Is it possible to design a tax that targets the really wealthy? The biggest barriers to taxing wealth are practical

The Resolution Foundation point out that more than 80% of the growth in net property wealth since the early 1990s has been driven by the property price boom, not savings behaviour – the wealthy have become progressively wealthier not from endeavour but luck. Yet, as the think tank highlights, while wealth has been increasing compared to GDP, the tax revenue from wealth has not. The burden of funding public services is firmly on labour, not capital.

London School of Economics Professor, Howard Glennerster, argues that’s not just unfair, it’s economically inefficient:

“Taxing work but not taxing rising property values creates perverse incentives to invest in property not work. And letting private owners reap most of the rewards of public infrastructure investment restricts the optimal scale of major projects. Ultimately, the whole economy loses.”

This all helps explain why the idea of taxing wealth is gaining traction and not just on the Left. Nick Timothy, the former chief of staff of Britain’s Conservative Prime Minister Theresa May, writing in The Sun newspaper, called on the Government to “increase taxes on accumulated wealth”.

I agree with Nick – with the current capitalist model seemingly unable to deliver prosperity for all, it’s time to seriously examine the case for wealth taxes. Which is exactly what we’re doing in a forthcoming UnHerd audio-documentary.

Does an annual wealth tax really spell economic disaster?

There are different types of wealth taxes, including land and property taxes, and capital gains, but it is an annual tax – usually around 1% on net wealth above a certain threshold – that, championed by rock star economist Thomas Piketty, has been gaining both traction and criticism.

Opponents of an annual tax point out that most countries that have levied one have subsequently abandoned it. Denmark and Germany abolished theirs in the late 1990s, Finland, Iceland, Luxembourg, Sweden and Spain in the 2000s, and this year France joins their European neighbours. (Switzerland and Norway are among the few nations to have retained their wealth taxes.)

And the arguments deployed for binning the tax? They’re a drag on growth, investment, and entrepreneurialism, of course. It’s a reasonable proposition, lowering the return on investment through taxation reduces the attractiveness of investing, and less investment means less job creation and less economic growth.

Yet on closer look, it seems, as economist David Seim puts it, that these countries had “sparse knowledge about [the] effects”.³ They appear to have acted out of fear of negative economic impacts, rather than actual evidence of direct damage.

Where there is empirical evidence, the negative impact of wealth taxes on desirable economic behaviour appears much smaller than critics would have us believe. A 2010 paper by tax expert and economist Asa Hansson looked at the relationship between wealth taxes and economic growth.⁴ Based on analysis of 20 OECD countries between 1980-1999 she did indeed find “robust support for the contention that taxes on wealth dampen economic growth”, but, crucially, “the estimated magnitude is relatively modest”. A one percentage point increase in wealth taxes – a very large increase indeed – reduces growth by just 0.02 to 0.04 percentage points. Not insignificant, but certainly not the picture of economic doom painted by critics.

Interestingly, Hansson also notes that by lowering the net return on financial investments relative to investment in human capital, wealth taxes might in fact encourage a shift towards human capital formation, and that in turn could stimulate growth.

In another paper looking at the impact on self-employment, a proxy for entrepreneurialism and another common focus for criticism, Hansson finds a similarly small, though still negative, impact. While self-employment in countries that taxed wealth was on average 24% lower than in counties that didn’t, abolishing a wealth tax resulted in an increase in self-employment of just 0.2 to 0.5 percentage points.⁵

“Other factors such as perhaps attitudes toward risk, overall business friendliness, and labor market institutions that vary across countries are likely to be more important than the wealth tax.” 

That’s important, wealth taxes shouldn’t be seen in isolation, governments have many policy levers they can pull. Plus it is worth remembering that income taxes also have economic impacts, but revenues have to be raised, and its only fair that everyone, not just workers, contribute.

The biggest barriers to taxing wealth are practical

David Seim, in his analysis of the behavioural effect of Sweden’s wealth tax, found that evasion, rather than a reduction in savings, is the more likely outcome. And herein lies the real issue, wealth taxes have tended to raise little by way of revenue – and have therefore proved ineffective at redistributing wealth – because wealthy individuals tend to have clever accountants. Just think of the Paradise Papers, or the Panama Papers before that.

Much of today’s wealth is mobile, making an annual tax on net wealth near impossible. Where wealth is rooted and measurable, like land and property, there is often no associated revenue – so if you’re asset rich and income poor, how do you pay the tax? And how do you prevent the rich shifting their wealth to less easily identifiable investments, like art or fine jewellery?

As Seim’s puts it: “If the practical difficulties of capital tax implementation can be resolved, wealth taxes are likely to be a powerful redistributional tool.” But that’s the million-dollar question: can a wealth tax be designed that raises sufficient revenue to justify administrative costs, and that taxes the super wealthy rather than just capturing those who can’t shift their assets? We’ll be answering that for you, plus examining other types of wealth taxes, in our up-coming audio-documentary.