Is Zack Polanski justified in wanting a UK wealth tax?

Zack Polanski, leader of the Green Party of England and Wales, has been on the record vigorously defending his party’s plans for a wealth tax. This would take the form of an annual levy of 1% on assets above £10mn and 2% above £1bn. It is not hard to see why the idea is appealing to many. Polanski claims the tax could raise between £15bn and £25bn every year – money that could be used to prop up public services or, indeed, finance the Green Party’s expansive manifesto pledges.

But will a wealth tax actually solve the UK’s precarious fiscal position? An extremely brief review of the economic theory behind a wealth tax provides a starting point for our analysis. In Capital in the Twenty-First Century, economist Thomas Piketty articulates what is known as the r > g line of reasoning. In essence, if the growth of returns to capital (which is to say, profits accumulated by those who own capital goods like machinery) exceeds the growth rate of the whole economy, wealth begins to pool in favour of the holders of capital. As a result, a wealth tax can be both a powerful redistributive tool, and a source of additional government revenue.

The value of capital that moved abroad when the [French wealth tax] was in force is estimated at between 200 billion and 300 billion euros

Every economist will tell you, however, that theory can only get you so far. The real issue with wealth taxes is that the countries that have implemented them thus far have seen broadly negative results. Piketty’s home country, France, provides an instructive example. The Impôt de Solidarité sur la Fortune (ISF) taxed net wealth above 800,000 euros at a progressive rate ranging from 0.5% to 1.5%. The tax was seemingly well-designed: it was capped at 75% of annual income to avoid placing an undue burden on those with valuable assets but a limited income (which would have created liquidity problems, where people in that position would have had to sell assets to be able to pay the tax if they could not do so directly out of their income).

There was just one catch – the tax probably cost more money than it raised, between its introduction in 1989 and abolition in 2017. The ISF brought in around 4 billion euros in annual revenue (already substantially less than the figures promised by Polanski, bearing in mind that France during this period had a population similar to the UK’s currently). Around 10% of revenue was lost solely due to administrative costs, as assets had to be valued. More seriously, however, there was a sharp rise in capital flight – where those likely to be seriously affected by the tax moved their assets abroad, particularly to Belgium, Germany and Switzerland. This not only leads to a loss of wealth tax revenue (which has been accounted for in the four billion figure given above), but also to a loss of other taxes, such as property tax, capital gains tax, and VAT from the spending these individuals engage in. The value of capital that moved abroad when the ISF was in force is estimated at between 200 billion and 300 billion euros.

Without strong international guardrails to prevent capital flight, a wealth tax would permanently lower Treasury revenues

What does this tell us? In the battle between the government and the rich, the rich will always have the upper hand, whether we like it or not. High-net-worth individuals will move their taxable assets out of the UK to avoid paying, and they may not return even if it were to be repealed. The idea of a wealth tax is appealing, but the fact is that the rich already pay a disproportionately large share of the UK’s tax burden (which, to be clear, is as it should be), and the UK economy needs them to continue paying those other non-wealth taxes as well. The most likely outcome is that, without strong international guardrails to prevent capital flight, a wealth tax would permanently lower Treasury revenues. Many countries that have tried wealth taxes have abolished them, like France did, and those that have kept them (Spain and Norway) have fiscal particularities that make the wealth tax not meaningfully burdensome in the way the UK’s would be.

So, are there any real solutions? As we’ve seen, flat taxes on assets are economically fraught. It may be possible to design a revenue-positive wealth tax, but sketching out what such a proposal could potentially look like is beyond the scope of this article. For those who really do not want to reform broader capital income and transfer taxes, a better starting point would be a temporary, one-off levy (as some economists have suggested). This would reduce (but not eliminate) the level of capital flight while also providing a much-needed revenue boost.

For now, though, Mr Polanski would be better off looking to more sustainable fiscal solutions rather than simply claiming that taxing wealth would bolster the Treasury’s coffers without any unintended negative consequences.