Tax and Fiscal Policy

Wealth taxes are not the way to go

A classical conservative believes private property exists in a moral, not merely political sense.  We could truly own things even if we lived on a stateless desert island and my property is truly mine, like my hair or my sense of humour.  One of the things the state exists for is to protect private property from theft and banditry.

No true conservative would support taxing people differently depending upon their hair colour or how humorous they were. There is no objection to taxing people for what they do with their hair (e.g. modelling) or sense of humour (e.g. writing plays), but we do not believe in taxing people according to what they are.

Yet sometimes conservatives play with the thought that the UK should have wealth taxes – even though property is just like hair or a sense of humour. For example, in yesterday’s Financial Times Janan Ganesh – the biographer of the UK’s Chancellor George Osborne – suggests we should impose “wealth taxes” upon the “asset-rich”. CapX contributor Tim Montgomerie is another who advocates taxing “assets and inheritance more”.

But if we tax property we undermine people’s ability to enjoy peacefully the fruits of their efforts and the efforts of those around them.

Suppose, for example, my mother were a great painter and she gave me a very valuable painting she had done. If the state estimated the value of that painting and then imposed an annual tax on it, eventually I might have to sell that painting when all I really wanted to do with it was have it hanging on my wall to remind me of my mother. Wealth taxes are an attack upon the stability of property accumulated and turn the state from the protector of the stock of property into a looter of it.

A key reason it is legitimate for the state to tax what we do with our features and skills is that the state facilitates trade (including trading labour for things). When we work or sell things, there is a greater value to the transaction because the state guarantees and protects it. So it is legitimate for the state to take a portion of that added value (e.g. as income or sales taxes) – it is in some sense the state’s share of the value it adds.

Certain kinds of property right exist only insofar as states themselves exist. So for example patents or mobile phone spectrum can only be owned at all because the state creates a right to them. When there is only a property right because the state creates it, it is legitimate for the state to make a periodic charge for the continuation of that right (as indeed the state does do in the case of patents).

The other kind of case in which it might be legitimate for the state to make a charge would be if the state or society collectively were fundamentally the owner of something, so the person controlling the property didn’t really own it themselves. In such a case, the state might make a charge to the “property owner” as a kind of rent.

Land is an oft-argued albeit contentious example, and historically there was a periodic charge on all land called “socage”. The idea of re-establishing a socage system was floated in a recent Europe Economics report for Shelter.

Of course, some socialists regard all property as fundamentally collective. They think of it all as “ours” for “us” to decide how it is distributed.  So they worry about how “fairly” property is distributed.

Yet a conservative should not believe that all property is collective by nature and distributed only according to social utility.  Setting aside special cases such as patent charges, wealth taxes are morally illegitimate – just like hair or wit taxes would be.

Dr Andrew Lilico is the Executive Director of Europe Economics. This article was first published by CapX

Member of Advisory Council

Dr Andrew Lilico is a Fellow of the Institute of Economic Affairs and Chairman of the IEA/Sunday Times Monetary Policy Committee.  Andrew also acts as Executive Director and Principal of Europe Economics.  He is a frequent contributor in the UK and international media on economic and financial matters, appearing on programmes such as Newsnight, the Today Programme, Sky News, CNBC and Bloomberg. Andrew received his first degree from St. John’s College, Oxford, and his PhD from University College, London, where he also lectured in macroeconomics and in monetary theory.  

4 thoughts on “Wealth taxes are not the way to go”

  1. Posted 28/10/2015 at 11:44 | Permalink

    I disagree. As you infer, property ownership is conferred by the state that protects it and you. If were invaded by a foreign force it can be taken away. Indeed our own state might legislate to take away “our” property. In many ways, the state does collectively own our property. Try declaring UDI if you don’t agree and see what happens.

    So basically the more we have, the more we need the state to maintain us and our wealth. Certainly some aspects of state spending like defence and policing should be linked to wealth. We can be sure that more police time and money will be used to recover a stolen Van Gogh than it would my mountain bike.

