The case for taxing wealth
There is currently much hand-wringing over income inequality – and rightly so. In the UK, the ratio of CEO to average worker pay is 130:1. Less fuss is made, however, about the distribution of wealth. Yet this is worse than that of income, and its implications are further reaching.
This briefing is a companion piece to UnHerd’s latest audio-documentary (below) in which I explore wealth inequality, consider what can be done about the unfairness in the system, and present my ‘wealth tax manifesto’…
Wealth is highly concentrated
Wealth (the stock of assets someone owns – from property to pensions, super cars to stocks and shares) is highly concentrated. Globally, half of the world’s wealth is in the hands of the top 1%.1
‘Well of course,’ you might conclude, ‘the vast disparity between those living in luxury and those in abject poverty in the developing world is skewing the stats’. Wealth inequality can’t be nearly as bad in advanced, Western economies, with their capitalist promise that anyone can succeed with a little hard work and creativity… can it? Sadly, yes.
In the US, the wealthiest 10% own 77% of the country’s wealth, the bottom 10% are net debtors.2
It’s slightly better in the UK, but wealth distribution is still shockingly inequitable: the wealthiest 10% of households own 45% of the total wealth. The bottom 50% own less than 10%. To put it even more starkly, the richest 10% of households own 875 times more wealth than the poorest 10%.3 And as Credit Suisse’s 2017 Global Wealth Report notes, “The pattern of wealth distribution in the United Kingdom is fairly typical for a developed economy.” It seems the West’s current model of capitalism is indeed generating wealth, but it’s being funnelled into the hands of a fortunate few.
It is also worth noting that, while much time is spent discussing income inequality – which of course contributes to wealth accumulation – wealth inequality is far worse. In fact, in the UK it’s twice as bad.4
The wealth divide is getting worse
Shockingly, the share of wealth owned by the top 1% globally has been increasing since 2008. In 2000, those ‘one percenters’ owned 45.5% of household wealth. They now own over 50%.1 At the same time, with the exception of China, median wealth is lower now than pre-crash.
In America, wealth inequality has been growing steadily worse for decades. Between 1983 and 2010, almost 40% of wealth growth went to the top 1% and three quarters went to the top 5%. In depressing contrast, the bottom 60% saw their wealth decline.2
Likewise, in the UK, the wealthy – the top 10%, the top 1% and the top 0.1% – have all increased their share of household wealth since the 1980s. Since 2010, the wealth of the richest 10% has risen by 21%, while the wealth of the poorest 50% has risen by just 7%, further exacerbating the divide.
Why are the wealthy getting so much wealthier than the rest of us? Because wealth creates wealth. The returns to wealth are outstripping the growth in GDP and earnings.
Take, for example, financial assets. In the UK, an estimated 77% of all stocks and 64% of bonds are owned by the 10% wealthiest households. As think tank IPPR points out, globally financial assets have grown by 6-7% a year, after inflation, which is 3-4 times the growth in GDP.3 And central bank policy since the crash has exacerbated this: the Bank of England’s QE programme inflated the value of financial assets, with 40% of the gains going to the richest 5% of households.4
And as assets increase in price, fewer can afford them, further compounding the divide. Just look at the declining levels of home ownership in the UK, a key reason for now rising wealth inequality: over the last decade, the value of private housing stock has increased by £1.7 trillion, driven by a 51% increase in average house prices, and only a 9% increase in the number of privately owned homes.5
Wealth inequality is threatening faith in capitalism
Fairness, in Anglo-Saxon capitalist countries, is understood differently from equality. An uneven distribution of wealth might be acceptable, if it is linked to effort and talent. Unfortunately, too much wealth is the result of speculation or luck. And that makes it seem like the system is rigged in favour of the rich – which is precisely the view of more than three quarters of people in America and Britain.1
Capitalism is in trouble. 63% of Americans think wealth should be more evenly distributed.2 76% of Britons think the distribution of wealth will either be the same or worse in ten years, just 4% think it will be fairer.3
A majority of people on both sides of the Atlantic think it’s time for government to act.
52% of Americans think that “heavy taxes on the rich” should be used to redistribute wealth – a noticeable increase on the 45% that thought as much two decades ago. Meanwhile, 57% of British people think the Government should do more to reduce wealth inequality.
We barely tax wealth, yet wealth has grown significantly
In the UK, in 1980 the sum of personal wealth was equivalent to around three times GDP, by 2009 it had risen to five times.1 Yet, as a percentage of GDP, revenue raised from taxing wealth has barely changed since the 1950s, where it has hovered around 1%.2
Instead, the burden of taxation falls heavily on earnings. Income tax and National Insurance Contributions account for nearly 50% of UK tax revenue, while capital taxes (capital gains, inheritance and stamp duty-related taxes) and council tax combined account for around 8%.3
And the rates at which wealth is taxed are lower than those for earnings – which not only represents a profound unfairness, but also incentives ‘creative accounting’, with high earners in particular converting earnings into capital gains.
…But countries are abandoning annual wealth taxes
With an ever-growing wealth divide, and pressure to raise the revenue needed to fund public services, wealth taxes look increasingly attractive.
