Is the wealth tax a left-wing idea?

Is the wealth tax a left-wing cause?

If you have been following the arguments around wealth taxes for the past few years, this will sound a bit “Is the Pope Catholic?”. All the major proponents of a wealth tax are clearly well to the left of the centre.

For example, all the members of parliament who have publicly supported a wealth tax are either from the Green Party, from (what is becoming) Your Party, from the socialist wing of the Labour Party, or from one of the left-wing regionalist parties. There is one lonely LibDem who supports it, but not a single Tory and nobody from Reform UK is on that list. The same is true of we look at activists, campaign groups and think tanks. Oxfam, the TUC and Tax Justice UK are in favour of a wealth tax, while no conservative, liberal/libertarian or centrist group has even lukewarmly supported it. At present, support for a wealth tax rests exclusively on one side of the political spectrum. If a left-wing cause is a cause that is only taken up by left-wingers, then the wealth tax seems to fit that description perfectly.

But this is very much a peculiarity of the 2020s. Historically, wealth taxes have been supported – and opposed – by people from a wide variety of political persuasions.

Aristocrats for wealth taxes

The old Kingdom of Prussia was certainly no hotbed of progressivism, and while I am generally reluctant to attribute opinions on present-day issues to historical figures, I think it is safe to say that if Kaiser Wilhelm II were alive today, he would be neither a Corbynite, nor a fan of Gary Stevenson. And yet, it was Prussia which, in 1893, introduced one of the early modern wealth taxes. The Supplementary Tax Act (Wealth Tax) states:

“We, Wilhelm, King of Prussia by the Grace of God, decree, with the consent of both Houses of Parliament of Our Monarchy, for the entire extent of the same, […] the following:

[…]

With effect from 1 April 1895, a supplementary tax shall be levied in accordance with the following provisions.

[…]

Subject to the supplementary tax are […] natural persons […] based on the total value of their taxable assets”, defined as “their Prussian real estate, […] their fixed and operating capital used for the operation of agriculture or forestry, […] mining, or a permanent trade in Prussia.”

That is not quite how we would phrase it today (“We, Gary Stevenson, King of YouTube by the Grace of God, decree, with the consent of both Twitter and Bluesky…”), but it clearly describes a comprehensive wealth tax in the modern sense. It appears to have been quite uncontroversial at the time. The introduction to the legal text states that it was passed by the Prussian House of Commons with a two-thirds majority, with a further quarter of MPs abstaining, and hardly anyone actively voting against it. Further:

“In the House of Lords, it was mainly Count Frankenberg-Tillowitz who spoke out against […] the tax reform. He repeated his attacks […] which he had already published in extremely fierce newspaper articles, but remained completely isolated.”

Three belated cheers for Count Frankenberg-Tillowitz, I guess.

Prussia was not a complete outlier. In their paper “The Historical Origins of Wealth Taxation”, published in the Journal of European Public Policy, Julian Limberg and Laura Seelkopf show that countries with a politically powerful landed aristocracy were historically more likely to introduce wealth taxes than others. This sounds surprising at first: would a landed aristocracy not be the main target of a wealth tax? But this depends on what the alternative is. If the starting point is a tax system which targets property wealth, a general wealth tax can be a way to shift the tax burden from feudal to bourgeois wealth: tax factories, not castles.

Conservatives and liberals for wealth taxes

In postwar West Germany, it was the – otherwise very market-friendly – conservative-liberal coalition government of Konrad Adenauer and Ludwig Erhard which hiked wealth tax rates to help finance the burden of repairing wartime damage. The rates were later reduced, but in the 1990s, it was, once again, a conservative-liberal coalition which raised wealth tax rates to help finance the cost of reunification. And while the same government later suspended the wealth tax, they did this in response to a ruling by the Federal Constitutional Court, not on their own initiative.

It is, of course, entirely possible that the wealth tax enjoyed greater support among leftists than among conservatives or liberals. The fact that the latter sometimes made use of the wealth tax does not mean that they were ideologically wedded to it. But it was not “owned” by any one political camp.