  2. Posted 29/10/2015 at 14:05 | Permalink

    Taxing Income and Capital can never be justified morally or economically. Dr Lilico twists himself up into knots by trying to do so. Firstly, we only owe the community compensation for burdens we place upon it. This is why Capitalism works, because it is market based compensation for the ownership of the efforts of others. It therefore aligns incentives between individuals and firms. As Land is an unreproducible factor of production, we should compensate those excluded from it for the same reason we pay for any other good or service. That we do not, distorts incentives, leading to deadweight losses like vacancy, under occupation, land banking, urban sprawl, rent seeking and excessive inequality. This is the actual cause of our “housing crisis” not planning regulations. Even in an anarchy, sharing Land rent is a prerequisite for peace and prosperity. That we should choose to pool our compensation(rent) to pay for public services is a separate issue. All taxes are “land taxes” insofar as they reduce rental incomes and selling prices. The differences between them are how directly or indirectly they do so. A direct land taxes enforces peoples property rights to an equal share of the rent derived from them, aligning incentives, increasing wealth and welfare. Doing so indirectly by taxing income/capital infringes peoples property rights to enjoy the fruits of their labour, distorting incentives, reducing net wealth and welfare. Fair economic system=fair distribution of the factors of production=aligned incentives=optimal efficiency. We will only ever have an equitable, prosperous society when Land and other economic rents and negative externalities are the sole source of public finance. Of course this is the last thing fake-Capitalists like Dr Lilico and the IEA want, so they’ll never campaign for it. They only want protected privileges, not efficient markets .

  3. Posted 29/10/2015 at 16:13 | Permalink

    Benji, no taxation can be morally justified without some kind of recognition of the supremacy of the state as protector of the land over which it exerts control. This makes the state some kind of protection racket. But we justify that by collectively agreeing to a system to govern in our collective interests. Failing that we have a revolution!

    The idea of a free market for land is a bit strange, really. Ownership of land only exists insomuch that the state upholds laws which recognise us as owners. So is it really so odd that in return, we should pay to the state something in return for that recognition? I don’t think so. And if we’re not going to turn the country into one huge game of Monopoly then there needs to be a redistribution of wealth that is commensurate with land values. Without that, some kind of forced expropriation of land will result, either through ballot boxes or through civil disobedience. (Equivalent in Monopoly to players taking money from other players or tipping the board over!)

  4. Posted 30/10/2015 at 11:38 | Permalink

    Although I agree with the author’s conclusion that wealth taxes are morally illegitimate and shouldn’t exist, there are a number of flaws with how he arrives at this conclusion.

    On one hand, he mentions that we could own things in a stateless society but on the other he strongly implies that property rights exist only due to the state? I recognize that in the case of the former, he is talking about intangible assets such as sense of humour but he fails to recognize that ALL property rights emerged through homesteading initially and now exists through a transfer of title on mutually agreeable terms between a third party and the legitimate title holder. The state needn’t be involved in either. There have been violations of property over the years but that doesn’t make the state’s claim on private property any more legitimate. Historically, most of these violations have been by various states themselves.

    Another flaw in the argument is the reference to spectrum and patents. Unlike spectrum, patents/copyrights are a government grant of monopoly and wouldn’t exist without the state. That just proves that they are NOT legitimate property. On the other hand, mobile spectrums, much like radio frequencies, are no different to any scarce resource and they could be developed by anyone who first uses it. However, governments the world over have nationalized it in the ‘pubic good’. The biggest beneficiary of that ‘pubic good’ is of course the state bureaucrats themselves.

    In reality, the state is the biggest violator of property rights and claiming the right to someone else income or property though the use of force (or implied force) is in fact the very theft and banditry the state is meant to protect us from.

    Also, the author seems to claim that the VAT/service tax that’s being taken is it’s percentage of value added (i.e. – cost of protection). Even if you believed this statement, in no way does it justify income tax or inheritance tax, taxes which are completely arbitrary and have nothing to do with the ‘service’ provided, if you can really call it that in the first place.

    The author asks us to believe in property rights and reject collectivism just because he says so. This isn’t really an argument for it unfortunately. The real reason for property rights comes down to a famous saying that is a property that belongs to everyone in theory belongs to no one in practice. That’s the real problem with the collectivist argument against property rights. They really fail to realize that property rights are the foundation of any society. It’s what allows us to specialize and advance humanity. Without them, we would all be hunter/gatherers. The so-called wild-west in the US is a classic example of what happens without property rights – a dustbowl. That problem too was caused by state legislation as well.

    Lastly, it’s about time we took back the word ‘liberal’. There is no such thing as a ‘classical conservative’. Conservatives are simply descendants of the Whigs, who were nothing more than right-wing socialists.

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