Is it time for the UK to introduce a wealth tax?
DATE
26 Nov 2024
AUTHORS
Stephen Hunsaker
With the gap between the UK’s wealthiest citizens and the rest of the country increasing, Stephen Hunsaker discusses whether it is time for the UK to introduce a wealth tax.
The Covid-19 pandemic has drawn attention to the growing divide between the wealthiest and the rest of society, intensifying discussions on how governments can address this inequality. Globally, wealth taxes have emerged as a potential solution. France’s left-wing New Popular Front campaigned to reinstate a wealth tax abolished in 2017, progressives in the US floated similar proposals, while Argentina introduced a one-off wealth tax to ease fiscal pressures during the pandemic. The UK government has expressed its intent to tackle wealth inequality but has firmly ruled out introducing a wealth tax. But should it have?
To answer whether a wealth tax is the right move for the UK, we need to consider two key questions: have wealth taxes worked in the past, and is it better than alternative solutions for addressing inequality and raising revenue?
Wealth, defined as an individual’s net worth – assets such as property and savings minus liabilities like loans and mortgages, has become increasingly concentrated at the top. Both globally and in the UK, the richest 10% of people now hold more than half of all private wealth, while the poorest 60% hold around just 10%. Addressing this disparity requires targeted policy interventions, and wealth taxes are often proposed as one option.
While wealth taxes have existed since the 19th century, only a handful of countries have implemented them widely. In the 1990s, 12 OECD countries had wealth taxes, but today only three have retained them: Norway, Spain, and Switzerland. In the UK, the idea of a wealth tax has been considered sporadically, including in 1974 and more recently in 2020 by the independent Wealth Tax Commission.
Evidence from countries that have implemented wealth taxes shows that while they have had modest success in reducing inequality, the results are mixed. The average country that introduced such taxes experienced small declines in wealth inequality, while those that repealed them saw inequality increase. These results suggest that while wealth taxes can have an impact, they tend to be marginal. This raises questions about their overall efficacy, especially as many repeals occurred right before the 2008 financial crisis which saw wealth inequality rise in response almost across the board.
The limited success of wealth taxes is likely due to several factors. In many cases, these taxes were not well-integrated into broader tax systems. Some relied on outdated administrative systems or self-assessment methods, making enforcement weak and unreliable. Others were introduced during crises, such as wars or economic downturns, and were not adapted to reflect evolving economic conditions. As a result, the revenue generated by wealth taxes has often been trivial. In most cases, they have accounted for less than 1% of total tax revenue or GDP. For instance, Finland’s wealth tax brought in just 0.15% of its total tax revenue in 2002 before being repealed in 2006.
Given these challenges, many economists argue that governments would be better served by improving existing tax systems rather than introducing new wealth taxes. In the UK, addressing loopholes in property taxation, inheritance taxes, and capital gains taxes could be a more effective and administratively feasible way to tackle inequality and raise revenue. Reforming how wealth is valued for tax purposes or closing mechanisms that allow assets to be transferred abroad untaxed could yield significant gains. These measures would also strengthen the current system’s capacity to target wealth more effectively.
That said, wealth taxes should not be ruled out entirely. Reports, including one from the OECD, have suggested that such taxes can be made more effective if introduced as part of a broader package of reforms. For instance, pairing wealth taxes with reductions in regressive taxes – those that disproportionately burden lower-income households, could enhance their redistributive impact. In the UK, a phased approach might make sense: first, strengthen and modernise the existing tax system, then revisit the idea of a wealth tax as a longer-term solution to reducing wealth inequality.
Ultimately, addressing wealth inequality in the UK does not require reinventing the wheel. By closing loopholes and ensuring the current tax system is fair and efficient, the government can take meaningful steps toward reducing disparities and raising revenue. Once these reforms are in place, wealth taxes could be revisited as part of a comprehensive approach to wealth redistribution. Wealth taxes, while not a panacea, could eventually form part of a broader strategy to create a more equitable society. By prioritising practical reforms today, the UK can lay the groundwork for more ambitious solutions in the future.
By Stephen Hunsaker, researcher, UK in a Changing Europe
Evidence from countries that have implemented wealth taxes shows that while they have had modest success in reducing inequality, the results are mixed. The average country that introduced such taxes experienced small declines in wealth inequality, while those that repealed them saw inequality increase. These results suggest that while wealth taxes can have an impact, they tend to be marginal. This raises questions about their overall efficacy, especially as many repeals occurred right before the 2008 financial crisis which saw wealth inequality rise in response almost across the board.
The limited success of wealth taxes is likely due to several factors. In many cases, these taxes were not well-integrated into broader tax systems. Some relied on outdated administrative systems or self-assessment methods, making enforcement weak and unreliable. Others were introduced during crises, such as wars or economic downturns, and were not adapted to reflect evolving economic conditions. As a result, the revenue generated by wealth taxes has often been trivial. In most cases, they have accounted for less than 1% of total tax revenue or GDP. For instance, Finland’s wealth tax brought in just 0.15% of its total tax revenue in 2002 before being repealed in 2006.
Given these challenges, many economists argue that governments would be better served by improving existing tax systems rather than introducing new wealth taxes. In the UK, addressing loopholes in property taxation, inheritance taxes, and capital gains taxes could be a more effective and administratively feasible way to tackle inequality and raise revenue. Reforming how wealth is valued for tax purposes or closing mechanisms that allow assets to be transferred abroad untaxed could yield significant gains. These measures would also strengthen the current system’s capacity to target wealth more effectively.
That said, wealth taxes should not be ruled out entirely. Reports, including one from the OECD, have suggested that such taxes can be made more effective if introduced as part of a broader package of reforms. For instance, pairing wealth taxes with reductions in regressive taxes – those that disproportionately burden lower-income households, could enhance their redistributive impact. In the UK, a phased approach might make sense: first, strengthen and modernise the existing tax system, then revisit the idea of a wealth tax as a longer-term solution to reducing wealth inequality.
Ultimately, addressing wealth inequality in the UK does not require reinventing the wheel. By closing loopholes and ensuring the current tax system is fair and efficient, the government can take meaningful steps toward reducing disparities and raising revenue. Once these reforms are in place, wealth taxes could be revisited as part of a comprehensive approach to wealth redistribution. Wealth taxes, while not a panacea, could eventually form part of a broader strategy to create a more equitable society. By prioritising practical reforms today, the UK can lay the groundwork for more ambitious solutions in the future.
By Stephen Hunsaker, researcher, UK in a Changing Europe
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