What do Gary Stevenson, Lord Kinnock, Anneliese Dodds, groups of backbenchers, Tax Justice UK, and Rachel Reeves have in common? Answer: They have all started talking about wealth taxes. In the current political climate, it’s easy to understand why. The Labour government clearly needs to raise taxes in the autumn budget, but there is widespread nervousness about increasing the tax burden on working people. Part of the reason for this is that the UK has a wealth inequality problem where the top one fifth own two thirds of the UK’s wealth, whilst the bottom fifth own just 0.5%. This wealth is often not fairly earned, with 60% of global billionaire wealth coming from either inheritance, cronyism and corruption or monopoly power.
This clearly isn’t fair and acts as a driving force behind the rise of extreme political parties, who are taking advantage of the discontent. It is also creating a perverse set of rewards and incentives in the economy which Thomas Piketty describes in his seminal work, Capital in the Twenty-First century. Piketty asks us to consider two variables: the rate of growth of capital (profits, dividends, rent, or interest) and the rate of growth of the broader economy (growth in income or output). His thesis is that, in the long run, our economies have often delivered a rate of growth of capital that is higher than the rate of growth in the broader economy. We have seen this play out in recent years, with growth in the stock market and house prices consistently outstripping wage growth, meaning productive work is poorly rewarded compared to passive asset ownership. This means that those who already have wealth will find it easier to grow it than those who are working to generate wealth for the first time.
Influencers like Gary Stevenson take this thesis further. In many of his Gary’s Economics videos, Stevenson claims that we are now at a crisis point, where the wealthy have accumulated so much wealth that they are buying up all of the assets once owned by the middle class. There is simply nothing else for them to spend their money on. Housing is Stevenson’s most consistent example of this. In the 1980s, houses cost four times the average UK salary. Today, that figure is closer to seven.
So, everyone is talking about wealth taxes. But are they actually possible?
Imagine money is like cement and all the government has to collect it are scoops. Working people generate their income by spinning the cement mixture. Their income is liquid cement, and the government finds it very easy to scoop a portion of this to fund public services. Over time, working people build up a stock of cement in the mixer. Eventually, they decide to pour this out to harden as an asset. As this asset is being purchased, the government is able to collect a share through transfer taxes like stamp duty. However, once the cement hits the ground and hardens, it becomes difficult for the government to scoop a portion.
Whilst a working person feels lucky to own a square meter of hardened cement, the ultra-wealthy own cities’ worth of it. These cement metropolises are often inherited, not registered to them, and disguised with artificial grass, so no one knows what lies beneath. If the government talks about trying to use their scoops anyway, the ultra-wealthy threaten to use their own diggers and helicopters which can relocate their hardened cement to a country beyond government control, a phenomenon called capital flight.
Maybe I’ve stretched the analogy too far, but hopefully it’s clear that our government faces a problem. So what can the government do?
The pragmatic approach to taxing wealth is to try and intervene when it is moving or changing hands, i.e. when the cement is more liquid.The Labour government has introduced measures to this effect already, with increases in both the lower and higher rate of capital gains tax in 2024 (the tax levied upon a sale of an asset when it has appreciated in value over the lifetime of ownership), and are clearly thinking about additional measures in the upcoming budget. The papers are suggesting that this time the focus is likely to be on property wealth, arguably for the sake of simplicity for HMRC.
One proposal they are considering is another change to capital gains tax. Despite Labour’s intervention last year, capital gains tax remains significantly lower than income tax, 18% for basic-rate taxpayers or 24% for higher-rate taxpayers and certain gains are exempt. The Guardian claims Reeves is considering removing an exemption on the sale of primary residences worth more than £1.5 million.
A second proposal being considered relates to stamp duty. Stamp duty is a form of transfer tax which is levied on the buyer in large transactions. Most people interact with stamp duty when they buy a property. From a wealth inequality perspective, this form of stamp duty often penalizes first time buyers with limited wealth, rather than sellers with more substantial wealth. Reeves is considering flipping property stamp duty to tax the sellers of owner-occupiers on homes worth more than £500,000, who definitely own assets, rather than buyers, who may not.
These measures may slow down the property market as homeowners are disincentivized from selling, including from downsizing. However, no taxes are without distortion, and in the main these proposals are practical and achievable tax changes that focus on wealth, not work.
Having said this, these taxes alone are not enough to move the dial on wealth inequality because some wealth is deeply entrenched and rarely changes hands. That is why most progressive commentators are advocating for a net wealth tax, levied on the total value of a person’s wealth over a certain value. This has broad public support, with three quarters of British citizens saying they would support a wealth tax of 2% on wealth over £5 million.
In recent years, Spain has proven that the cement problem of net wealth taxes is not insurmountable. They offer a precedent for wealth taxes in the modern economy, including measures that ensure it is achievable and proportionate. Spain’s wealth tax dates to 1978, and was significantly revised during the pandemic. The tax is now payable on worldwide assets and starts at 1.7% for net wealth over €3 million, and rises to 3.5% for wealth over €10 million. The tax has allowances, and contains a cap on combined income and wealth taxes to ensure the asset rich and cash poor aren’t stuck in the cement problem.
When Spain revised its wealth tax, the media predicted an exodus of the rich, much like is happening in the UK. It is hardly surprising given the ultra-wealthy own many mainstream news outlets and don’t want to be taxed. However, this exodus hasn’t materialised. In 2021, Spain had 26 billionaires. This year, it lists 34.
Spain’s wealth tax is not a perfect solution. Wealth taxes are also inherently risky as a fiscal solution as they have such a narrow tax base and are often exposed to loopholes. What’s more, every tax creates distortions in the economy. However, when progressive commentators argue for wealth taxes, they are not primarily arguing for these taxes as a fiscal solution to a budgetary hole but as a partial solution to our wealth inequality problem and, as with Labour’s taxes, it is worth remembering that all taxes change incentives in economies.Whilst many find it refreshing to see the UK government taking a pragmatic approach to taxing wealth, not work, strong arguments remain for them to follow in Spain’s footsteps with bolder action. To battle wealth inequality, Labour could listen to the majority of the British public and use their significant majority to levy a wealth tax on global net wealth.
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