I’d rather build wealth than tax it

Wealth taxes raise little, cost a lot to run and distract from the reforms that would actually make Britain richer

Kristian Niemietz is Editorial Director and Head of Political Economy at the IEA.

On 13 October, the King’s College Union Society (or ‘King’s Union’) organised a debate on the motion ‘This House would levy a 2% wealth tax on assets above £10’ at King’s College London. Kristian Niemietz was one of the speakers against the motion. The article below is based on his opening remarks.

I have no major ideological problems with a wealth tax.

I have an ideological preference for a smaller state, yes. I want the state to do a lot less than it does now.

But even a small state needs to be financed somehow. It needs to tax something. So why not wealth? Taxing wealth is not per se worse than taxing income, or taxing consumption, or taxing whatever else governments may want to tax.

In fact, if we could import the tax system and the public finances of Switzerland – where they do have a wealth tax – wholesale, as a package deal, I would take that deal, wealth tax and all. But I don’t think anyone else in this room would. This is because that would require a drastic reduction in public spending, from 44% of GDP to 32%, a largely privatised healthcare system, a largely privatised pension system, etc.

But I would certainly not want to import the Swiss wealth tax in isolation, because that would mean importing one of the few things they get wrong, without any of the things they get right.

While I have no huge ideological objections to wealth taxes, I have plenty of practical ones. The practical experience with wealth taxes thus far has been disappointing, to say the least. Wealth taxes have been tried many times before. This is not a remotely new idea. Until the mid-1990s, half of Western Europe had wealth taxes. From then on, they were dropped in country after country, and even the three remaining ones have been heavily scaled back.

That’s very unusual. Governments rarely abolish taxes, even bad ones, so when this does happen, we should pay attention. Why do they do it? Why did so many European governments abolish their wealth taxes in the 1990s and early 2000s?

There’s no need to speculate. They told us why they did it. It boils down to: wealth taxes are more trouble than they are worth.

For a start, they raise very little revenue. Nobody has ever managed to raise much more than 1% of GDP from a wealth tax, on a sustained basis. Gary Stevenson sells T-shirts that say ‘Tax Wealth, Not Work’. It’s a nice slogan. But it implies that these two types of taxation are broadly equivalent to one another in terms of their revenue-raising potential, which they are not, and which they have never been anywhere.

We’ve heard the argument from the proposition that ‘real’ wealth taxes have never been tried, that the problem with actually existing wealth taxes was just that they had too many exemptions. That was not the main problem with them, and it was not the reason why they were abolished. The exemptions were a response to one of the actual problems with wealth taxes: the valuation problem.

The important taxes, the ones that raise actual revenue, have one thing in common: they are tied to transactions. Someone sells something to someone. Money changes hands. A good or a service changes hands, for example in the form of an employment contract, or a sales contract. The taxman observes that transaction, and says: ‘I want X% of that.’ What makes wealth taxes fundamentally different from taxes on income or consumption is that there is no transaction. Nothing changes hands. You just own an asset, you use it, you do something with it, but you are not selling it and nobody is buying it. So nobody knows how much it is worth.

Value is subjective. Things are ‘worth’ as much as people are prepared to pay for them. The only reliable way to find out how much something is worth is to offer it, and see how much people are prepared to pay. Where there is no market transaction, there is no market price.

That doesn’t mean that valuation of assets is impossible. What it means is that wealth taxes are extremely bureaucratic and admin-intensive. You need a valuation bureaucracy, which has to work out asset values indirectly, by looking for substitutes that do have a market price, and then extrapolating. That’s why actually existing wealth taxes typically had exemptions: governments simply exempted asset classes that are particularly difficult to value, such as property and business wealth.

Photo by Val Bond on Unsplash

Even some of the supporters of wealth taxes acknowledge that you would have to hire thousands of additional tax bureaucrats to make a wealth tax work. They think it’s worth it. I don’t.

Because what problem would that solve, exactly? Suppose we had a wealth tax, and it raised 1% of GDP. It wouldn’t, but let’s say it did.

Public spending would then go up from 44% of GDP to 45%. And then what? You’ve seen the mass protests in France, where they’re currently protesting against ‘neoliberalism’ and ‘brutal austerity’, or, as I call it, government spending levels of 56% of GDP. Does anyone seriously believe that demands for additional public spending would be satiated if we had a wealth tax? Of course not. Campaigners would celebrate for a year or so, and then we’d be back to having exactly the same debates we’re having now.

This is all before we even get into the behavioural responses to wealth taxation, the reduction in saving, investment, entrepreneurship and business formation, which we can talk about later.

These responses are real, and they show up in empirical studies, even though there’s a lot of disagreement about their size. But that’s not even my main problem with wealth taxes.

My main problem with the wealth tax, or at least with the way wealth taxes are currently being debated, is the opportunity cost.

I’ve been in the think tank sector for 18 years. Until about two years ago, nobody ever asked me what I thought about wealth taxes. Now, I am getting invitations like this one all the time. Don’t get me wrong, I like being here, thank you for the invitation and all that – but I would rather be discussing something else. Instead of having to oppose bad ideas, I would rather be making a positive case for good ones.

Speaking of good ideas: during its first couple of months, the Labour Government briefly tried to brand itself as a YIMBY government, a government for the builders, not the blockers, as they put it. That would have been a perfectly sensible agenda for a centre-left government to pursue. It’s the way to improve housing affordability, and it’s also the way to get the economy growing again. Yet today, housebuilding rates are even lower than they were under the Conservatives. Why did the Government not follow up on its YIMBY rhetoric? Why did they lose interest in YIMBYism so quickly?

Because there’s no political mileage in YIMBYism, that’s why. There’s no political capital to be gained in that way. Instead, we had hype around figures like Zack Polanski and Gary Stevenson, around ideas like the wealth tax. That’s where all of the Left’s political energy and enthusiasm has gone. If half of that political energy had gone into YIMBYism, we could be in the early stages of a building boom right now. Instead, we’re debating wealth taxes, while the building industry and the growth figures are collapsing all around us. It’s a waste of time. It’s a dead end.

Britain could very easily create billions and billions in additional wealth by just removing the blockages, by just allowing it to happen. That’s a wealth creation machine which we are just refusing to use. I’d rather build wealth than tax it.

The motion was carried with 105 ayes and 41 noes.