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Pressure is growing on Rachel Reeves to find new ways to boost the ailing economy after government borrowing reached the second-highest June figure since 1993 last month.
Many now predict the chancellor will have little choice but to tweak taxes to find more funds for the Treasury following dramatic changes to government policy over cutting welfare spending and stripping back the winter fuel payment.
At the same time, calls are also growing to axe the two-child benefit cap – a Tory-era policy which experts say keeps 400,000 children in poverty and runs contrary to Labour’s missions.
These policy decisions, paired with a difficult economic backdrop, will require funds from somewhere. The chancellor has so far stuck to Labour’s manifesto commitment not to raise taxes for working people, meaning tweaks to national insurance, income tax, and VAT are off the table.
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Pressure is growing on Rachel Reeves to find new ways to boost the ailing economy (PA)
This means more creative tweaks may be under consideration for her next autumn budget, building on changes already made to levies like inheritance tax and employers’ national insurance.
One option an increasing number of campaigners are pointing to is a ‘wealth tax’, an economic policy adopted by very few countries which focuses on the ultra-rich.
Cabinet ministers have so far rejected calls for a wealth tax, although Ms Reeves would not publicly rule out some version of the measure on Tuesday in front of the economic affairs committee.
Here’s everything you need to know about the idea and what the experts say about it:
What is a wealth tax?
A wealth tax is a direct levy on an individual’s total net assets – things like property, investments, cash, and other possessions. Unlike most regular taxes, the idea is to target accumulated wealth, rather than only income earned that year.
Alongside being a new way to raise revenue for the exchequer, the policy is also designed to redistribute wealth to reduce economic inequality.
The UK already has some taxes that focus on assets, such as inheritance tax, capital gains tax, and council tax. Tweaking any of these may also be on the table for the chancellor later this year.
Capital gains tax is most similar to a wealth tax in that it sees a levy charged on the sale of an asset. However, most models of a wealth tax would see an annual charge based on the value of assets held, even if they are not sold.
The idea of a wealth tax has proven divisive among economic experts, with debates ongoing around its fairness, revenue-raising potential, and economic impact.
Could a wealth tax work in the UK?
Campaigners say a wealth tax could generate significant sums for the Treasury, whilst only affecting a small number of individuals who are less likely to feel the sting of higher receipts.
Tax Justice UK is calling for a two per cent levy on individuals who own assets worth more than £10 million. They say this would affect 0.04 per cent of the population, while raising £24 billion a year.
The calls come at a time when the wealth of the ultra-rich in the UK has increased massively in recent decades, while living standards have dropped for those on low- to middle-incomes.
The Sunday Times rich list recorded 171 UK billionaires in 2023 – up from 15 in 1990. At the same time, there are now record numbers of children living in poverty in the UK, and in precarious living conditions like temporary accommodation.
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Tax Justice UK is calling for a two per cent levy on individuals who own assets worth more than £10 million (Gareth Fuller/PA Wire)
A wealth tax should be seriously considered by the chancellor, said author and host of the Macrodose podcast, James Meadway: “It starts to chip away at the idea that we’re just going to allow wealth to pile up in a very few hands forevermore.”
Responding to criticism that a wealth tax would threaten investment in the UK, the economist said: “Investment has fallen off a cliff between Brexit and the financial crisis. Sixty per cent of wealth in Britain is inherited. It’s not something that’s been built up by somebody going off and setting up a new business.
“If these people were any good, our economy would be better. It isn’t better, so they’re not that good, so it doesn’t matter that much.”
He added: “It’s not going to solve every single economic problem, but 24 billion is not a number to be sniffed at if you’re the government right now looking at how you’re going to continue to fund the NHS, how you’re going to pay for not imposing massive benefit cuts, how you’re going to get rid of the two child benefit cap.
“There’s a whole stack of things that we could do with that money that isn’t being done at the minute because it’s just sitting in the hands of very, very wealthy people.”
What are the issues with a wealth tax?
One of the most difficult factors in calculating the benefits of any wealth tax is predicting what the behavioural response will be. While a wealth tax would raise fairly large sums in any scenario, this uncertainty means it is hard to model.
A common concern put forward is the risk of ‘capital flight,’ where wealthy individuals – who tend to be more globally mobile – simply leave the UK, or at least move some of their assets.
Wealth can also be held in a diverse range of assets, anything from cars to art, meaning it may be hard for tax authorities to know exactly how to enforce the levy.
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While a wealth tax would raise fairly large sums in any scenario, uncertainty means it is hard to model (PA Wire)
Dan Neidle, founder of Tax Policy Associates, said it is highly uncertain how much could be raised by implementing a wealth tax. While it is difficult to estimate exactly how many wealthy individuals would leave the UK should the measure come into force, the tax expert points out that just ten leaving could reduce the revenue by billions.
This is because 15 per cent of the projected yield would come from just ten ultra-wealthy individuals, while 80 per cent would come from less than 5,000.
Alongside the risk of capital flight, Mr Neidle argues that the economic damage of a wealth tax to the UK would be massive.
He explained: “If you tax something, you get less of it – always. All taxes are a trade-off; you need to just be clear about what they are. With a wealth tax, you’re taxing savings and investment, so you get less savings and investment.”
The tax expert points to modelling of wealth tax in the US and Germany, which found the long-term effect was a two per cent and five per cent reduction in GDP respectively. This would be damaging for the economy and hit employment hard.
“We need to respond not to what we want policies to do, but what they actually do,” Mr Neidle added. “There are lots of ways you can reform tax and tax the wealthy fairly in a way that doesn’t damage the rest of us.” These could include reforming land tax, capital gains tax, and inheritance tax.
Any of these is probably a more likely option for Labour than introducing a wealth tax. But as autumn approaches, calls for some form of more redistributive measure will likely only grow louder.
