Dear Keir Starmer, here's why a wealth tax will impoverish us all

Here we go again. Tax the rich! Make the wealthiest pay more. Even a small percentage will repair the public finances, ending the country’s annual deficit and reducing the national debt. Allegedly.

The Labour MP for Alloa and Grangemouth, Brian Leishman, is pushing for the Labour party, and in time Labour governments to introduce a so-called “wealth tax” to raise more funds for our politicians to spend on everyone’s behalf.

The particular version Mr Leishman is supporting (for there are at least 57 varieties available) is to place a two per cent levy on all wealth that a family possesses worth over £5 million. The STUC estimates it would raise £1.4 billion, which is not much different from the saving Rachel Reeves is making from denying ten million pensioners the winter fuel allowance.

Right from the start the claim that the wealthiest should pay the most tax ignores the inconvenient fact that they already do. The top ten per cent of income taxpayers pay 60.2 per cent of the income tax revenues. Of that exclusive group the top one per cent of income taxpayers pay 29 per cent of all income tax revenues.

If taxes on the wealthy get too high, they have a tendency to leave the country (Picture: Christopher Furlong) | Getty Images

Pushing on an open door?

It is a fair point to say that income tax does not tax wealth, as measured by assets held or liquid funds, but the purchase, sale and gifting of assets is generally liable for various taxes (such as the variations of stamp duty). Indeed in the UK, it often seems that if anything moves or is transferred, it will be taxed. This results in purchases out of taxed income being taxed when bought and sold – double or sometimes triple taxation when VAT is included.

Take property, where various types of stamp duty exist across the UK to capture its purchase, and then, when it is sold, capital gains tax will be levied on the increase in value it has achieved, even though that might be entirely down to inflation that the government has caused. That’s not a tax on wealth – it’s a tax on the falling purchasing power of our currency.

Leishman may be pushing on an open door. It was only four years ago that Keir Starmer said: "We're looking at income from property, income from dividends, shares etc – all of those options are a wealth tax.” Likewise, Lisa Nandy, now a minister, said: “At a minimum we should bring wealth taxes into line with income taxes – we go after the wealth... wealth is in assets and that's where we start.”

Farmers’ inheritance tax bill

Needless to say these comments were for consumption by Labour party members during its 2020 leadership election, and, surprise, surprise, a blatant “does what it says on the tin” wealth tax did not make the general election manifesto – but taxing wealth through existing taxes was left possible – and has come to pass.

For what is the halving of agricultural property relief and business property relief towards inheritance tax but a wealth tax on farmers’ and business owners’ assets. There is also still support among Labour MPs for increasing capital gains tax to at least the same rates as income tax.

Another revenue earner that is often a favourite of wealth tax advocates is council tax, where adherents want to increase the proportion of revenues funded by the most expensive property valuation bands, possibly by bringing in new bands precisely for this reason. That would transform the purpose of council tax away from financing the use of local services through the likely size of a household to performing a further redistribution of ‘wealth’ through an additional punitive tax on more expensive properties.

Another tax to add to the Chancellor’s tax-raising pallet is a new gift tax, which would seek to catch the transfer of assets and funds not yet caught by existing taxes. There is no shortage of ideas about how to relieve people of any wealth they have built up. Shut your eyes and you can almost hear Labour politicians saying, “if you don’t like this wealth tax, we have others”.

Capital flight

Take a step back from the clenched-fist, red-flagged rhetoric and it is not difficult to see there are a number of problems with a wealth tax. The most obvious is that wealth taxes are so damaging to a country’s economy that those who have had them have mostly abolished them. Examples include Sweden and France, but there are many more.

The other is that, as taxes rise generally, we are already seeing capital flight at different wealth brackets across the UK. HM Revenue and Customs is reported as concerned about Scottish taxpayers relocating to England to avoid paying Scottish Government taxes. This very same phenomenon caused the Scottish Fiscal Commission to include in its tax revenue modelling an allowance for behavioural responses by people relocating that reaches a point whereby tax increases raise little at all.

Of course it’s not just within the UK that taxpayers will move, some of us can remember how in the 1970s Labour drove many A-list celebrities such as Michael Caine and Rod Stewart to become tax exiles, only returning after the taxes were cut in the 80s and 90s. The point here is that the tax revenues were lost by having tax rates that drove the wealthiest away, and to make up the shortfall there has to be greater public borrowing or higher taxes paid by lower earning taxpayers.

Thanks to the high taxes of Rishi Sunak, Jeremy Hunt and Rachel Reeves, we can now see the UK is second in the world only to China in having an exodus of millionaires – estimated at 10,800 net in 2024 – a 157 per cent increase over 2023..

No, a wealth tax will not do what its admirers claim, it will impoverish everyone left paying for our spendthrift governments – and it is to that spending we should be turning our attention.

Brian Monteith is a former member of the Scottish and European parliaments and a senior advisor to the Tax Reform Council