What’s so bad about a wealth tax?

Monday 07 July 2025 6:10 pm

That “millionaires don’t want all that cash” misses the purpose. Wealth taxes harm us all, writes Callum Value

Neil Kinnock is aware of a factor or two in regards to the Far Left. His time as chief of the Labour Get together (1983 – 1992) was overshadowed by frequent clashes with what we’d now name the Corbynite wing of the motion. Kinnock should know higher than most likely anybody else within the nation that one can’t take care of these individuals by assembly them half-way. 

Which makes it all of the extra shocking that it’s Kinnock, of all individuals, who’s now responding to the potential electoral risk from a brand new socialist social gathering – led by Jeremy Corbyn and Zarah Sultana – by reviving the political zombie of the wealth tax.  

Wealth taxes have been as soon as a reasonably frequent type of taxation. Within the mid-Nineties, a dozen OECD nations nonetheless had some variant of such a tax. However they then fell out of favour, and have been quietly dropped in nation after nation. As we speak, the one main economies that also have wealth taxes are Spain, Norway and Switzerland. In Norway, the wealth tax solely accounts for somewhat over one per cent of complete tax income; in Spain, it isn’t even half that. Switzerland is the one nation the place the wealth tax is a significant income (somewhat over 4 per cent of the whole). However Switzerland additionally has one of many lowest tax burdens in Europe total, and a really investment-friendly tax system. They get so many different issues proper, they will get away with this one populist gimmick. 

What’s so unhealthy about wealth taxes? 

For a begin, they’re much extra administratively advanced and bureaucratic than most different taxes. Let’s evaluate them to earnings taxes and consumption taxes. If you wish to tax incomes, it’s important to understand how a lot individuals earn, and if you wish to tax consumption, it’s important to understand how a lot client items value. The previous is laid out in individuals’s employment contracts, and the latter is printed on the worth tags. Wealth, then again, must be particularly assessed and appraised, which is a burdensome course of, particularly for property that aren’t often traded.

Wealth additionally fluctuates on a regular basis. By the point you learn this, your earnings, and the worth of many of the belongings you purchase, might be nonetheless about the identical because it was on the time of writing, however the worth of your pension fund or property (when you’ve got any) virtually definitely not is. One consequence of this complexity is that a lot of the income raised by a wealth tax is straight away swallowed up by the tax paperwork. 

Wealth taxes impede the formation of capital

Supporters of wealth taxes usually argue that the individuals who pay them do probably not “want” the cash anyway. This misses the purpose. Suppose you personal property value £10,001,000, i.e. £10m plus £1,000. Neil Kinnock’s model of the wealth tax has a tax charge of two per cent, and a tax-free allowance of £10m, so you’d pay a wealth tax of two per cent on these further £1,000 above the allowance. Thus, your wealth tax invoice would come to £20. Not precisely onerous, is it? You’d nonetheless be a really wealthy individual. It gained’t drive you to the meals financial institution. 

However right here’s one other approach of taking a look at it. When you make a 3 per cent return on these £1,000 (i.e. £30), a wealth tax of two per cent on them is equal to a tax of 66 per cent on these returns. It gained’t impoverish you, certain, and it’ll not make you liquidate your £10m asset portfolio both. However would you trouble attempting to develop your asset portfolio a lot past the £10m you have already got? Or would you quite devour extra now, and save much less for the long run? 

That is a method through which wealth taxes impede the formation of capital. 

To this point, we’ve solely seemed on the home penalties. We now have not even touched upon the topic of capital flight but, though we all know that that has traditionally been a side-effect of wealth taxes, and one cause why they’ve fallen out of favour. Britain has already seen an uptick within the variety of rich individuals emigrating, and a wealth tax would solely exacerbate that pattern. 

If the federal government is anxious about wealth inequality, there’s a a lot easier method to handle that subject: construct extra homes. That will successfully “redistribute” property wealth, whereas rising the pie on the identical time. Don’t tax wealth – multiply it.  

Callum Value is director of communications on the Institute of Financial Affairs (IEA)