Like a hungry passenger on an early Ryanair flight, Rachel Reeves has just been served a deeply unpleasant breakfast and she’s going to have to eat it. This morning’s fiscal gruel is served by the Office for National Statistics, which reports that the UK has borrowed £132.2bn so far this financial year (since 6 April 2024), almost £15bn more than the same period in the previous year. Borrowing for the fiscal year is £20.4bn ahead of the Office for Budget Responsibility’s last forecast in October. This sets a rather subdued tone for next week’s Spring Statement.
The state of the public finances may help the Chancellor make the argument for her government’s plan to cut the welfare bill, but it also highlights the fact that more significant measures are needed. The UK will need to do more than saving £6bn on welfare (if we assume that the plan doesn’t end up costing more money, as some previous welfare cuts have) if it’s already overshot the last forecast by more than three times that amount.
The response from many on the left of the Labour party, the Greens and others to the question of how they would fix this fiscal conundrum is through a wealth tax. Unlike job centres and hospitals, wealth tax proposals are free to create and you can make them as extravagant as you like. A group of 30 MPs, including Diane Abbott and the Green leader Carla Denyer, claims a wealth tax would raise £24bn a year, but why stop there – Tax Justice claims $2.1trn could be raised globally by taxing the assets of the super-rich.
Would it work? One widely accepted answer people who work in the tax system is: no. Wealth taxes have been tried repeatedly in the past by many countries, and failed. They are sometimes found to be illegal, because most legal systems are fine with the state helping itself to your property as it becomes yours (income taxes) but take a dimmer view of appropriating property that has been yours for some time.
That is what a wealth tax would do. A one per cent tax on all assets over, say, £10m would mean that for every million pounds’ worth of extra stuff your lordship owns over £10m – land, cars, superyachts, company shares – the state would send you a bill for £10,000 a year.
The other reason this tends not to work is that it involves valuing lots of superyachts, Renaissance paintings and so on, and the very rich have teams of people whose job it is to help them park such things as discreetly as possible. So it’s hard to find out how rich the very wealthy really are, and it’s much easier for them to move to a friendlier tax regime. Critics of wealth taxes point to Spain’s recent Solidarity Tax on Large Fortunes, which has been expensive to implement and brings in about £500bn a year. In countries where wealth taxes persist at the moment – such as Norway and Switzerland – they do so because they’re a substitute for capital gains and inheritance tax.
Does this mean it couldn’t work? Also no. Arun Advani, director of the Centre for the Analysis of Taxation, says we can learn from the failures of previous wealth taxes. Spain, Norway and Switzerland all face the same barrier – valuing people’s stuff – which is very hard to do for millions of people. So an effective wealth tax would involve making the political choice only to target the very wealthiest. “You need to do a full market valuation of assets,” Advani told me. “You can’t do that if you were talking about half the country, or even one per cent of the country. So if you want a wealth tax, you should have a high threshold.”
Advani’s work has found that addressing only those with wealth of over £10m would limit it to around 22,000 people, which would make it possible for HMRC to value their assets in full. At an individual level this is very possible; the pennies are counted as closely as possible every time rich people get divorced.
A one per cent wealth tax would be fairly trivial for most rich people. Someone with £15m in assets would pay £50,000 extra tax per year. But those assets will also be making money – the average annualised return from shares in FTSE100 companies is about six per cent – so it’s not like the state would actually be making them less rich.
Advani’s research accounts for the fact that something up to 17 per cent of these people would leave anyway, and suggests that the state could still raise around £10bn a year from a one per cent tax on assets over £10m. Most of this would come not from the really-quite-rich (somewhere around £10m) but the seriously rich (centimillionaires and beyond). This suggests the returns could be hard to predict, because they are predicated on a very small number of people putting up with the tax.
Then again, rich people do already put up with high tax bills. A third of income tax comes from the richest one per cent. Our economy is highly unequal, but this also suggests that one effective means of running it is to address the behaviour of this small group of people. Farmland, for example, has been made much more expensive because the wealthy have used it to avoid inheritance tax. One positive side-effect of closing that loophole – whatever you think of its effects right now – could be that it will help reduce the inflation of land prices and make it more affordable to actual farmers.
A wealth tax might in this way be business-friendly, because it might deter unproductive investment: “It creates an incentive, if you have lots of money, to actually go and look for high-return investments”, said Advani.
Politically, Labour faces the problem of its own electoral promises on tax. The merest whisper of interest of interest in a wealth tax would bring James Dyson screeching to the front page of the Telegraph to declare that Britain had become a communist dystopia, but then the rest of us might find that rather entertaining. More importantly, there is no getting around the fact that taxes are going to have to rise still further anyway. The only questions are who will pay them, and how.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: The unbearable weight of the literary canon]
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