Celebrity economist Thomas Piketty advocates an annual tax on net wealth. On the face of it, a small percentage levy, say 1% on wealth above a certain threshold, seems reasonable. Those with the broadest shoulders… as the saying goes. So why have countries with this type of wealth tax abandoned it – including, from this year, Piketty’s home nation France?
In the past two decades, Denmark, Germany, Finland, Iceland, Luxembourg, Sweden and Spain have all scrapped their annual wealth taxes. Norway’s Minister of Finance is making noises about abolishing theirs. Critics argue that makes sense – wealth taxes dampen growth by disincentivising investment and entrepreneurialism.
In fact, the evidence on that is weak, but the rich do tend to have clever accountants, and even if they didn’t, exemptions and valuation complications mean little revenue gets raised. In Sweden, for example, while aggregate household wealth grew by around 60% between 2001 and 2006, wealth tax revenue decreased almost 60%. The tax typically accounted for between 0.5% and 1% of tax revenue.1 As symbolic as the wealth tax might have been, it could hardly be described as redistributive, and surely doesn’t justify the administrative burden.
An annual tax, however, is just one example of a wealth tax. There are plenty of other, more practical options that the UK could implement.
Taxing income at the same rates regardless of source is a no-brainer
It is absurd that the UK tax system treats unearned income more generously than earned income. On earnings, Income Tax is levied at 20%, 40% or 45%, and National Insurance Contributions (NICs) are added to that at a rate or 12% up to an earnings ceiling. The highest rate for capital gains is 28%, with no NICs on top.
Which means: the millionaire bank CEO who takes a large chunk of their earnings via stock options pays a lower rate of tax than a local branch manager; or the property speculator who makes big capital gains (often as a result of community investment) pays less tax on their profits than the shift worker toiling through a 40-hour week.
As Nobel laureate Sir James Mirrlees argued in his seminal 2011 review of the UK tax system, neutrality should be a key principle underpinning taxation: “Income from all sources should be taxed according to the same rate schedule”.1
“Applying different rates to different income sources complicates the system, unfairly favours those taxed more lightly, distorts economic activity towards lightly taxed forms, and facilitates tax avoidance…[it] means applying that same rate schedule to, inter alia, self-employment income, property income, savings income, dividends, and capital gains.”
Revenues have to be raised, which means taxes have to be levied. There is no justifiable reason for levying a lower rate on capital gains than labour – not least when the labour or taxation of others has contributed to those gains.
Time to implement a land value tax
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”
These are the words of Adam Smith, the 18th century economist and philosopher, and father of modern capitalism. Land value taxes (LVT) are popular among economists – Nobel laureate Milton Friedman referred to them as “the least bad tax”. Land cannot be hidden, or off-shored, it is finite, its value is dependent on the activities of others, and when valued based on its optimal use it discourages unproductive uses, speculation and land banking.
As Winston Churchill put it in a speech in 1909:
“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”
Land taxes are already levied in some countries, including Estonia, Denmark and Finland, and within some areas of America and Australia. There is flexibility in how they are applied, for example in some states in Australia primary residences are exempt, in Estonia a lower rate of tax is levied on agricultural land, and in Finland a penalty tax is charged on vacant, urban lots.1
A proposal has been put forward to trial an LVT in London, replacing other property-related taxes like council tax and business rates.2
The benefits of an LVT are be two-fold: a fairer tax system and increased development, including house building (thereby reducing prices and allowing more people to become home owners).
Inheritance isn’t a right, its unearned income on which tax should be levied
Inheritance is one of the most unpopular taxes – one YouGov poll from 2015 found 59% of respondents see the tax as “unfair”. That is unsurprising: it is a very human desire to want to leave something to your children. But unpopularity doesn’t make a tax wrong, or unjust. Gifts and bequests are, to the recipient, unearned income, and should be treated as such for tax purposes.
In addition, inheritance, as well as gifts made during someone’s lifetime, have been shown to reinforce wealth inequality.1 It is not ‘fair’ that some people benefit from the transfer of wealth while others are not so fortunate.
As 19th century philosopher and economist John Stuart Mill argued: “Many, indeed, fail with greater efforts than those with which others succeed, not from difference of merits, but difference of opportunities”, reasoning “inheritances and legacies, exceeding a certain amount, are highly proper subjects for taxation”.
But an inheritance tax is too narrow to properly capture the transfer of wealth, and too open to avoidance. In fact, in Britain, avoidance is built in: if you transfer your wealth at least seven years before you die, you don’t pay tax.
An accession – or gift – tax would make far more sense, and is levied on the recipient rather than the donor. An individual is given a personal gift allowance to use over their lifetime. Once the cumulative value of all the gifts and bequests they have received has passed that allowance, they start paying tax. So, someone who receives a very large inheritance would pay tax immediately, whereas someone who receives lots of small gifts would not.
An accession tax would also encourage the spread of wealth. While the total value of someone’s estate might be above the personal gift allowance threshold, if it is divvied up between enough people, each recipient’s bequest may be below it.
That’s much fairer.