Squeeze the rich

Liz Kendall’s proposals for welfare reform/cuts have brought a renewed spate of calls for a wealth tax to raise revenue for public services and benefits instead. Hang on...

“The UK Government had a choice. They could have targeted those with wealth, assets and property, taxing and then redistributing the revenue. They’ve chosen instead to punch down – something we cannot support." (Roz Foyer, STUC general secretary).

This relatively mild ( cf "vindictive") reaction to Liz Kendall's green paper on welfare reform/disability benefit cuts, Pathways to Work, from within the labour movement tries to refocus the debate on inequality in the UK. It raises once more the vexed issue of a wealth tax.

'Once more' because the British Left always reaches for a wealth tax as an alternative when a Labour or any other government sets out to cut the burgeoning cost of the social security system and/or erode/eradicate the budget deficit. 'Vexed' as a wealth tax is not a simple, cut-and-dried matter as years of discussion have exposed; there is no consensus on its merits.

Even without Kendall's proposals the idea of a wealth tax has risen up the agenda before, during and after the Covid pandemic because of Trump's huge tax cuts, the Exchequer's need to raise revenue and rising inequality of wealth distribution (see Stuart Adam's excellent IFS slides here). The grotesque and widening gulf between the asset-rich and income-poor is the critical issue for the Left (and even some others).

This has acquired greater salience at the same time as mounting evidence that UK spending on working-age benefits, including PIP/ADP, could go through the roof as the number of claimants more than doubles: from 2m to 4.3m for PIP by 2030 when the cost could be £70bn a year according to Kendall. Or £20bn more than today which in turn is four times the £5bn savings the reforms/cuts are due to render.

'Squeeze the rich till the pips squeak'

A wealth tax could raise eye-watering sums for the Treasury, according to some estimates. Yet, as has been pointed out, where once 14 OECD member countries in Europe levied a wealth tax, only three - Norway, Spain and Switzerland - now do and the sums raised are derisory, according to Dan Neidle, who claims the Sanchez government in Madrid has raised just €630m.

The TUC, drawing on the Spanish scheme. has proposed a "modest" wealth tax on the richest 140,000 Brits which would raise £10.4bn for public services. The tax would range from 1.7% on assets worth more than £3m to 3.5% above £10m. Tax Justice suggests a 2% levy on assets worth more than £10m, saying: "it would affect 0.04% of the UK population and would raise £24 billion a year. We’re also campaigning to apply national insurance to investment income, raising up to £10.2 billion a year." This campaign would also treat capital gains the same as income tax, raising a further £16.7bn a year, it claims.

The Wealth Tax Commission in 2020 made the case for "a one-off wealth tax payable on all individual wealth above £500,000 and charged at 1% a year for five years would raise £260 billion; at a threshold of £2 million it would raise £80 billion." It insisted it would be economically efficient, with no distortive impact upon behaviour (primarily as a disincentive to work and/or encourage avoidance. It would also be fair. (Read more here).

Alternatively, the authors say, the authorities could raise £250bn over five years via: • Basic rate (E&W) of income tax to rise by 9p (20p to 29p) • All income tax rates to rise by more than 6p • All VAT rates to rise by 6p (taking main rate from 20p to 26p) • Corporation tax to rise by 5p and VAT to rise by 4p. Obvious no go-es!!

Clearly, a one-off wealth tax at the very least has some merit in principle but an array of critics highlight the difficulties of design it raises alongside a lack of admin capacity and cost. In his Prospect piece Neidle also pinpoints problems with loopholes (exploited by the super-rich) and the obvious one of folk simply leaving the country (as per the Norwegian example). One might recall the decision of the great film director Ingmar Bergman to leave his native Sweden temporarily when he was facing being taxed at more than 100% of his income and accused of tax evasion.

Reform the tax system

Governments of whatever hue rarely have the guts to embark upon long overdue reform of blatantly unfair taxes. In Scotland, after 18 years of the SNP in power, we're still waiting for even the slightest sniff of the promised reform of the thoroughly inequitable council tax (apart from doubling it on second homes to allegedly raise invisible extra funds for affordable housing). That alone could deliver big sums - and diminish inequality.

Other changes put forward include closing inheritance tax loopholes and being less generous fiscally towards high earners' pension pots alongside equalising income and capital gains taxes. In Scotland, again, delivering what the government says it intends doing: implementing a genuinely radical tax strategy rather than "a visionless roadmap to nowhere."

But this requires a greater cross-party commitment to reform and to cooperation in designing and implementing a better system. Plus, as usual, a readiness to examine proposals on their merit rather than a rush to extravagant, belligerent judgment on social media - as we've seen with the Kendall proposals and the crude political gain made out of the genuinely disabled. (Speaking as the father of a terminally ill cancer victim).