Health, Wealth and Happiness
Health, Wealth and Happiness
In response to widening inequality and deeper budget deficits caused by the Covid-19 pandemic, The International Monetary Fund’s recent biannual fiscal report has called for temporary tax increases on the wealthiest in the form of increased wealth taxes. This echoes the sentiment of Shadow Chancellor Annaliese Dodds, who suggested new wealth taxes to pay for some of the costs of the pandemic prior to Rishi Sunak’s summer statement in July 2020, so why are the Labour frontbench not now doubling down on this message with the backing of the IMF?
Keir Starmer and several other members of the Shadow Cabinet have been repeating the line “Now is not the time for tax rises” ad nauseam – to the point that they even temporarily opposed the planned rise in corporation tax, a policy from Labour’s 2019 manifesto – instead suggesting that stimulating growth is the way to pay off the pandemic debts. Whilst it is true that growth is the key to recovery, and with interest rates at historic lows it is clear that any tax increases on low and middle income households would not be the optimum strategy, increased taxation on unearned wealth is unlikely to stifle consumption but can provide the government with greater fiscal flexibility at a time of immense need. Income from employment is on average taxed at a rate of almost 30% in the UK, whereas non-employment income faces an average tax rate of just 3.4%. Considering that it tends to be those on the higher end of the income distribution that earn more of their money from sources other than employment, this illustrates the hugely regressive nature of the UK tax system. If wealth were to be taxed at the same rate as income, it could raise up to £174bn per year (roughly 21% of annual UK tax receipts).
Wealth taxes are by no means a new idea: Adam Smith and David Ricardo were both proponents of a land value tax, the 18th Century French Physiocrats advocated a “single tax” on the value of land owned, and even Owen Smith included a proposal for a wealth tax in his manifesto for the ultimately unsuccessful 2016 Labour leadership challenge. A number of countries in the OECD currently use wealth taxes, including Norway where any wealth over 174,000 USD ($348,000 for married couples) is taxed at a rate of 0.85%. Only 10% of Norwegian taxpayers meet the threshold for paying the tax, and research conducted by Kristoffer Berg and Shafik Hebous of the IMF suggests that the presence of the wealth tax helps to reduce intergenerational inequality as those from wealthier backgrounds have a reduced “Privilege Effect” that separates them from less wealthy peers. The reduction in this effect is particularly pronounced in Norway given the strong public provision of health and education, characteristics which are shared by the UK – indicating that a wealth tax may not only help to ease the UK’s deficit but also reduce intergenerational inequality.
The introduction of a wealth tax in the UK is not simply fiscally astute and conducive to social mobility, but also spreads the tax burden away from those who work to earn their income and towards the vast quantities of hoarded capital held by the wealthiest in society. Given that the Labour party was founded to defend the interests of workers, it is perplexing that the current leadership is unwilling to call for a policy that has diversified benefits without creating any cost for most working families. After her support for a wealth tax last summer, Annaliese Dodds now resolutely claims that there should be no new taxes or tax increases and the UK should seek to grow our way out of the current crisis, but with GDP growth in the UK failing to reach the 2% minimum target since the first quarter of 2016 it seems unlikely that without new proposals to radically change and rebalance the economy that the levels of growth required can be reached. Labour’s current failure to campaign for a significant change in the way that labour and capital incomes are taxed is symptomatic of a party leadership that doesn’t seem to know what it stands for other than power for power’s sake.