Why a wealth tax was abandoned in Britain.
Wealth taxes have become an increasingly popular policy in recent years, though there is some confusion among their advocates.
On the one hand are those, like the economist Thomas Piketty, who propose wealth taxes with the goal of eliminating concentrations of wealth. He has argued for a graduated wealth tax of 5% on those worth 2 million euros or more and up to 90% on those worth more than 2 billion euros so that “there won’t be billionaires anymore.” To Piketty, the wealth tax will have succeeded if nobody is rich enough to be liable to pay it and revenue is $0.
On the other hand are those, like Senator Elizabeth Warren, who believe a wealth tax could fund vastly increased government spending. Her proposed ‘Ultra-Millionaire Tax’ would levy:
Yet despite this increased prominence, wealth taxes have become less common. In 1996, twelve OECD members collected revenue from net wealth taxes: by 2020, just five did. Even Piketty’s native France ditched its wealth tax in 2017. Britain’s failed attempt to impose a wealth tax indicates why.
In February 1974, the Labour party was elected promising to “fundamentally redistribute income and wealth”. They proposed increased pensions, a new child benefit, and reductions in public housing rents. Their manifesto pledged “an annual Wealth Tax on the rich” to help pay for this.
The Inland Revenue was initially positive, reporting that:
But they did not believe it would raise much revenue. This had been the experience of Britain’s inheritance tax, raised to 75% in 1949 but generating revenues of just 0.6% of total personal wealth by the mid-1960s as people quite legally avoided paying it, mostly by giving it away. While this might reduce wealth inequality – Piketty’s goal – it would not raise the revenues Labour needed to fund its new spending plans – Warren’s goal.
The Select Committee which examined the proposal was much more skeptical of the practicalities than the Inland Revenue. Countries with wealth taxes had imposed them at low rates when most wealth was held in the form of land; neither was the case with Labour’s proposal for mid-1970s Britain. As Howard Glennerster notes:
But if Labour’s wealth tax wouldn’t have achieved the Warren revenue goal, it would have helped achieve the Piketty goal of equalized wealth.
The Treasury concluded that the wealth tax:
“1. Will lead people to seek non resident status, result in a considerable outflow of funds in the form of dividends and interest.
- Since it will apply to all wealth held world wide foreign employees in foreign companies resident here would be subject to tax. This would result in a big movement of banks, insurance and shipping business moving out of the UK.
- Assets held here would be affected. This would reduce the level of business in UK.”
They had good reason to think this. Britain imposed a top income tax rate of 83% and 98% on investment income. This was the era of the Tax Exile, which The Rolling Stones acknowledged with their LP Exile on Main Street, partly recorded in the south of France in 1971-1972. Their guitarist, Keith Richards, explained:
Britain’s punitive tax rates did help reduce wealth inequality just as Piketty would hope, but they did so by pushing the wealthy – and their wealth – out of the country.
In November 1976, Labour abandoned their plans for a wealth tax. Denis Healy, then Chancellor of the Exchequer, wrote:
So has everybody else.