Rachel Reeves, the UK’s Shadow Chancellor has an especially hard row to hoe. She must reconcile the ongoing costs of government with the revenue she brings in from taxation. To put an approximate price tag on that goal, she’ll need to raise at least £20 billion and up to £50 billion. This challenge is now much more difficult after the Office for National Statistics of Great Britain recently suspended a new household wealth data series over quality issues.
The debate over wealth taxation in the UK is gaining momentum. As Reeves notes, there are many existing taxes that are directly targeted at the rich. Yet, at the same time, she recognizes the difficulty in tracking and preempting the actions of wealthy individuals.
Reeves has expressed her dissatisfaction with international taxation models, particularly criticizing Switzerland’s absence of an inheritance tax and Spain’s wealth tax exemptions. Meanwhile, Spain opted for the recently passed solidarity tax, especially aimed at wealthier Spaniards. In the background, Switzerland remains stubborn in its enforcement of its own wealth tax. All of these examples bring us to important flaws in her claims. That’s why they’re campaigning for a much stronger wealth taxation framework in the UK.
It gets worse right here though. Her Majesty’s Revenue and Customs (HMRC) does not have reliable data on how many millionaires and billionaires reside in the UK. This dearth of information makes it extremely difficult to develop effective tax policies targeting the wealthy.
The fiscal picture in the UK has been shifting underfoot at a prodigious pace. If the economic situation should deteriorate further, Reeves’ fellow Labour Party members might not be so willing to wait for a gradual rollout of any new wealth taxes. This kind of pressure should drive the call for more immediate, meaningful reforms in tax policy.
Economists have had their say, with economists such as James Mirrlees swaying the Treasury’s approach to wealth taxes. The Organisation for Economic Co-operation and Development (OECD) officially counts the UK amongst the highest property and wealth tax rates in developed economies. This puts the UK at the cutting edge of taxation globally in this regard. This context might help clarify some key questions. How much additional burden can we impose on wealthy Americans before it starts to retards overall economic growth?
In order to address these fiscal hurdles, MPs from the Labour parliamentary party’s left are coming together. They’re pushing for the enactment of notable wealth taxes. A related early day motion has been introduced. It proposes a tax of 2% a year applied to individual assets over £10 million. This proposal would help ensure a more equitable system of taxation while raising billions in new revenue for public services.
Reeves, for his part, has made clear that they were looking for any proposed wealth tax reforms to be very clear. He challenged, “Show me plan, in detail how it would work, if it’s a permanent tax, and what effects it would have on tax avoidance and individuals’ decision-making on moving or storing their wealth. Sheldon Whitehouse for additional transparency, and in doing so points to the challenges of creating a tax code that is equitable and efficient.
The discussion surrounding wealth taxes is underscored by a fundamental economic principle articulated by economist Christophe Chamley: “Tax rate on capital income tends to zero in the long run.” This is a troubling observation given the long-term sustainability of taxing wealth without possibly having negative impacts in dis-incentivizing investment and economic activity.