Wealth Tax Explained: Its Possibility in the UK and Prospective Implementation Scenario
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In the wake of economic turbulence, Rachel Reeves finds herself in a whirlwind, as the fiscal rules she's sworn by are put to the test.
The Chancellor has no plans to bend her self-imposed fiscal rules, which govern how much the government can borrow and invest. But with borrowing costs skyrocketing, maintaining this rigid stance is proving to be quite a challenge. That means she needs to find another way to drum up some extra dough.
The routes are clear cut: either cut spending further or hike taxes. But Labour, in their election manifesto, pledged not to go the latter route. A group of activists, however, believe they've found a solution that eases the pressure on working people: a wealth tax.
They suggest targeting the super-rich, not only to raise the necessary funds, but also to address rising inequality. Critics claim that such a move would only accelerate the exodus of the wealthy to nations with friendlier (or lower) tax environments.
But as the economic landscape changes, is it time for the UK to consider a wealth tax? Let's delve into the proposal and whether it's a viable option.
Tax the Super-Rich
The idea of a wealth tax isn't new. It was first explored in 1974 and again in 2020 by the independent Wealth Tax Commission. While it's never been enacted in the UK, a few countries have opted for this approach. France temporarily embraced it before scraping it in 2018, and it remains in force in Norway, Spain, Colombia, and Switzerland.
Each country imposes different rates and thresholds, and taxes different assets. And in the UK, there are assorted ideas circulating on what and how a wealth tax would be implemented.
The Wealth Tax Commission concluded that a one-off wealth tax following the pandemic could funnel sufficient funds to the Treasury, but it did not provide any specific rates or thresholds. Now, tax advocacy group Tax Justice UK is urging the current government to impose more taxes on the super-wealthy.
They contend that while many high earners pay their fair share of income tax, those profiting from capital gains face relatively lower rates.
Capital Gains Tax (CGT) is levied on profits from assets ranging from stocks to second homes, buy-to-let properties, personal possessions, and more. The Autumn Budget increased CGT rates for basic rate taxpayers to 18%, and for higher-rate taxpayers to 24%, bringing them in line with the already higher levies on property gains. These changes took effect immediately.
Traditionally, CGT rates are applied at lower rates than income tax, due to the inherent risk involved be it entrepreneurial or investment risk. The charity argues that a wealth tax would make the CGT system fairer, but what does their vision of a wealth tax entail?
They want to apply a 2% wealth tax on assets exceeding £10 million, which they claim could raise up to £24 billion annually. In addition, they're advocating for reforming CGT to generate £14 billion, as well as introducing national insurance on investment income, closing inheritance tax and non-dom loopholes, and a 4% tax on share buybacks.
The Case for a Wealth Tax
Though a wealth tax has been successful in a handful of countries, it's been met with repeal in others due tohigh administrative costs and the risk of wealthy individuals fleeing the country. Experts generally concur that wealth taxes can have an impact, but its effects are usually marginal. Instead, many economists advocate for the improvement of existing tax systems rather than introducing new wealth taxes.
The Wealth Tax Commission concluded that an annual wealth tax would not be effective and instead recommended that the government reform existing taxes on wealth. Others caution that a wealth tax will lead to an escalating exodus of wealthy individuals, dragging down the overall tax take.
Economist Cristina Enache wrote in 2024, "Wealth taxes disincentivize entrepreneurship, leading to less innovation and less long-term growth. They reduce wages, destroy jobs, and decrease the overall stock of capital. All income groups are worse off under a wealth tax due to decreased economic activity."
Does a Wealth Tax Make Sense for the UK?
The idea of a wealth tax has gained support from politicians of all stripes, as well as from a majority of millionaires. Dale Vince (founder of Ecotricity) and Julia Davies (CEO of Osprey Europe) are among the wealthy individuals advocating for a fairer society through a wealth tax[4].
The UK's proposal is distinct in its narrow focus on ultra-high-net-worth individuals and its emphasis on funding public health and climate initiatives[3][5]. Unlike Spain or Norway, it avoids taxing primary residences or middle-class wealth, targeting instead extreme concentrations of assets[3].
Barring a wholesale overhaul of the tax system, it seems likely that Reeves will have to strike a delicate balance between cutting spending, hiking taxes, and safeguarding the wealthy.
- Rachel Reeves, faced with economic turbulence, contemplates alternative sources of revenue beyond her self-imposed fiscal rules' borrowing and investing limitations.
- A wealth tax, targeting the super-rich, is suggested by a group of activists to alleviate pressure on working people and address increasing inequality.
- France briefly implemented a wealth tax before abandoning it in 2018, while countries like Norway, Spain, Colombia, and Switzerland still maintain it.
- Tax Justice UK advocates for increased taxes on the super-wealthy, arguing that while high earners pay income tax, capital gains tax rates remains relatively lower.
- The Autumn Budget increased Capital Gains Tax rates for basic and higher-rate taxpayers, bringing them in line with property gains levies.
- Tax Justice UK proposes a 2% wealth tax on assets exceeding £10 million, which could generate up to £24 billion annually, along with other reforms to bolster tax revenue.
- A wealth tax has faced repeal in some countries due to high administrative costs and the risk of wealthy individuals fleeing, but experts agree it can have marginal impacts.
- The UK's proposed wealth tax focuses on ultra-high-net-worth individuals, avoiding taxing primary residences or middle-class wealth, and emphasizes funding public health and climate initiatives.