In the 20^th century, this was also true in Britain. Britain never had a wealth tax, but the idea was seriously considered by senior policymakers on multiple occasions. It was always more popular on the Left than elsewhere on the spectrum, but it was not a straightforward Left-vs-Right (or a Left-vs-liberal) issue.

For example, after World War I, there were calls for what we would nowadays call a windfall tax or a one-off wealth tax. The most prominent supporter of the measure was Winston Churchill. In his paper Taxing Wealth: A Historical Perspective, Prof Martin Chick from the University of Edinburgh explains:

“In the Cabinet, the only member who argued strongly in favour of the wartime levy was Winston Churchill who was concerned that the Government not appear as a ‘class’ government as he saw a failure to gain working-class support as the ‘greatest danger to capital’. For Churchill, such a levy was required to defend the existing system of capitalism. In the context of the recent revolution in Russia, inflationary and political disorder in Germany and the 1926 General Strike to come in Britain, Churchill’s view was that ‘it will be very hard anyway to hold this immense electorate by reason and not by force and still hold the capitalist system. If we cannot reason with them and convince them, we shall bring the very disaster which the City fears.’”

Churchill said that

“if we turn down the scheme of taxing war fortunes […] [i]t will be said that we are in the grip of the plutocracy and it will be said with a certain truth”. 

Churchill may have been the only member of the cabinet who supported the measure, but there were others who stopped just short of it. In “How can wealth be taxed? Debates in Britain since the First World War”, a paper presented at the LSE’s “History of Wealth Taxation Workshop”, Prof Martin Daunton from the University of Cambridge explains:

“Austen Chamberlain, the Chancellor of the Exchequer, saw that ‘The prejudice against great wealth in pockets is a danger to all capital. The wealth has come to men too rapidly and they have waxed fat while the mass has grown poorer’. But he was wary, given ‘the unreasoning fear of the City’.”

Churchill’s and Chamberlain’s defence of the wealth tax was clearly a more instrumental than an ideological one: they saw it as a concession to make capitalism more palatable to people who might otherwise be attracted to socialism. In the 1960s, though, the idea made a comeback, and this time, we find principled supporters who were not on the Left. Daunton points out:

“On the right, a wealth tax could be justified on grounds of efficiency – a way of stimulating enterprise. The tax would fall on the asset and not the yield which would encourage a shift from safety and low yields to seek higher returns that would encourage entrepreneurialism. The tax might break up passive accumulations of past wealth and allow a cut in higher rates of income tax. […] In 1963, the economist Alan Peacock noted that ‘the net wealth tax gets high marks from economists’.”

Chick adds that “the Conservative Shadow Cabinet was discussing plans for a wealth tax until their abandonment in 1968.”

For a present-day reader, this is, of course, a very unusual defence of a wealth tax. It inverts the familiar argument that the wealthy are greedy, and that a wealth tax is needed to restrain their greed: in this version, the wealthy are complacent, and must be prodded by the tax system to chase higher returns.

It is not an especially plausible argument. While it is true in a given year that a wealth tax is not a tax on returns, those returns are added to one’s wealth, and are thus taxed in subsequent years. Plausible or not, though – that was the conservative argument for a wealth tax.

Even when the conservatives embraced what we now call Thatcherism in the 1970s, this did not immediately mean a hostility to wealth taxes. One component of Thatcherism is the idea of “popular capitalism”, i.e. a capitalism with lots of small-scale capitalists, in which everyone has a realistic chance to accumulate at least modest levels of wealth. This idea would later have a huge impact on the form which the privatisation process took. In principle, support for popular capitalism is a position one could also combine with support for a wealth tax: a wealth tax that is less about raising revenue, and more about deconcentrating wealth.

That agenda never quite took shape, but some conservatives were flirting with it. Danton explains:

“[T]he wealth tax […] might also appeal on grounds of equity by balancing taxes on income compared with capital, and self-made wealth compared with inherited wealth. In 1975, Nigel Lawson accepted there was a ‘reasonably strong case’ for a wealth tax. And if the tax threshold was high, not threaten small business: it would preserve capitalism and remove plutocracy.”

This is not an endorsement: I can see “a reasonably strong case” for lots of things which I ultimately reject, because I can also see a reasonably strong case against them. Still, quite clearly, Lawson did not see the idea of a wealth tax as inherently socialist.

