Would a wealth tax reduce wealth inequality?
A wealth tax is not a tool for wealth redistribution
Introduction: political hypes come and go – but bad ideas often linger
Zack Polanski has become for Generation Z what Jeremy Corbyn used to be for the Millennial generation.
During a political hype of that nature, it often feels like there is nothing anyone can say or do which would make the slightest bit of difference. Those who are swept up in the hype will go along with it no matter what, and they will be completely deaf to any counterarguments.
But I have seen a succession of these hypes come and go over the years: they never last forever. Remember Occupy, for example? They were all the rage in the early 2010s, and for a while, it really felt like this was going to be their decade. Yet by 2013, the movement had largely fizzled out.
Then from 2013 to 2015, there was this bizarre cult around Russel Brand, not in his role as an actor or comedian, but as a political figurehead. I could not, for the life of me, understand what people saw in him. For me, ‘Brandism’ was just teenage communism combined with inane New Age hippie clichés. And yet, establishment figures like George Monbiot and Owen Jones could not get enough of him.
The Brand cult abruptly ended after the 2015 General Election, only to be almost instantly replaced by Corbynmania. This was, perhaps, the longest-lasting political cult I have witnessed to date, but last year, the Your Party shambles finally killed the Corbynism vibe.
At the end of 2018, Greta Thunberg became a cult figure, and throughout 2019, you could barely walk through Westminster, because all the streets were clogged up by ‘climate protesters’. The summer of 2020 became the summer of BLM, whose woke ideology seemed completely hegemonic and invincible. Until it didn’t anymore.
Sometimes, these political hypes just fizzle out, and disappear without leaving much of a trace. This is probably the best-case scenario. On other occasions, though, they leave a political legacy which outlives the movement, and the enthusiasm, which had originally created it.
Greta Thunberg has lost interest in climate change, but Net Zero is still with us. BLM are gone, but petty bureaucrats still pester us about ‘white privilege’ and the need to ‘decolonise the countryside’. Political hypes may be short-lived, but the policies and institutions they create may not be.
This is all a long-winded way of saying: I realise that nobody will ever say ‘I used to be a massive Polanski fan, and thought wealth taxes were the best thing ever – but then I read an article on IEA Insider, and now I’m not so sure anymore.’ You cannot defeat fashionable causes with better arguments. But the hype will fade one day, and opponents of wealth taxes need to make sure that the idea fades with it, rather than solidify into something permanent. That’s why it’s worth pushing back against it now, even if it may often feel like we are wasting our time.
Wealth inequality in Britain
The revival of the wealth tax as a political project is one of those political trends which spilled over from the US, and which British commentators copied and pasted uncritically. In early 2021, US Senator Elizabeth Warren came up with her ‘Ultra-Millionaire Tax Act’, a legislative proposal for an American wealth tax. It had the approval of Senator Bernie Sanders, who was then still a hero of Britain’s Corbynite Left, and therefore became fashionable in Britain, too.
The proposal makes a bit more sense in a US context than it does over here. In the US, the people in the top percentile of the wealth distribution account for over 35% of the total wealth. That is far higher than in Europe, and far higher than it used to be even in America itself, within living memory. The British situation, though, is completely different. In Britain, the people in the top 1% of the wealth distribution only hold about 22% of the total wealth, which is below the European average, and much lower than it used to be for most of the previous century.
Wealth tax fans, however, measure wealth inequality a bit differently. Zack Polanski recently tweeted:
“The 50 wealthiest families in the UK own more than 34 million people combined. That level of inequality is totally unsustainable. A wealth tax isn’t radical - it’s inevitable.”
Similarly, Zarah Sultana also said:
“We have 50 rich families who hold more wealth than half of the country. So we need a wealth tax, but we also need to nationalise the entire economy.”
I don’t quite see why you would bother with a wealth tax if you want to nationalise everything anyway, but let’s leave that for another day. How do we reconcile the figures used by Polanski and Sultana with the ones I have just cited?
