What happened to the wealth tax?

Thomas Piketty’s book Capital in the Twenty-First Century seized global attention a decade ago with its call for a global wealth tax. Yet politically, the idea now appears to be struggling.

A US plan to tax wealthy people’s investments is unlikely to pass Congress, the UK Labour party this year scrapped its commitment to the taxes and France ditched its wealth tax in 2018.

Opponents include the French president Emmanuel Macron, who replaced the French wealth tax with one on real estate with the aim of fostering international investment in the country. Critics have also looked to the example of Norway, where a tax on the country’s billionaires has led dozens of them to decamp to Switzerland. 

Despite the expansion of the state in other areas, wealth tax proposals have often fallen foul of the political process. And where the taxes were introduced, they were sometimes easy to avoid and often featured multiple carve-outs that cut into the revenues raised: according to the OECD, by 2020 they were typically raising less than 1 per cent of total tax revenues.

Edward Troup, a former head of the UK tax authority HMRC, believes that having to pander to “vested interests” means that wealth taxes are simply not worth the political capital. “[They] get you to carve out pensions, property, private companies — to the point where it’s not worth it,” he said.

At the same time, as western governments face up to the reality that ageing populations will shrink their workforce and limit tax revenues from people’s pay, economists and campaigners argue the idea — which tends to win broad public support — is due for a resurgence. 

“In the current environment where existing taxes are already high in many economies, we could see new taxes on land, or wealth more generally, come on to the agenda,” says Keith Wade, an economist from asset manager Schroders.

Spain last year introduced a broader “solidarity tax for great fortunes” on those with net assets over €3mn in response to its cost of living crisis. Countries in Latin America have also introduced the levies, including Venezuela in 2019, and Argentina and Bolivia in 2020.

Colombia became the latest country in the region to follow suit at the start of 2023, levying a rate from 0.5 per cent to 1.5 per cent on individuals whose assets exceed $750,000.

Piketty told the Financial Times: “There’s no doubt that the wealth tax will come back in France and elsewhere, quite simply because there’s no way the rest of the population will accept to pay for the climate, education, health, and so on, if the richest do not pay their fair share.”

Arun Advani, a British academic and advocate for the taxes, acknowledges they have been difficult to pass. “People understand a wealth tax would be a good thing,” he said. “But the losers are well-connected to those who listen and have power: politicians and journalists.”

But he added: “It’s harder now for people to say that these taxes can’t raise serious amounts of revenue.” The value of assets in the UK has ballooned from two to three times annual national income to around seven since the last time a UK government campaigned for a broad levy on all forms of wealth under Harold Wilson in 1974, he said. That attempt never came to fruition.

Advani argues that to bypass the difficulties associated with introducing a broad wealth tax, the “lower hanging fruit” would be to improve the existing state apparatus to better tax increases on wealth — that is, unearned or investment income. He advocates equalising capital gains tax, which in the UK is levied at a rate of between 10 and 28 per cent, with tax on wage income, which carries a top rate of 45 per cent. 

“The tax system is unequal among rich people who earn the same amount,” Advani said. “There should be a lot of bankers, who earn their money in income and not investments, angry that this disadvantages them.” 

This fact has not gone unnoticed among high earners. “It’s an absolute crime,” said Gary Stevenson, formerly Citibank’s top trader, who paid the top rate of income tax on all his bonuses and now campaigns for levies on extreme wealth as part of the Patriot Millionaires group. 

In the UK, wealth divides have increased sharply over the past decade and a half. Incomes have stagnated while the prices of assets, particularly of housing, have continued to increase, making wealth less attainable for the young. 

Surveys tend to show that the public backs wealth taxes — in the UK a poll by YouGov this year showed that three quarters of Britons supported them. But Dan Neidle, a tax lawyer and founder of Tax Policy Associates, said: “There’s a dangerous political trap with wealth taxes — they poll well in isolation, but in the heat of an election campaign, they’re not so successful.”

Instead, Troup advocates focusing on one asset, such as residential property, through a land value tax.

Despite the example of Norway, Advani argues wealth taxes do not necessarily scare the rich into leaving. A previous reform to the UK’s non-dom regime — under which people resident in Britain are exempt from full taxation on their foreign income — did not lead to significant numbers quitting the country.  

The Return of Big Government

This is the final part of a series on how advanced economies are shifting back to using fiscal policy to drive interventions

Part one: Tax and spend redux
Part two: The $100tn path to net zero
Part three: The new price of peace
Part four: The problems of taxing wealth

Governments have also vastly improved their ability to track offshore assets through the advent of more data-sharing protocols with other tax authorities, he said. 

Critics of plans like Advani’s have argued that increasing capital gains taxes would reduce the incentive to set up businesses in the first place. But Advani argues that most entrepreneurs, when selling their companies, say they were completely unaware of the tax rates they would face when doing so.

“What you should be doing to help entrepreneurs isn’t a lower rate at the end of the process for those to happen to do well,” Advani said. “You should provide support to people on the way in.” 

Additional reporting by Emma Agyemang in Copenhagen, Jim Pickard in London and Leila Abboud in Paris

Data visualisation by Keith Fray