Dr Kristian Niemietz is Editorial Director and Head of Political Economy at the IEA.
On 9 November, Discourse Collective organised a debate on the motion “This House Believes We Should Tax Wealth, Not Work” at the Big Belly Comedy Club, Southbank, London. Kristian Niemietz spoke against the motion. The article below is based on his opening statement.
It’s a great slogan, “Tax Wealth, Not Work”. Gary Stevenson even sells T-shirts with that slogan printed on them, which is quite an achievement. I’ve never seen anyone sell T-shirts expressing an opinion on fiscal policy before.
And if that were an actual possibility, if it really were possible to shift the tax burden away from work, and towards wealth, I would probably be on the other side today. Not because I like taxes on wealth, but because I dislike taxes on work.
The tax burden on labour income is already far too high, and taxes on labour income have really bad economic effects. They erode work incentives.
We know this already, because economists have been arguing about it for decades. There are economists who say that tax levels don’t actually matter very much, because most people are not very responsive to tax incentives.
Most people have a standard employment contract, which says that you have to work for 38 hours a week, and that you have to do X, Y and Z. When the tax burden goes up, you don’t have the option of saying “I will now reduce my working week by one hour and 23 minutes”, or “I will now reduce my work effort by 8 per cent”. You can’t fine-tune your working habits in that way. You will just have to keep doing what you do, and pay up.
This is true for a lot of people. But there are also situations where tax incentives do matter. When you’re thinking about whether or not to apply for a promotion, of course it matters whether the extra income this would generate is taxed at 20 per cent, or 40 per cent, or 60 per cent.
The same is true if you are thinking about training and upskilling, or about working extra hours, or if you are a potential second earner in a household which is not reliant on a second income but could do with one. It matters if you are a freelancer, it matters if you are self-employed. None of these effects are huge on their own, but they keep adding up, and in the end, taxes on labour income do matter.
That’s why, if somebody has a proposal for how we could reduce the tax burden on labour income by shifting it elsewhere – I’m all ears. The alternative doesn’t even have to be good. It just needs to be less bad than the taxation of labour income. That’s a low bar.
But a wealth tax doesn’t even clear that low bar. Here’s why:
The slogan “Tax Wealth, Not Work” implies that these two types of taxation are roughly equivalent in terms of their revenue-raising potential. They’re not. They have never been anywhere near that. Plenty of countries had wealth taxes in the past. No wealth tax has ever been a serious competitor to income taxes or consumption taxes. Those are the big revenue-raisers. Wealth taxes are also-rans. That’s always been the pattern everywhere.
Even the people who use the “Tax Wealth, Not Work” slogan aren’t seriously claiming otherwise. Their own numbers don’t match their rhetoric. Even Zack Polanski, who has made the wealth tax his flagship policy, does not claim that he can raise more than £15bn from it. I don’t believe that he could raise even that, for reasons I set out below, but let’s say he could.
£15bn. That’s half a per cent of GDP.
What’s the point of that?
Is that worth creating a big new tax bureaucracy for, and complicating the tax system even further?
Look at the tax system we have today. The number of taxes in Britain has almost doubled since the early 1990s. Britain has 88 taxes today. Only about a dozen of them raise serious amounts of revenue. The rest are mostly pointless, but they still need to be administered, they still need to be complied with, they still distort people’s behaviour.
Who would look at a system like that, and say, I know exactly what this country needs right now: another tax! Eighty-eight taxes isn’t enough, but the 89th one will do the trick. Who would seriously argue that?
Today’s proposition, that’s who.
That’s why you could paraphrase today’s motion as: “This House believes that having 88 taxes is not good enough: Britain urgently needs an 89th one.”
I think we should do the precise opposite. We should massively simplify the tax system. My ideal tax system would have no more than maybe half a dozen taxes for revenue-raising purposes, and then a few environmental ones for cutting pollution. At the very least, I would set a minimum revenue threshold, and if a tax falls short of that, I would abolish it. I would certainly not add new ones.
But a wealth tax is not just another tax. Taxes on wealth are about the most bureaucratic type of taxation that exists, because of the valuation issues. We don’t know how much something is worth unless it is being traded, and we can see how much people are prepared to pay for it.
Most types of taxes take advantage of that. They tax things when they are being traded, and when their value is being revealed through that trade. A wealth tax is different. It is a tax on things that are not being traded in that moment. So you have to compensate for that missing transaction in some way. That is why they are so bureaucratic, and inherently so.
It’s not just a theoretical problem. The valuation issue is one of the main reasons why so many historic wealth taxes have been abolished.
I grew up Germany, a country which had a wealth tax at the time. It was abolished in the 1990s for precisely that reason. It had a valuation bureaucracy which was constantly behind with the valuations.
And so, the tax authorities would point at some asset, and say, this is worth DM1,000,000. And then the owner would say, no it’s not, it’s only worth DM800,000. The owner would challenge the valuation, and demand a revaluation. Then the tax authorities would challenge the challenge of the valuation, and demand a revaluation of the revaluation.
The German example is not an unusual one. I only single it out for one reason:
I know the old place well enough. I know how much Germans love bureaucracy. They love filling out forms, and they do it very meticulously. In that regard, the stereotypes are true. If you’re looking for a place which can make large, complicated bureaucracies work, my old home country is your best bet.
But even they could not make their wealth tax work properly. They had 100 years to figure this out, but they couldn’t do it.
Maybe you are all very patriotic people, and you have a lot of faith in the capacity of the British state. Maybe you think the British state will succeed where the German state failed. But you’ll forgive me if I don’t share that optimism.
One more thing. In the case of California, where they just had a referendum on wealth taxes, some economists have argued that a wealth tax can impose economic costs even if it is never implemented, because some of the people targeted leave pre-emptively. I would argue that the British wealth tax is already imposing real costs on us, even though it does not exist yet, and might never exist.
How so?
In its early days, the Government had a bit of a “yes in my back yard” (YIMBY) outlook. It was weak, it was poorly developed, it was only skin-deep, and it may not have been entirely genuine. But it was there. Why did the Government not develop it? Why did nothing come of it?
Because all the political energy on the Left is tied up in this ridiculous wealth tax fad, that’s why. It leaves no room for anything else.
We need that political energy, or at least some of that political energy, behind policies that could actually get the country growing again, creating wealth again. We can literally build wealth. But we won’t. Because we’re too busy talking about how to tax it. That’s the real cost of the wealth tax. And we’re already paying it today.
The motion was rejected after a swing towards the opposition.
Comrades! The sum a wealth tax would raise is immaterial, is it not? It would be redistributive! That is its glorious purpose. But, comrades, for now, we must be the crouching tiger. Be still; let our Labour comrades work in the shadows.
Very good.
You could also draw on Mirrlees' insistence that we consider tax, and progressivity, as a system.
See Swiss cantons. A relatively small wealth or property tax, down around the 0.1 or 0.2pc level, in a system of (1) no stamp duty (2) very low income taxes (3) no inheritance tax....is a hell of a different proposition compared to "I know, let's have 0.5-2pc wealth tax AND take 10% of your house when you buy it AND 86pc marginal tax rates AND 40pc IHT."