We do not need to do much reconciling, because they can both be true at the same time. If we look at the wealth distribution of Britain, three things stand out:
There are millions of people in this country who own considerable amounts of asset wealth, even if they are not millionaires. (Homeowners with pension funds, basically.) So the Sultana/Polanski story, in which everyone in Britain is either a billionaire or destitute, is clearly not remotely true. If you are in, say, the seventh decile of the wealth distribution, you are essentially living the Thatcherite dream of the property-owning, share-owning democracy.
There are multi-millionaires and billionaires in Britain, too. Just not very many of them. We are talking about the lower tens of thousands, or less than 0.1% of the population. If you express these people’s combined wealth as a proportion of the total, it will not look that massive, because the aforementioned group – homeowners with pension funds – is so much larger.
But there are also millions of people – roughly, the entire bottom third of the wealth distribution – who own only a fraction of the median wealth level. In some cases, this is simply because these people are very young, and have just not had the time yet to build up any wealth. But that is not the whole story: many people do start to build up wealth from a fairly young age.
In this context, if you’re bothered about wealth inequality, your focus should really be on building up wealth in the hands of those at the lower end of the distribution, rather than in taking it away from those at the very top.
Wealth taxes and wealth redistribution
I’m sure wealth tax supporters would object that these are two sides of the same coin: that some people have too little wealth because others have too much, and that the wealth tax is the way to solve this. It is very much not. Not even on its own terms.
I’ve written about the various problems with wealth taxes before: the negative behavioural responses, the valuation bureaucracy it requires, the limited revenue-raising potential. This article is explicitly not about any of that. For the purposes of this article, I will assume an idealised wealth tax, which has never existed anywhere. Even then, it would still be true that a wealth tax is not a tool for wealth redistribution, in the way that our system of direct taxes and income transfers is a tool for income redistribution.
Under a wealth tax, the wealthy do not transfer assets to the state. If your wealth consists of shares, you do not pay your wealth tax bill in shares; if it consists of property, you do not pay it by transferring ownership of a room to the state; and if it consists of a business, HMRC does not become a co-owner. You pay the wealth tax, ultimately, out of your income, just like income tax, even if the amount you pay is not income-related. So there is no transfer of assets from the wealthy to the state. Nor is there a transfer of assets from the state to the asset-poor. If the state spends the wealth tax revenue on the NHS, we may get better healthcare, and if it spends it on green energy, we may get lower carbon emissions. But the asset-poor are still asset-poor. If it is true that the 50 wealthiest families own more than the entire bottom half of the wealth distribution (I haven’t been able to check those figures, but how could I not take Zack Polanski’s and Zarah Sultana’s word for it?), that will still be true after the introduction of a wealth tax.
Now, I’m not saying that a wealth tax has no impact on the distribution of wealth: it almost certainly has some indirect effects. It could, for example, force or nudge some people to sell off some of their assets, in which case, there would be an indirect transfer of wealth. But what kind of a wealth transfer would that be? Who would benefit from that?
The most common version of a proposal for a British wealth tax envisages a threshold of £10m. If so, it would apply to the top 0.05% of the wealth distribution. Let’s round that up to 0.1%, and let’s generously assume that it is effectively more like 0.2% or 0.3%, because people just below the threshold would also engage in pre-emptive asset sales, or at least, they would be reluctant to acquire new assets.
Still, that’s not a lot of people, and while they are, by any definition, very, very, very wealthy, even they are not wealthy enough to flood the country with assets. If it’s a more limited asset sale – who would buy them? Presumably, not the people in the bottom third of the wealth distribution. The most likely buyers would be people closer to the sellers, say, the 95th, the 96th and/or the 97th percentiles of the wealth distribution – or even just to people at the lower end of the top percentile.
In other words, while a wealth tax may well lead to some wealth redistribution, it is much more likely to be a redistribution within the top group: from billionaires and multi-millionaires to ‘ordinary’ millionaires, and perhaps some almost-millionaires. The very top of the wealth distribution would become a little flatter, but the rest of the distribution would remain unchanged. The vast majority of the population would see no benefit, at least in wealth terms. It would also still be true that a small number of people at the top would own more than the entire bottom half of the wealth distribution, even if “a small number” now means a few hundred families rather than 50.
