The middle class have the most to fear from Labour's wealth tax

Telegraph

15 hours ago

A wealth tax would be economically damaging, administratively burdensome and ultimately counterproductive. There is a clear need to push back against calls for one in the UK.
Although often framed as a response to rising fiscal pressures, such taxes consistently fail to deliver the revenues promised, distort behaviour and penalise saving, investment and growth.
Worse, they divert attention from the deeper structural challenges in public spending and the need for long-term reform.
Few countries globally have a wealth tax, with the number in the OECD falling from 12 in 1990 to three now. In those three –Norway, Spain and Switzerland – thresholds have risen and rates fallen.
The global retreat from wealth taxation reflects a hard-earned recognition that such levies don't work.
While much coverage focuses on the fact that the wealthy will leave, the truth is these taxes fall disproportionately on those who are not internationally mobile – retired savers, small business owners, and households with illiquid assets. The most mobile individuals and capital simply relocate. The middle class would be those with most to fear from a wealth tax.
The result would be not just lost revenue, but a damaging shift in the composition of the UK economy. Britain would risk becoming a 'domestic economy' – less open to international capital, talent, and enterprise, and more reliant on taxed domestic wealth and consumption.
That is a path to stagnation, not renewal.
For the UK to raise a wealth tax would send a negative signal about the outlook, disincentivising entrepreneurs and wealth creators, discouraging them from investing or creating jobs here. An efficient tax is one which does not impact behaviour. A wealth tax would do just that.
This is not a defence of billionaires but a focus on the economic reality of how the policy would work. It would deter those considering the UK as a base for innovation and enterprise.
Research for The Wealth Tax Commission by academics at the London School of Economics, and endorsed by former Cabinet secretary Gus O'Donnell, is often cited in favour of the idea.
Interestingly, its analysis contains many reasons to oppose the very tax it is advocating. For a start, it accepts that it would be more effective to make existing taxes on wealth such as capital gains work better, as opposed to a new one.
Worryingly, it acknowledges that even at a very low rate of wealth tax, one in six of those impacted could leave. As the report puts it, 'at a tax rate of 1pc, between 7pc and 17pc of the initial tax base would be lost to behavioural response. This is not a trivial amount'.
That research also found that for individuals with taxable wealth over £5m, 87pc is tied up in 'business assets.' It also acknowledged that 'another problem category could be start-ups that are potentially profitable but loss-making in the early years'.
A wealth tax would clearly act as a deterrent to those with the potential to create jobs, growth, and future tax revenues. It would be both anti-business and anti-growth.
The double taxation involved in capital gains tax, inheritance tax and wealth taxes would, in time, tend to limit domestic savings, investment and capital accumulation. The long-term result would be to reduce the UK's productive capacity, undermine financial resilience and discourage long-term planning.
These issues are not new. Dennis Healey, Chancellor between 1974 and 1979, acknowledged: 'We had committed ourselves to a wealth tax, but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.' Perhaps just as well. Ireland, which did impose a wealth tax in 1975, abolished it in 1978.
There are also deep issues of liquidity and fairness associated with wealth taxes. An old argument against is that they would hit people who are asset rich but cash poor. Even its advocates accept that it 'may require acceptance of the need to force some additional borrowing and/or asset sales.'
Yet, the economic reality is that imperfect capital markets mean it is often difficult for people to raise the cash value of their fixed assets such as houses or precious items. Borrowing, or deferring tax liabilities, would be cumbersome and could depress asset prices, undermining property markets and, in turn, inheritance tax receipts.
The Treasury has always argued in favour of taxes where there is a clearly identified income stream, making them easier to collect and harder to avoid. That is clearly not the case with a wealth tax.
The administrative burden would be significant. Unlike income, which is transparent and traceable, wealth is often hard to value and easy to shift. Implementing a wealth tax would require annual valuations of illiquid assets and would create strong incentives for avoidance, reclassification and emigration.
Worse still, if applied at a rate high enough to raise material revenue, it would amount to a slow expropriation over time. A recurring wealth tax of 2pc would see the state appropriate the full value of a person's assets over 50 years.
Alternatively, if imposed at a lower rate - one that households might realistically be able to pay - the revenue raised would likely be minimal, raising the question of whether the disruption would ever justify the return.
A progressive tax system is right but in a globally competitive economy, over-taxing mobile assets risks driving talent abroad and deterring investment. The UK's future prosperity will be secured not by taxing wealth more but by creating the conditions for more people to generate it.