Peter Franklin is an Associate Editor of UnHerd.
Say what you like about the wealth tax advocate Gary Stevenson — and just about everyone has lately — but, at least, he’s been willing to face his adversaries.
He interviewed some of them in his Channel 4 documentary, How to Get Filthy Rich with Gary Stevenson. I wish certain other high profile “activists” were as upfront and open to scrutiny.
Nevertheless, it can’t be denied that Stevenson has come off worse from the experience. Naturally, his central argument — for a 2 per cent annual tax on assets totalling over £10 million — attracted criticism from the right. But more damaging was the reception from the left. Lucy Mangan of The Guardian gave Stevenson’s documentary a two-star review. It’s presenter was “left floundering” by the critics he interviewed, she said. Another critic, the tax expert and longtime Labour Party member, Dan Neidle, was also unimpressed. Here he is, in his interview with Stevenson, painfully exposing the basic flaws in his big idea.
Of course, one needn’t possess Neidle’s forensic knowledge of the tax system to understand why the proposal — or anything close to it — wouldn’t work.
In a global economy, capital doesn’t sit still. It moves to where it attracts the highest returns and/or is subject to the lowest taxes. No one with a good accountant is going to keep an asset in a country where the government simply confiscates 2 per cent of its value each and every year. At least, not unless the asset appreciates in value by a sufficient margin over the annual tax rate — which is likely to bias the deployment of capital towards short-term speculation instead of the long-term investment that our economy desperately needs.
The practical problems with the Stevenson tax don’t end there. But rather than shoot fish in a barrel, I’d like to tackle a more difficult — and fascinating — aspect of this debate. It’s articulated by the Blue Labour MP, Jonathan Hinder:
“The Right’s response to a wealth tax is always “but it won’t work!” What I find interesting is that there is rarely an attempt to argue against it on moral grounds…”
As it happens, James Cleverly responded to Hinder’s tweet, making the point that that “it won’t work” is a moral argument. One needn’t agree with Tony Blair’s claim that “what’s right is what works” to see that “what doesn’t work, isn’t right” — not when other people’s time and effort is at stake. But let’s steel man Hinder’s argument by assuming that a new wealth tax would work — by which I mean raise a significant amount of revenue for the public purse without killing the golden goose.
In such a scenario, is there still a moral problem with taxing wealth? Or to make the question even harder — isn’t it obviously better than, say, taxing earned income? Framed that way, wealth taxation doesn’t just find support on the left, but from many centrists too — and even a few right-wingers (I could name names, but won’t).
Before going on, let me clarify that I’m not just talking about wealth-taxing the super-rich. Stevenson’s proposal applies to asset totals exceeding £10 million, but you can bet that any serious shift towards wealth taxation would start hitting much lower thresholds. Andy Burnham’s people are already floating the idea of reducing the Mansion Tax threshold from £2 million to £1.5 million. We can see where this is heading. For his part, Jonathan Hinder wants a “a proportional property tax” — and I’ve little doubt that proportionality would mean punishing cash-poor pensioners for the crime of living in a nice-ish house in the South East.
It’s a fundamental principle of progressive taxation that the amount asked for should be related to the ability to pay. That’s why modern tax systems focus on income (and its close proxy, consumption) not wealth. Indeed, from a conservative point of view, the best argument against libertarian claims that tax-is-theft is that tax is a commission on everything that a well-governed country does to enable its inhabitants to earn money. By contrast, demanding money from someone merely on the basis that they own something (which they’ve paid for out of already-taxed income) isn’t a commission, it is confiscation.
Of course, there’s the counter-argument that such taxpayers are nevertheless able to pay because assets can be sold to settle the bill. That may mean forcing people out of their homes, but to a certain kind of “rational” liberal, this is offset by the more efficient allocation of housing stock that supposedly results. On the other hand, to a conservative, it is a violation of the home and of family life — and, therefore, objectively evil.
Ah, but what about the aBaird increase in the value of these sacred suburban semis over the last fifty years? Why are the pensioners I want to protect from expropriation morally entitled to that?
Let me reply in three ways:
Firstly, property inflation in this country is indeed ridiculous, yet from the point of view of a long-term home owner it is still the same house. It’s paper value is, in most circumstances, notional and the lived experience of “wealth” unchanged. Secondly, many forms of wealth tax — like the Mansion Tax — take no account of the capital gain or loss: someone who bought a taxable property yesterday pays the same as someone who was lucky enough to buy an identical residence decades ago. And, thirdly, far from fixing the housing crisis, which is a crisis of affordability, a shift to taxing wealth would give politicians a perverse incentive to keep it going.
While we’re on the subject of perverse incentives, let’s look at another moral hazard that comes with wealth taxation:
By now, we’re all too familiar with the concept of public borrowing as a tax on future generations. It allows politicians today to buy votes with money that our children and grandchildren will have to pay back. No doubt you see the problem with that. Well, I’d argue that wealth taxation is its mirror image i.e. it is a tax on the past. I’ll explain:
“Wealth“, for most people, is literally what the taxman has previously allowed us to keep from our earnings minus what we had to (or chose to) consume. It therefore represents the willingness and ability of past governments to a) restrain their spending b) hold down the cost of living and c) encourage the citizenry to build-up capital. These, surely, are things that our leaders should be encouraged to strive for. In this regard, the trouble with wealth taxation is that it allows incumbent governments to leech off the responsibility of their predecessors. It’s the equivalent of raiding a sovereign wealth fund to bankroll profligate spending — only, in this case, the fund is owned individually by the people, not the state.
It’s another reason why a tax base consisting of current income and consumption is greatly to be preferred: because it directly incentivises serving governments to foster ongoing growth and prosperity instead of strip-mining past achievements. To put it another way, ministers should be farmers, not scavengers.
OK, that’s my argument against wealth taxation in general. But what about the billionaire problem? Is it fair that they should be able to get away with effective tax rates below those paid by the rest of us?
Absolutely not, but the solution isn’t crude wealth taxation — not least because the mega-wealthy are those best-placed to take their money elsewhere. Better then to recognise this reality and develop the capacity of government to do deals on a case-by-case basis
In this respect, HMG isn’t entirely without cards to play. Holders of great wealth, whether individuals or corporate entities, have a problem: their money doesn’t exist in the abstract, it has to go somewhere. In that respect, the UK is an attractive destination — not least because we’ve yet to indulge (much) in the self-cannibalisation that is taxing wealth.
Instead, we need to be bolder in the way we influence where global capital flows to in this country and the impact it has while it’s here. For instance, there’s a world of difference between investing in the UK-based industries of the future and outbidding first-time buyers for new housing stock. One creates the good jobs that Britain needs, the other a new class of serfs (not to mention, a generation of voters for the left).
These are qualitative — and, I would say, moral — distinctions that a wealth tax cannot capture.