The alternative: wealth creation
The only way to meaningfully change that would be to facilitate the formation of wealth in the hands of people at the lower end of the wealth distribution. In a British context, this would mean two things: building houses, and enrolling more people in private pension schemes.
The amount of property wealth is not fixed. If we increased the size of our housing stock to, for example, German, Swiss or French levels, the value of individual housing units would drop, but the value of the housing stock as a whole would increase. Home ownership rates could very easily reach their previous peak level again, which would mean millions of additional homeowners.
The amount of pension wealth is not fixed either. We could, over time, increase it to, for example, Australian levels, by adopting a pension system more like theirs, in which people pay pension contributions into their own pension fund rather than into a state system.
The result of this would be a ‘levelling-up’ of the wealth distribution, as the lower deciles would benefit disproportionately. It would, at long last, open up the old Thatcherite ideal of a property-owning, share-owning democracy to millions of people who are currently excluded from it. Rather than a zero-sum redistribution of wealth, this would be a positive-sum levelling-up of wealth, benefitting everyone – or at least, everyone except Zack Polanski, Zarah Sultana and Gary Stevenson.
 | A guest post by
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Yes, another insightful piece Kristian. But I believe a wealth tax is not only a hard task to assess but impossible to account for. Besides, it’s not wealth that we should be looking at. It’s money itself.
Look, if you work hard and earn more then in my view you are entitled to keep the fruits of your labour. But where I draw the line is money itself. That is presently allowed to hang onto as well. And thus holding if our money away from the rest of us is the problem why we are in a stagnant economy. Not wealth, just money.
When the government wants paying they don’t want stuff, they want money. We are no different.
The rich want stuff and money! And want and can hold both. I say hold asset hold goods and hold stuff! But money has to rotate around so it fuels our growth. That’s the starting point if you like, the passing of money back not from taxation where they get nothing in return but, from a fair exchange if SPENDING that money.
Look to get this you really need to get taxation. Our tax system is based on a monetary value attributed to SPENDING and the movement of money. In a fair exchange. And it’s fair to get an exchange of that money rather than it be taken in an unfair tax take.
In other words, make money move, and get asset in exchange that can either be enjoyed or sold on later in a fair exchange back for money. S prices any self employed businesses man knows full well. The CEO of Tesco’s exchanges goods for money and money for goods all the time! It’s not a new concept. But what it dies is rotate constantly that flow. But alas, the money the earn as profit is not necessarily SPENT and is kept and that’s then the cause of us all, the rest bring devoid of its use.
Now as an employer SPENDS on the wages and taxes of their employees the tax is triggered and paid to government. In the same way when we buy petrol it triggers vat snd fuel duty. So the common factor is SPENDING MONEY triggers taxes.
So if you SPEND more you earn more tax for the government to SPEND on the poorer end for them to SPEND back at Tesco etc. so SPENDING in a fair exchange is not only good fir all it gets more tax revenue. Because it’s the motion of SPENDING that triggers the extra taxes our government need to pay their way. It’s a win win,
But allowing money NOT to be SPENT is not good for our economy. It allows Tesco to hang onto money and not SPEND it back. They then put it in a bank or fund to lend to government to get more back and take even more snd more money out the system. Making us poorer them richer and never having to SPEND it back just keep loaning it back!
So we pay them more for NOT SPENDING it back!
Thats the issue Kristian. We are devoid of money! Not wealth. Money!!
You can easily tax money. It’s a known amount. Unlike Wesley gets an awful waste of time to try and calculate. We can gain enough tax for growth off SPENDING.
In fact, you can’t ever get growth from any economy without the SPENDING of money. That has to increase to give growth. No fronting, no growth.
This strikes me as a very intelligent and well thought-out critique of wealth taxes, which have a lure for many at a very superficial level. Unusually, a positive alternative is proposed. Its strikes me that we're in danger of arguing over shares in a static or dwindling pot, rather than seriously trying to enlarge the pot.