The Garrulous Jay – The Broadest Shoulders

The last few weeks have been challenging for the Government, as I wrote after the Chancellor’s tearful appearance in the House of Commons. Since then we have had news of anaemic economic growth and elevated inflation, potentially compounding her difficulties as she considers her options for her autumn Budget.

It is perhaps no surprise, therefore, that speculation of a wealth tax has increased.

Economic and political credibility are at stake, and that goes for the PM as well as his neighbour in No.11, now he has hitched his political wagon to the Treasury’s fiscal engine…

Promises broken around borrowing commitments would rile financial markets, driving higher bond yields and ultimately borrowing costs for government and individuals alike.

Promises broken around tax rises (or their absence) for “working people” that were written into the Labour manifesto – however sensible such a move might be – would probably be political suicide.

A wealth tax would theoretically avoid both mantraps whilst plugging the gap opened up by policy U-turns and lacklustre economic performance.

It could be argued that the broadest shoulders should bear more of the financial burden for supporting public services. This could be supported by evidence that the wealth gap has widened since the global financial crisis, and that the balance between the taxation of income and capital has fallen more heavily on the former than the latter in recent years.

Pitching it at a level of wealth above £10 million, for example, as some commentators have suggested, would see it impacting a limited number of people (although the exact figures are hard to ascertain), thereby containing the political backlash.

Those opposing such a move would cite the fact that previous attempts to raise significant revenues by taxing wealth have failed. Very few countries currently impose a wealth tax (just Norway, Spain & Switzerland in Europe), and it raises a very small percentage of their total tax take.

Furthermore, plenty of countries have actually given up on wealth taxes over the last three decades, citing reasons including capital flight, administrative costs, low revenues, deterrence to saving and even constitutional issues.

But could this time be different? As a 2021 paper in Fiscal Studies points out, perceptions of wealth inequality are higher now, international tax transparency has increased materially over time, and technological progress has reduced the potential administrative burden.

Taking these developments together, and incorporating the lessons learned from past mistakes support the advocates’ case for a wealth tax.

So I asked a peer group of some of my wisest colleagues if they thought the next Budget would see the introduction of a wealth tax… Their verdict? Seven noes, and no ayes.

The consensus appears to be that reforms to existing taxes on capital are quicker and easier to implement than the introduction of an entirely new tax regime, whilst also being harder to avoid.

This is a view with which, perhaps unsurprisingly, I concur. So I can see the “two C’s” – Capital Gains Tax and Council Tax – being firmly in focus come October… That will still leave some with an uncomfortable feeling in their shoulders.