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.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.