Alexander Bowen is an MPP-MIA student at SciencesPo Paris and St Gallen specialising in public health, and a policy fellow at a British think tank.
Had you been watching TV last Thursday, you may well have had the misfortune of watching Question Time. I say misfortune for as a show it ought to have been retired alongside David Dimbleby in 2019.
This is not due to any fault of Fiona Bruce, his replacement, but because the show has long ceased to serve its old core function as edutainment. Sometime around the Brexit referendum, if not before, the floodgates for screeching were opened – and screeching is neither entertaining or educational.
Last Thursday’s show was of course no different in that regard. What was different though was the presence of Gary Stevenson: a YouTuber, economist, and activist (emphasis on the latter) with a record as “City Bank’s top trader” (though this record seems to have a good deal in common with Rachel Reeves’ career in high finance or Jonathan Reynolds’ work as a solicitor).
What was also different was the backlash Bruce received after asking Stevenson a simple question:a wealth tax hasn’t worked elsewhere, so why would it work here? Cue interminable reiterations of essentially the same point: ‘Switzerland has a wealth tax and it’s super successful’; ‘who wouldn’t want to be like Switzerland?’; or, more directly, ‘Bruce is an idiot’.
In fact, however, she was spot on.
Why Switzerland is able to maintain a wealth tax that is unique among nations in representing a genuinely substantial share of tax revenue – four per cent – can essentially be explained by two factors. The first is simply the vague sociotropic of Switzerland simply being a much nicer place to live for a wealthy person than essentially anywhere else on earth.
The second, more relevant one is the concrete absence of other taxes. Switzerland has no capital gains tax, and in some parts of the country no inheritance tax.
Why that kind of wealth taxation system works over there – and why it definitely wouldn’t over here – becomes quite obvious when Gary’s two per cent tax gets converted from stock to flow. (In tax ‘stock’ refers to wealth held at a specific point, e.g. capital or assets, and ‘flow’ to economic activity, e.g. income or spending.)
If we take a simple model where wealth compounds at five per cent a year, and that wealth is taxed at one per cent of its value, then when converted from stock to flow, it is essentially a 20 per cent tax. Every year, one fifth of the income accruing to the taxee (interest, etc.) is being taken by the state.
Crucially, in Switzerland that’s where it ends – at a rate entirely inline with most country’s capital gains tax (something it, again, does not have). Stevenson’s idea, on the other hand, is to levy on that same hypothetical five per cent what amounts to a 40 per cent tax.
Technical specificities aside, that would not by itself be notably unreasonable or impracticable. It is, after all, in line with the kind of income tax levels everyone else pays.
It becomes so, however, because in Stevenson’s conception (and unlike in Switzerland) the tax would be an addition, not an alternative. Alongside that new 40 per cent tax, the pre-existing 24 per cent capital gains tax rate would be levied – taking the actual rate on that five per cent flow to 64 per cent.
Add in a 30-year or so annualised version of the UK’s 40 per cent inheritance tax rate (equivalent to a 1.8 per cent annual wealth tax), and again convert from stock to flow, and on top of our pre-existing 64 per cent you must add another 36 per cent. Thus this 40 per cent tax becomes, de facto, a 100 per cent tax.
I do not think I need explain why a 100 per cent tax would not work; one need hardly be Ibn Khaldun or a laffer-curve zealot to think that there is a problem.
Even Patriotic Millionaires, the group of which Stevenson is part, knows it too: leading members of its American inspiration stated directly that a tax that takes the “growth rate to zero” is “no longer moderate” and not in line with what they call for.
Now of course you can adjust the parameters of those assumptions slightly. Assuming returns of seven per cent, for example, does start to mildly move the tax away from total confiscation
But you can equally plug in the assumption of Thomas Piketty, the world’s most celebrated inequality economist and Gary’s inspiration, and yield a four per cent rate that turns a wealth cap into proactive confiscation (which much foreign jurisprudence suggests could be illegal under the ECHR).
The problem created by a supplementary wealth tax could be fixed by allowing for capital gains or inheritance tax to be deducted. But then much of the imagined revenue, and pretended efficacy, would be deducted too.
None of this is to even mention the most fundamental fact: that the price of an asset is, at least in part, determined by the returns on it. Indeed in the most foundational models, like the Lucas Asset Pricing Model, the value of an asset is put simply the value of future returns. No returns? No value.
What do we think would be the economic implications, both immediate and in terms of this country’s ability to attract foreign investment, if government threatened to send the value of assets held by the most mobile section of the tax base to zero?
So far, Stevenson’s argument (or perhaps tactic) has been to wring his hands about how he knows taxing the rich is hard but it doesn’t mean we shouldn’t try. That is not a good enough basis to make policy.
Anyone interested in actually establishing a good enough basis would need to acknowledge three facts that Stevenson, and the current fad-left, seem to be incapable of doing.
First, that the revenues generated by a wealth tax (even if we assume the £25bn figure that is routinely wheeled out is true, and has no other negative revenue effects) are simply too small to fix anything. That £25bn is about the cost of moving defence spending from two to three per cent of GDP the cost of a one off ten per cent hike in NHS spending.
It’s certainly something. But when the government spends £1,200bn, it is not noticeable (the Conservatives increased NHS spending by about 25 per cent in real terms between 2010 and 2023 and couldn’t even stave off claims they underfunded it). Indeed, it’s essentially the amount of revenue that would be raised automatically if GDP would just grow by two per cent.
Second, that the UK is already one of the most equal countries in Europe and on earth ranking 140th out of 170 assessed countries on Crédit Suisse’s Global Wealth Databook. In fact, as far as inequality is concerned it vastly outperforms the much vaunted Nordic countries in statistical measure after statistical measure.
Third, that the last 15 years of ‘austerity’ has seen inequality decrease – but nobody in their right mind would argue that the economic situation of the last 15 years has been good for the country or themselves.
That last point really ought to be key here. What we have achieved is an economy where the central problem is plainly not distribution, but a lack of anything to distribute. Fixing that is going to take a lot more than rambling about a wealth tax.
Moreover, had Stevenson finished reading Piketty, or at least decided to read some of the peer review, he would also have seen that the main justification offered for a wealth tax – returns on capital being greater than growth – can largely be chalked up to housing.
Yet far from calling for the kind of pro-growth deregulatory agenda that allow houses to be built again, allow public services to be invested in, and that would actually help reduce inequality, we have been left with a flavour of the month that amounts to a half-baked update of Ferdinand Lassalle’s iron law of wages. It’s really quite tedious.
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