There's no case for a wealth tax

Once again, we hear calls for a wealth tax not just from Nick Clegg and Simon Hughes, but also from Tim Montgomerie.

These calls cannot go unchallenged. A wealth tax is a pernicious tax because it taxes the same wealth year after year after year. It is double taxation and an attack on property rights far greater than the attack on property rights that comes from taxation in general. A wealth tax specifically targets only income that people choose to save and invest and build up into a store of property and assets. Earn £0.2m and spend it on a luxury cruise and some entertainment packages at the Olympics and you avoid the tax; earn £0.2m and invest it in a business and you pay the tax. It is as simple as that. The income out of which the taxed wealth is accumulated has, of course, been taxed already.

Tim Montgomerie wishes to tax all wealth, but he focuses on property:

‘Many people got wealthy during the boom years not because of great ingenuity on their part or through hard work but because they invested in Britain's highly state regulated property market. They benefited from state intervention and that benefit should now be taxed by state intervention. I don't want to confiscate all of their gain - or even most of it - but I think it's right that the propertied wealthy make a bigger contribution to the Exchequer.’

This misses an important subtlety. Those of us who live in the South East, and therefore own a valuable asset from no particular act of ingenuity, have to pay more to live in the South East — we effectively rent the house to ourselves. It is not as if we can move to the moon. And, of course, additional property taxes would also damage those newcomers to the property market who have to buy a house at high prices striving to save over a long period (probably well into their thirties these days). And, when we die, that house, in our estate will, of course, be taxed at 40 per cent.

Tim Montgomerie particularly wants transactions to be taxed more. But, transaction taxes are generally regarded as the most damaging of all taxes. We already have a top rate of stamp duty of an incredible seven per cent. As the Institute for Fiscal Studies (not known for its Tea Party leanings) said after the last budget increased stamp duty: ‘To see another Chancellor increase again such a poorly designed and distorting tax does not bode well for tax reformers.’ Taxes on transactions are especially poorly designed because they cause people to hoard the wrong assets for the wrong reasons instead of putting their money to work.

 

Read the rest of this article on ConservativeHome.

Good article, Philip. Goodness me, though, how unpleasant some of the responses are - all behind the veil of pseudonymity (is that a word?) of course. I have said before that I can't see why serious websites allow anonymity. You wouldn't be allowed to publish a letter in The Times or The Guardian with some asinine moniker. I assume that this proposal of Mr Clegg's is just a silly season thing and will never get anywhere, but it is a reminder once again of the danger of proliferation of new taxes which don't bring in significant revenue. We really need a cross-party consensus on tax simplification. I can accept that the parties differ on the tax take that they want, but why can't we have some agreement on efficient ways to raise tax?
I agree with your arguments against a wealth tax. However it does seem to me that there is a case for a special tax to restrain very high salaries. The 'market' clearly is not working, and in such circumstances the Government should act, and why a new tax is justified. The tax should be levied on the companies that pay these high salaries, not the employees, so it would look like a special form of Employers' National Insurance Contribution, paid by companies on the aggregate salary/bonus packages of a subsection of their employees - those earning over £500K. The advantages would be No sector would be unfairly penalised, most companies would not pay the tax No individuals would have to pay more tax. It would not be easy for companies to avoid the tax It would be easy to collect Companies would keep freedom to set their pay levels - the Government would not micromanage pay The effect of the tax would be to put pressure on top pay rises and compress overall pay differentials. The tax change could be fiscally neutal if used to reduce Employers' NI contributions for the lower paid.

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