More tax on wealth is the last thing we need
Increasing the levy on investment returns would discourage enterprise and make us all poorer
‘Tax wealth. Get growth.” That’s the pithy conclusion of a piece by the Loughborough MP Jeevun Sandher for the news website LabourList. But while there’s truth to some of what Sandher writes, his overall argument does not stack up.
Sandher does not call for the government to tax wealth directly, for example, with a net wealth tax. This idea, much loved on the radical left as a solution to all our ills, would be a disaster.
As well as being impractical to levy, a net wealth tax would lead to punitive tax rates on investment returns, undermine start-up (and scaling) businesses and lead to capital flight. For a country like Britain it would amount to a kind of economic euthanasia. Instead, Sandher’s argument is that we should rely less on taxing work and more on taxing investment returns — dividends, capital gains and rental income. This wouldn’t only be fairer, we are told, but would boost the economy too.
It is true that investment income is generally taxed at “preferential” rates, with lower headline tax rates than ordinary income and/or exclusion from national insurance contributions. Many have suggested having one set of tax rates for all kinds of income. It seems logical. But unless you make adjustments to the tax base — giving tax relief for savings, allowing for losses, accounting for inflation, offsetting the impact of corporation tax — taxing capital and ordinary income at the same rates creates a big, structural tax bias against investment. That will tend to reduce capital accumulation and make us poorer.
If you do make those adjustments, you may end up with a tax system that is more rational. But it will also be more complex — and won’t necessarily generate much more revenue. There’s a case for these sorts of reforms, but they won’t amount to a significant rebalancing of the tax system.
Similarly, the idea that higher tax rates on capital income increase investment — by encouraging businesses to reinvest profits rather than distribute them to shareholders — can be easily dismissed.
We shouldn’t try to lock profits up inside companies. We just want capital to flow where it will have the highest returns. Returning money to shareholders gives them more cash to invest elsewhere. This is a feature not a bug of shareholder capitalism.
None of this is to say that the right kind of tax reform wouldn’t boost growth. But we need a different approach to one that simply raises taxes on investment income then hopes for some counterintuitive magic to happen.
Corporation tax and business rates need to be reformed so that they don’t discourage investment. Stamp duty needs to be phased out, perhaps as properties change hands, in favour of a low but recurring property tax. And we desperately need to eliminate the cliff edges and tax traps in income tax and VAT that stop people from working and earning.
If there’s rebalancing to be done then, over time, it should be about getting more from taxing income when it is consumed and less from taxing it when it is earned and invested. We just need to work out how to do that in a way that spreads the burden fairly.
By contrast, taxing wealth would only deepen our economic malaise.
Tom Clougherty is an independent policy analyst. Times.
