Taxing wealth in the budget could score the chancellor a triple win

Much ink has been spilt – and maybe some tears too – about how Rachel Reeves has boxed herself into a corner ahead of November’s budget. By making a manifesto pledge not to raise any of the three big revenue-raising taxes (income tax, national insurance and VAT), while sticking to her self-imposed fiscal rules, she has severely reduced her options for balancing the books.  

Partly in response to these limitations, many voices are calling for the chancellor to take bolder steps than she took last autumn to increase taxes on wealth. Wealth in the UK is under-taxed compared to income (the average tax rate on wealth is 4%; on income it is 33%), and as a result we only raise a tiny fraction of annual tax revenues from taxes on wealth.

At the same time, wealth inequality in Britain is much higher than income inequality, and is increasing in absolute terms (the gap in total wealth between the top 10% and bottom 10% in the UK increased by 48% between 2011 and 2019) – so there is plenty of wealth out there to tax.  

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Opposition to the idea of taxing wealth more is often presented in terms of two arguments. The first, wildly overblown, line is about the danger of capital flight – the idea that the rich will all leave if taxes on them are increased, that thousands of wealth creators are just a mouse click away from relocating themselves and their families to Dubai or Geneva. This idea is promoted by a credulous or conniving media based on very flimsy evidence that does not stand up to scrutiny. 

The second claim is that taxing wealth will harm economic growth, which – for better or for worse – is the government’s top priority. This could be true if taxes on wealth were poorly designed or implemented. For example, simply equalising tax rates on capital gains with tax rates on employment income might conceivably reduce investment.

But such arguments are often a straw man. Most experts calling for the equalising of capital gains tax rates with taxes on employment income are also advocating for the introduction of an investment allowance to address this very concern, combined with other measures (such as an exit tax to deal with the risk of capital flight). Taken together, such measures to tax capital gains effectively could bring in more than £11 billion in additional annual tax revenue. 

But it is not just a matter of balancing higher tax revenues with the concern to promote growth. In fact, we argue that well-designed taxes on wealth can boost economic growth, at the same time as raising much-needed revenues.

How so? In part, there’s a direct impact, as when taxes on wealth that go beyond changes to tax rates can remove some of the distortions in the current tax system which lead to perverse incentives.

One such example is the drag on productivity that arises from people shifting employment income into capital gains so as to reduce tax liabilities. The Institute for Fiscal Studies noted earlier this week that “improving the design of the tax base” and “more closely aligning overall tax rates across different forms of income and gains would produce a fairer and more growth-friendly system”.   

But taxing wealth can also boost growth in other ways, by helping to tackle the wealth inequality that itself is a barrier to growth. Not nearly enough attention is paid by the political classes to this fact. Some have an ideological conviction that the role of government is to get out of the way of free markets and allow wealth to trickle down, and that wealth inequality is a necessary by-product of capitalism and prosperity. Most people in politics today realise that such a view belongs in the history books, but they still fail to recognise that full extent of the harms caused to our society, economy and democracy by wealth inequality.  

Wealth concentrated in the hands of a few perpetuates unfair advantages across generations, exacerbates social and regional divides, and disproportionately benefits certain groups at the expense of the 50% of the population who own practically no wealth.

Extreme wealth inequality also distorts the economy and undermines growth, by enabling and incentivising wealth extraction at the expense of genuine wealth creation (through mechanisms such as financialisation and rent-seeking that undermine productive investment and innovation), by reducing consumer demand, by blocking opportunity and wasting talent, and by undermining competition through the development of oligopolies.

Taxes on wealth can help to unpick some of these features of our dysfunctional economy, and in the process can help us to build an economy that is both fairer and more prosperous. A more effective tax system won’t solve all our economic problems, but it is a necessary element of a better system. We also need to find ways to spread wealth more broadly across society in the first place, rather than putting up with an economy that generates huge inequalities and relying on the tax system to redistribute some of it.

A final question is whether reforming existing taxes on income from wealth (like capital gains tax) is enough, or whether we should consider a tax on stocks of wealth – an annual or one-off wealth tax. There are certainly challenges in designing and implementing such a tax effectively, but we argue that they are not insuperable, and that taxing stocks of wealth delivers benefits that taxing income from wealth alone cannot. 

To discover how the chancellor can achieve the ‘triple benefit’ of raising revenues, boosting growth and reducing inequality by taxing wealth better in November’s budget, read our report for the Fairness Foundation, Win Win Win, which is out today.

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