What is a wealth tax – and would it work in the UK?
The UK economy is facing a challenging outlook, with economists warning that the Treasury may need to find at least £22 billion at the upcoming Budget. As the government seeks to boost funds, the chancellor is under pressure to raise taxes, potentially including an increase to the headline rate of income tax. However, an alternative proposal gaining traction is the implementation of a wealth tax, a policy that targets the ultra-rich and aims to redistribute wealth to reduce economic inequality.
A wealth tax is a direct levy on an individual's total net assets, including property, investments, cash, and other possessions. Unlike regular taxes, it focuses on accumulated wealth rather than income earned in a given year. While the UK already has taxes like inheritance tax, capital gains tax, and council tax that target assets, a wealth tax would be a significant shift in economic policy.
The idea of a wealth tax has sparked debate among economic experts, with concerns about its fairness, revenue-raising potential, and economic impact. Campaigners argue that a wealth tax could generate substantial funds for the Treasury without significantly affecting a large portion of the population. Tax Justice UK proposes a 2% levy on individuals with assets worth over £10 million, estimating a potential annual revenue of £24 billion from just 0.04% of the population.
This proposal comes at a time of growing wealth inequality, with the number of UK billionaires increasing from 15 in 1990 to 171 in 2023, while living standards have stagnated for low- to middle-income earners. James Meadway, an author and host of the Macrodose podcast, supports the idea of a wealth tax, arguing that it challenges the notion of allowing wealth to concentrate in a few hands. He suggests that the funds generated could be used to address various social and economic issues, such as funding the NHS and removing benefit caps.
However, critics raise concerns about the potential negative impact on investment and the risk of 'capital flight,' where wealthy individuals might leave the UK or move assets abroad. Dan Neidle, a tax policy expert, highlights the uncertainty in predicting the revenue from a wealth tax, as a small number of ultra-wealthy individuals could significantly reduce projected yields. Additionally, Neidle argues that a wealth tax could cause substantial economic damage, citing modeling from the US and Germany that suggests a reduction in GDP by 2% and 5%, respectively.
In conclusion, while a wealth tax is a proposed solution to address economic challenges, it remains a controversial and complex policy. The UK government must carefully consider the potential benefits and drawbacks before making any decisions that could significantly impact the economy and the distribution of wealth.
