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The UK raises more revenue from wealth and wealth-related taxes as a share of GDP than any other OECD economy — ahead of Spain, Norway and Switzerland, the only three European countries that still have a formal wealth tax
Wealth taxes have been tried across Western Europe and repeatedly abandoned — even by left-wing governments — because of high administrative costs, weak revenue and damaging effects on investment
Wealth inequality is lower today than at almost any point in the 20th century. The wealthiest 1% own around 22% of total wealth — below the EU average of 25% and well below the US figure of over 35%.
To reduce wealth inequality further, Britain should enable more people to create it rather than tax it more — through Australian-style pension reform and a YIMBY housing revolution that would extend property ownership to millions
Britain already levies more as a share of GDP in wealth and wealth-related taxes than any other OECD country, making the case for a new wealth tax weaker here than anywhere else in the developed world, according to a new paper from the Institute of Economic Affairs.
Fool’s Gold: The case against the wealth tax, and suggestions for alternatives [ [link removed] ] by Dr Kristian Niemietz makes the comprehensive case against a new wealth tax. It finds that when property taxes, inheritance tax, stamp duty and capital gains tax are combined into a single category of ‘wealth and wealth-related taxes’, the UK raises more revenue from them as a share of GDP than any other OECD economy — including Spain, Norway and Switzerland, the only three European countries that retain a formal wealth tax. Wealth tax campaigners are, in effect, demanding that Britain layer an additional tax on top of a system that already taxes wealth more heavily than its peers.
Summary
Wealth taxes have been tried many times. In the early 1990s, about half of Western Europe still had wealth taxes. In the meantime, all but three of these countries have given up on them, including, in some cases, under left-wing governments, and even the three remaining ones have scaled back their wealth taxes.
Governments that abolished wealth taxes justified this by pointing to their high administrative and compliance costs, adverse behavioural responses (especially negative effects on investment) and limited revenue-raising potential. These are also the reasons why previous attempts to introduce wealth taxes in Britain were abandoned.
This paper mostly draws on the work of economists who are broadly sympathetic to the idea of wealth taxes, as opposed to ideologically hostile critics. Even a lot of their sympathisers concede that wealth taxes have major drawbacks.
Britain does not currently have a tax which meets the strict textbook definition of ‘a wealth tax’, but it does have several wealth-related taxes, which can be considered close-enough substitutes, and it already raises more revenue from such taxes than any other OECD economy.
For its supporters, the wealth tax has become an all-purpose tool. They are trying to achieve too many different things, and often mutually incompatible things, with it. The ‘wish list’ of things that a wealth tax has been promised to finance is simply implausibly long, and then it is also supposed to do many things beyond raising revenue on top of that.
Wealth inequality in the UK is not especially high, and it is not rising. The top 1% of the wealth distribution account for about 22% of the total wealth, which is less than the EU average and much less than it used to be for most of the 20th century.
Wealth taxes have rarely raised more than 1% of GDP in revenue, with typical figures being much lower than that. Where wealth taxes have existed for long periods, revenue has often tended to decline over time.
In recent years, empirical evidence on behavioural responses to wealth taxes has largely confirmed the suspicions of sceptics. Wealth taxes really do reduce and distort investment in a number of ways. None of these effects are catastrophic, but they keep adding up and they tend to get worse over time.
There are vastly superior alternatives to wealth taxes, which are based on creating wealth rather than penalising it. In the 20th century, Britain had long periods of falling wealth inequality, which was not explained by the government expropriating the wealthy but simply by more people acquiring pension wealth and housing wealth.
Britain could move to a pension system more like the Australian one, where people pay contributions into their own pension fund rather than to a state pension programme. In such a system, the vast majority of people have the opportunity to build up considerable amounts of wealth over time.
Wealth inequality in Britain was at its lowest when housing was relatively affordable and home ownership rates were at peak levels. Britain needs a ‘YIMBY’ revolution to unleash a building boom. This would give millions of people the opportunity to build up housing wealth.
Dr Kristian Niemietz, Editorial Director and Head of Political Economy at the Institute of Economic Affairs, said:
“The current hype around wealth taxes is entirely vibes-based, and completely undeserved. Wealth taxes have been tried many times before, and no actually existing wealth tax has ever come close to delivering what its keenest supporters are promising today.
“Among economists, even those who are sympathetic to wealth taxes in principle concede that it comes with a myriad of practical problems and harmful side-effects.
“Everything wealth tax campaigners are trying can be better achieved in other ways. There are vastly superior alternatives to wealth taxes.”
Dan Neidle, Founder of Tax Policy Associates said:
“The UK’s greatest problems are anaemic economic growth and a lack of supply of housing. An annual wealth tax offers no solution to either, and risks actively hindering the growth we desperately need. This paper does an important job of shifting the debate: if we want to tackle inequality, the answer isn’t an unworkable new tax; it’s building homes and letting more people build wealth of their own.”
The Rt Hon Lord Frost, Senior Policy Fellow at the Institute of Economic Affairs, said:
“Wealth taxes are panacea policies, fantasy solutions advocated by those who don’t want to face up to the task of implementing an economic strategy that will genuinely make us richer and more prosperous. What Britain needs is less spending and lower taxes, not another effort to extract even more from hard-pressed businesses and voters.”
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