depending on levels of avoidance.

Experience in Europe is mixed, with Switzerland, ironically, collecting over 3% of its revenue through a wealth tax. More typical is France’s experience: the net wealth tax raised about US $2.6 billion annually but led to significant capital flight (for example, $125 billion in assets left France). Tax evasion via offshore accounts was rampant.

Studies have shown 20% tax evasion among wealthy French and Scandinavians. The French tax was repealed under President Macron due to its economic damage and low revenue (about 0.2% of GDP). The IFI wealth tax just taxes real estate and was narrower and less controversial but still generates limited revenue.

Other options

If we want a form of wealth tax, surely land tax which is impossible to avoid and fairly simple to administer offers an achievable option. Raising capital gains tax to the level of income tax would also simplify the system, reducing costs. Some estimates show that the accountancy sector advising the wealthy on how to legally avoid taxes, uses a lot of human labour, amounting in the USA to between 15% and 30% of GDP! A simpler tax system would shrink this industry, releasing labour for other purposes: let’s say, healing the sick or designing new renewable energy technology.

A wealth tax on all assets is intuitively appealing: it is absurd that the top 5% of the world’s wealthiest people can use their money to fund neoliberal thinktanks and persuade public opinion that they are the wealth producers, as opposed to wealth siphoners, and that we must do what they know to be best for us. But the current proposals for a wealth tax tend to hover around taking 1% to 2% of wealth. Ignoring any  problems of measurement, disputes, costs and  enforcement, this is still not going to address inequality or reduce the power and influence of the top 1%.

We need far higher marginal rates of taxation to dent the power of extreme wealth. The top 5% could probably claw back the 2% wealth tax in an afternoon!

Greater taxation of wealth and high income is a way of reducing inequality. But must we wait for this before we can spend? The neoliberal belief that a country must attract private foreign investment and that capital flight is a real danger prevents the left from allowing governments to spend the money required to end poverty and achieve full employment. Free movement of capital is embedded in EU law and leaves governments in hock to private capital.

Governments have the power to control capital. For example, Malaysia, against the advice of all the neo-Keynesian economists and the IMF, did so and survived the 1997-98 Far Eastern Financial Crisis better than similar economies that took the IMF’s advice. Malaysia avoided austerity.

The Liz Truss ‘bond crisis’, when correctly understood, demonstrates the power of the government which through Parliament sets the rules under which the Bank of England operates. As soon as the BoE stepped in to buy bonds, the crisis stopped.

A correct understanding of markets shows that after the Great Financial Crash, governments have the power to control markets. The left has been led to believe that the US Fed’s lending of dollars to UK banks after the GFC proved that the UK was dependent on capital flows – the dollar liabilities of the banks had to be defended and the UK would have collapsed if the US hadn’t lent us the dollars to do so.

In fact, what led the US to lend dollars, was its desire to see lower interest rates in the USA, because the USA uses LIBOR as its benchmark for interest rates. To lower interest rates, it set up swap lines to shore up banks’ supplies of dollars round the world. This was the US state stepping in to save the US and get the lower interest rates it wanted. The UK was not insolvent, and if banks had gone bust without the swap lines, their shareholders should have taken the brunt, and the banks nationalised. But no, we stick with the neoliberal narrative.

Tax and spending

Which brings us to the all-important question: we can use taxes to reduce inequality but can we use them to enable the government to spend more? This depends on the level of unused capacity in the UK economy. How much slack is there in UK factories and in our supply chains? What percentage of the population is unemployed or underemployed? If there is slack, then increasing taxes will increase unemployment, as taxation deprives the economy of money that has already been spent into existence. 

If we have spare capacity and unemployment, we need to reduce taxes. Given our desire to reduce inequality, it follows that hefty taxes on the wealthy, should be accompanied by greater tax reductions on the rest of us. Otherwise wealth taxes will turn the Reeves-induced austerity-lite stagnation into greater stagnation.

If we have a lack of resources, we should also note that spending on education, science and training creates resources. If, even after such spending, a careful analysis of supply chains, of firms’ mark-ups and of labour force surveys reveal we are running at full stretch, then tax rises on the private sector will be needed to release resources to achieve our goals. Given that the very wealthy save, whereas the poor have to spend all their income, taxing the very wealthy when the economy is overheating and resources are scarce, is less efficient at reducing the overheating than increasing taxes on the less well off.

It follows that if we need to reduce parts of the private sector so that labour and technology can be used to build designated priorities, such as climate change technology, and health spending, then prior to job losses in the sectors we reduce in size, we must make it clear that new jobs are available. It’s the familiar argument: you shouldn’t close down an industry without offering alternative opportunities.

The hegemonic narrative

Every ruling elite organises to maintain hegemony, starting with ideology with which to frame and justify government policy. In the UK the ideological position is that free markets are best, that we must ensure that our policies do not frighten the wealthy off, because we need them. Government is poor at running companies or choosing where to invest and should get out of the way: we must always placate the wealthy and their markets.

We should reject these assertions.

The money we spend to train doctors and pay carers comes directly from the Treasury which can never run out of pounds. The ability of the government to spend is not limited by capital flight: Bank of England reserves are a monopoly: no one else can create them. The left should stop rescuing the finance sector and the very wealthy and instead focus on the rest of us.

A close analysis of central bank operations reveals that the government funds its spending before it taxes and it is the implications of this on which the UK left disagrees.

The danger of government spending is that it may cause inflation and/or devaluation.  If we do not have the real resources to build and provide the goods and services we want, then spending more will indeed just bid up prices.

Currently in the UK, despite claimed shortages of labour, heterodox economists and the Social Market Foundation (SMF), a UK‑based think tank, estimated that in 2024 there were around five to six millionworking‑age UK individuals who were not in the workforce but who would work if decent work were available.  And labour shortages in certain areas, both geographic and sectoral, need to be addressed by skills training and decent wages. That will ease inflationary pressure, not increase it. If this is true, then the UK has spare human resources and can expand government spending without increasing taxation and without risking inflation.

And the final fear: a run on the pound. The reason why the West, including Germany and the USA, are not growing as fast as they want, is because the dollar, the pound and the euro are overvalued in relation to far eastern currencies. Secondly, the trade surplus countries are suppressing labour costs, and in the eurozone they are forcing Spain, Italy and others into private sector debt which they use to buy the exports of the trade surplus countries. This is unsustainable in the long run. To cap it all, the suppression of government spending – as per the neoliberal narrative – is locking the EU into stagnation and causing a lack of strategic long-term planning coupled with insufficient Research and Development.

As for devaluation phobia: provided markets know governments will not be browbeaten, they bet against a currency at their own risk: the US dollar and Canadian dollar undergo considerable volatility and the Canadian government is sanguine. If the pound plunges, and the UK government doesn’t jack up interest rates to try and defend it, UK assets become good value and the pound moves back up again.

The left should not be intimidated and should confront neo-liberal free market beliefs.

Steve Laughton Dip Econ/ MA Econ has been in the Labour Party since 1981. He was the Political Education Officer of Bournemouth East and Bournemouth West Labour for several years. He is a member of Momentum. Recently he has devoted his time to economics, and remains an independent philosophical economist, who believes current economic wisdom is deeply flawed and that centrist politicians who follow it are paving the way for their own demise.

Image: c/o Labour Hub.