Even today, the case for a wealth tax is not always presented in socialist terms. It is sometimes presented in ways which would be very easily compatible with a Popular Capitalism agenda. Take the following statement:

“If asset prices continue to rise relative to wages, it can be expected that the wealth distribution will lose connection to work and wage income over time, and will start to reflect largely historic, dynastic effects. […]

[I]t becomes difficult for working people with no inheritance to purchase assets. […] [D]istributions of wealth will become less related to work outcomes and more related to inheritances. At the very extreme, work outcomes could have almost no effect on the wealth distribution at all, moving society into a new feudalism, where relative social position is largely an inherited phenomenon.”

This could have been from an early Thatcherite proponent of Popular Capitalism in the mid-1970s. But it is, in fact, from Gary Stevenson’s dissertation.

So what?

I know what you’re thinking right now: “Stop waffling, Niemietz, and get to the point. Where, if anywhere, are you going with all this? Why does it matter who supported wealth taxes in what period, and for what reason? Who cares whether the wealth tax is left-wing, right-wing, or something else? None of this tells us anything about whether a wealth tax is good or bad!”

Which is true. It doesn’t.

But it matters for how we frame these discussions. I have critiqued wealth taxes before, and every time I do, all the replies are like “Well, of course you would say that! Of course you’re against wealth taxes! You’re a neoliberal trickle-down disaster-capitalist market-fundamentalist goon from Tufton Street! The fact that you are against wealth taxes is the least surprising thing ever!”

And I don’t that’s correct, on its own terms. Yes, I want the state to do a lot less than it currently does. That’s an ideological preference. But even a much-reduced state still needs to finance itself somehow. On the question of how exactly it should do that, I have no strong ideological priors either way. From a classical liberal perspective, no tax is wonderful, but taxes on wealth are not in principle more problematic than taxes on income, or taxes on consumption.

There is also the fact that whether or not a country has a wealth tax tells us very little about how economically liberal that country is overall, or even about the overall size of the state. France and Belgium have severely downgraded their wealth taxes, to the point where they are technically no longer wealth taxes at all. Yet public spending remains well above 50% of GDP in both, among the highest levels in the world. At the opposite end of the spectrum, there is Switzerland, which IEA authors have repeatedly held up as a positive example of a liberal small-state economy. Switzerland does not just have a wealth tax, but in terms of revenue, probably the largest one in the world. Norway and Spain also have wealth taxes, and there, public spending is just under 50% and just over 45% of GDP respectively: high, but certainly not exceptional.

None of this means that wealth taxes are good. It just means that there is no reason why classical liberals or libertarians have to be ideologically hostile to them right from the outset.

In the absence of such a reason, we might as well just put our technocrat goggles on, and go with the old-fashioned Optimal Taxation Theory. Taxes should be non-distortionary, they should have a low deadweight loss, low admin and low compliance costs, and they should be simple and predictable. By those standards, a wealth tax is a terrible tax. As the Institute for Fiscal Studies states in its Tax By Design report:

“Levying a tax on the stock of wealth is not appealing. To limit avoidance and distortions to the way that wealth is held, […] the base for such a tax would have to be as comprehensive a measure of wealth as possible. But many forms of wealth are difficult or impractical to value […]

And where attempts have been made to levy a tax on a measure of current wealth […] practical experience has not been encouraging.

There is also a persuasive economic argument against taxing the stock of wealth. […] Taxing the stock of accumulated savings is closely related to taxing the returns to savings, and raises many of the same issues.”

That’s it. That’s a good enough reason to be against wealth taxes. But it’s a technocratic, not an ideological reason. (Unless, of course, you’re a Marxist, and you think Optimal Taxation Theory is just bourgeois ideology, like everything else.) From a classical liberal perspective, there is no ideological reason to specifically oppose wealth taxes, or rather, to oppose a wealth tax any more than, for example, income tax, national insurance, VAT, corporation tax, council tax or business rates. The issue with the wealth tax is not that it inherently socialist, or inherently left-wing. It isn’t. On this issue, Gary Stevenson, Owen Jones and Zack Polanski are on the same side as Kaiser Wilhelm II. And they’re all wrong.