It is a common misconception that the Labour party has already pledged to introduce a wealth tax if they come into power. Whilst commonly assumed, a wealth tax was not part of Labour last election manifesto and, earlier this year, a Labour spokesman actively denied that a wealth tax was even under consideration. The reforms to the tax system put forward in the ‘Land for the Many’ paper suggest dramatic changes to capital gains tax and inheritance tax, but do not amount to a wealth tax in its purest sense.
For an example of that, we can look to the open letter penned by a group of the US’s wealthiest individuals asking all the 2020 presidential candidates to introduce a new wealth tax. The most specific policy is that of the Democrat Senator Elizabeth Warren who has suggested an annual 2 per cent levy on those with assets over $50m and a further 1 per cent on those with assets over $1bn.
In their research, Professors Emanuel Saez and Gabriel Zucman of the University of California, Berkeley, estimate that the tax would raise around $210bn per year, approximately 1 per cent of GDP. Clearly these figures are US focused and per the most recent Sunday Times Rich List, the US benefit from having 463 sterling billionaires. The UK is no slouch though in that department and reportedly lies in third place internationally for the number of sterling billionaires with 151.
So why are the calls for a wealth tax growing in the US? Part of the appeal is an argument that a wealth tax of this type will not deter entrepreneurs as it would only impact those who are, as Saez and Zucman describe them, ‘extreme cases of business success’. In contrast, research published by the Tax Policy Center, an independent body in the US, outlines that broader estate and inheritance taxes can negatively impact on entrepreneurial behaviour.
A further attraction is that the tax is narrow in terms of the number of people it would impact, with Saez and Zucman suggesting that it would only affect 75,000 households in the US; less than 0.1 per cent. As the open letter states, ‘that a moderate tax on a minuscule number of Americans could raise so much revenue simply reflects historic levels of wealth among America’s richest’.
The principle put forward is that this is a fair burden to place on a small number of people who could absorb such a tax from the investment returns on their existing wealth, reducing wealth concentration and inequality. By comparison, part of the criticism of the Labour proposals seems to be that they are broader in their impact and perceived by some as unfairly penalising hard work and saving.
There will no doubt be some of those 75,000 households in the US who are much less welcoming of a wealth tax than the signatories of the open letter. The difficulty for them is that it is difficult to remove yourself from the US tax net once you are in it. That in turn presents the potential difficulty for the UK introducing such a tax as it doesn’t apply a similar handcuff system and is perhaps one reason why a wealth tax has not formed part of Labour’s proposals to date.
Ultimately, neither tax plan may ever happen but what seems certain is that as wealth inequality continues to grow, so too will the calls to redistribute wealth with taxes.