Fool's gold: The case against the wealth tax, and suggestions for alternatives

Wealth taxes have been tried many times. In the early 1990s, about half of Western Europe still had wealth taxes. In the meantime, all but three of these countries have given up on them, including, in some cases, under left-wing governments, and even the three remaining ones have scaled back their wealth taxes. Governments that abolished wealth taxes justified this by pointing to their high administrative and compliance costs, adverse behavioural responses (especially negative effects on investment) and limited revenue-raising potential. These are also the reasons why previous attempts to introduce wealth taxes in Britain were abandoned. This paper mostly draws on the work of economists who are broadly sympathetic to the idea of wealth taxes, as opposed to ideologically hostile critics. Even a lot of their sympathisers concede that wealth taxes have major drawbacks. Britain does not currently have a tax which meets the strict textbook definition of 'a wealth tax', but it does have several wealth-related taxes, which can be considered close-enough substitutes, and it already raises more revenue from such taxes than any other OECD economy. For its supporters, the wealth tax has become an all-purpose tool. They are trying to achieve too many different things, and often mutually incompatible things, with it. The 'wish list' of things that a wealth tax has been promised to finance is simply implausibly long, and then it is also supposed to do many things beyond raising revenue on top of that. Wealth inequality in the UK is not especially high, and it is not rising. The top 1% of the wealth distribution account for about 22% of the total wealth, which is less than the EU average and much less than it used to be for most of the 20th century. Wealth taxes have rarely raised more than 1% of GDP in revenue, with typical figures being much lower than that. Where wealth taxes have existed for long periods, revenue has often tended to decline over time. In recent years, empirical evidence on behavioural responses to wealth taxes has largely confirmed the suspicions of sceptics. Wealth taxes really do reduce and distort investment in a number of ways. None of these effects are catastrophic, but they keep adding up and they tend to get worse over time. There are vastly superior alternatives to wealth taxes, which are based on creating wealth rather than penalising it. In the 20th century, Britain had long periods of falling wealth inequality, which was not explained by the government expropriating the wealthy but simply by more people acquiring pension wealth and housing wealth. Britain could move to a pension system more like the Australian one, where people pay contributions into their own pension fund rather than to a state pension programme. In such a system, the vast majority of people have the opportunity to build up considerable amounts of wealth over time. Wealth inequality in Britain was at its lowest when housing was relatively affordable and home ownership rates were at peak levels. Britain needs a 'YIMBY' revolution to unleash a building boom. This would give millions of people the opportunity to build up housing wealth.