EconLog |

Why a wealth tax was abandoned in Britain.

By:

  John Phelan

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:

…an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion…this small tax on roughly 75,000 households will bring in $3.75 trillion in revenue over a ten-year period.

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:

“…although there will of course be many problems to be resolved we see no reason why a wealth tax should not be introduced reasonably quickly”

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:

“The several thousand civil servants needed, depending on the valuation level at which the tax began, the numerous regional offices required and the process of regular valuation that might fall on individuals came as a surprise to the politicians and, indeed, to the Treasury when it got to think about the question properly.”

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.

  1. 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.
  2. 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:

“The whole business thing is predicated a lot on the tax laws…It’s why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we’d be paying 98 cents on the dollar. We left, and they lost out. No taxes at all.”

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:

“We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”

So has everybody else.


READER COMMENTS

Mark Brady
Jul 17 2022 at 4:20pm

Thank you for an interesting post.  I have two thoughts.

(1)  There was a slight respite under the Conservative government of 1970-74.  In 1971 under the Heath (Conservative) government with Anthony Barber as chancellor of the exchequer,  the top rate of income tax on earned income was cut to 75%.  (A surcharge of 15% kept the top rate on investment income at 90%.)  Then in 1974 under the minority Wilson (Labour) government with Denis Healey as chancellor, the cut was partly reversed and the top rate on earned income was raised to 83%.  (With the investment income surcharge the top rate on investment income rose to 98%, the highest permanent rate since the war.)

(2)  The policy of the Thatcher and Major (Conservative) governments was to compensate for the lost revenue incurred by cutting income tax by raising the standard rate of value-added tax (VAT) from 8% to 15% (1979), and later to 17.5% (1991), and extending its scope to domestic fuel and power.  And under the coalition government headed by Cameron (Conservative), the standard rate of VAT increased from 17.5% to 20% with effect from 4 January 2011.  This remains the rate, and it covers far more goods and services than do sales taxes in the U.S.

This policy of switching from income tax to value-added tax m(a) reduced the real purchasing power of many households, and (b) increased income inequality after both direct and indirect taxes are taken into account.

Craig
Jul 20 2022 at 11:25am

I’m no fan of wealth taxes, indeed I’d suggest that a wealth tax imposed at the federal level will almost assuredly constitute a direct tax and be applied in an unconstitutional matter. Still, the fact of the matter is that the argument against wealth taxes will ultimately fall on deaf ears. The vast majority of Americans who own homes, well, that home is quite possibly their largest asset on top of which it is obviously subject to property taxes which is obviously a wealth tax. Yes, it tends to be imposed at the local, maybe county level, but that distinction matters little to the people paying the tax.

Essentially the end result is that middle class Americans see their largest asset subject to a wealth tax while Jeff Bezos’ largest asset, presumably Amazon stock, isn’t.

Vivian Darkbloom
Jul 23 2022 at 2:31pm

“The vast majority of Americans who own homes, well, that home is quite possibly their largest asset on top of which it is obviously subject to property taxes which is obviously a wealth tax.”

The second “obvious” seems misplaced.  It’s a strange tax on “wealth” that doesn’t account for the debt used directly to acquire that asset.  For example, if I own a home valued at $1 million (or much less!) and have a $900,000 mortgage, it’s not obvious to me that my “wealth” as represented by that home is $1 million.   If the goal of property taxes is to tax “wealth” (which I doubt) then it is a very capricious and regressive “wealth tax”.

 

 

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