| Abstract: |
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. |