Tom Spencer is a Young Voices UK contributor. He is also the lead organiser for the London Neoliberals and sits on its Steering Committee as Vice-Chair of International Chapters.
Mel Stride, Tory MP and chair of the Treasury select committee, has just proposed a one-off wealth tax as a way of addressing the increasing national debt.
Why is Stride concerned about national debt at the moment? In theory, higher levels of debt should cause a rise in the real interest rate as investors demand a higher return in response to the greater risk of their loan. If this were to happen, then it could risk what is known as a debt-interest spiral – a state where governments accrue debt faster than they can afford to pay it back.
However, this is only problematic when the economy is not growing. Like anyone else, a Government should only view debt in regards to its ability to pay it back. If your profits are rising faster than your debt, then you’ve got nothing to worry about. The same logic applies to the Government – where nominal growth rate is greater than the rate of interest on that debt, then the debts value as a percentage of total wealth (or GDP) is actually decreasing.
Since the 1950s, the UK’s growth has almost always been greater than its interest rate. Indeed, the only exception was in the 1980s, when interest rates were increased instrumentally as a tool for fighting inflation under the Thatcher Government. Given we’re currently exiting one of the worst economic disasters in a century and interest rates are extremely low, it’s safe to say that we’re not at risk of entering the feared debt-interest spiral.
But even if we were, a wealth tax is a rather poor way of addressing this problem. Although some variants of the wealth tax are said to raise as much as £260bn, this is a very inefficient and distortionary way of taxing individuals. In recent history over a dozen countries in the OECD have implemented wealth taxes. Today, only three still have them in place. If these taxes were so effective, why would almost everyone abandon them?
The reason is they simply don’t raise enough revenue normally to justify the administrative and political costs. Looking at wealth taxes in Switzerland, a 2016 NBER working paper found that for every 0.1 per cent rise in the tax, the value of reported wealth falls by 3.5 per cent. This creates a system whereby those more savvy with their creative accountancy end up avoiding the tax en-masse, to the detriment of honest wealthy people.
Indeed, Britain is no stranger to this phenomenon. Denis Healey, former Chancellor of the Exchequer, famously explained his experience with the policy as follows: “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.” This is a Labour chancellor admitting that wealth taxes are not necessarily the way to go; so, why does Conservative Mel Stride disagree?
Of course, the plan proposed by Stride aims to get around these perennial problems with wealth taxes; rather than aiming to tax future wealth year on year, his plan is for a one-off tax applying retroactively. But this abandons one of the most basic principles of good tax policy given by Adam Smith in his Wealth of Nations: certainty. Regardless of the economics, from an ethical perspective it’s paramount that the individual should know their tax obligations at any one point, for this is the only way to ensure that the system is fair. To abandon this principle and retroactively seize wealth from someone gained before the tax existed is pernicious and unjust.
However, there is another tax that could help address wealth inequality and that is the proportional property tax (PPT). The Government are currently rumoured to be looking to replace stamp duty and council tax with an annual 0.48 per cent tax on property value. Given that the largest reason for rising wealth inequality is the housing market, taxing property values would help reduce inequality by reducing the incentive to take advantage of the housing crisis.
Excessively strict planning laws have gamed the housing market so house price inflation will always rise above earnings; this means those with the capital to get on the ladder are at a privileged position over less well-off individuals who cannot afford the initial investment. What a PPT would do is create an incentive for those holding multiple houses to sell off their excess, freeing up new homes for other individuals; therefore, spreading the housing wealth more equitably.
Whilst this plan may not raise the additional £60bn that Mel Stride hopes to get out of his one-time retroactive wealth tax, the country does not need £60bn at the moment. With debt as cheap as it is, we should instead focus on how we can generate the most growth possible. Taxing wealth in the way he suggests is baleful and will only act as a barrier to our economic recovery.
Instead, to help address wealth inequality the Government are better off pursuing a proportional property tax; this would reduce the incentive for wealth to be hoarded in housing, simultaneously reducing council tax bills for 76p per cent of households.
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Author: Tom Spencer
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