The idea has progressive credentials—but that’s not enoughby Paul Wallace / December 1, 2017 / Leave a comment
Cornered by bleak growth forecasts, pressure to ease austerity and resistance to tax increases, Philip Hammond resorted to borrowing more in his budget. Despite praise among fellow Tories for his efforts on 22nd November the chancellor of the exchequer delivered a budget as fiscally feeble as the government is politically weak. Yet finance ministers are never really short of ingenious ways to raise more revenue. At a time of booming asset markets, one option open to a stronger chancellor would have been to plug some of the borrowing gap by introducing an annual wealth tax.
No doubt one drawback for Hammond even to contemplate such a notion is that Thomas Piketty, a left-wing French economist hailed by the Economist as “a modern Marx” for his unlikely international best-seller, Capital in the Twenty-First Century, backs a global wealth tax to combat the increasing concentration of wealth. Yet the Conservative Party once came close to adopting a British wealth tax when in opposition in the 1960s, recounts Martin Daunton, professor of economic history at Cambridge University, in Just Taxes, which traces the politics of taxation in Britain between 1914 and 1979. Proponents argued that it would encourage capital to be used more productively while the revenue raised could be used to lower excessively high income tax rates.
Before the budget, Roger Farmer, research director of the National Institute of Economic and Social Research, proposed an annual tax on net wealth (assets less liabilities) above £700,000 (including residential property) while also abolishing three existing capital taxes—inheritance tax, capital gains and dividends. According to his calculations such a tax set at 1.2 per cent would in itself produce £43 billion (around 2 per cent of GDP). If it were set at 2 per cent the chancellor would rake in £72 billion. As well as making the tax system more equitable, Farmer argued that such a wealth tax would encourage property owners to switch some of their housing wealth into productive capital. At a stroke the policy would make homes more affordable thanks to the downward pressure on house prices while boosting labour productivity owing to the increase in investment.
However, the case for a wealth tax is disputed. Much financial wealth is accumulated retirement saving. This is particularly important in Britain where the state provides what is by international standards a modest pension benefit. As…