George Kerevan: Trying to tax the wealthy not worth the price

NICK Clegg, deputy prime minister and the leader of a party that has lost half its electoral support since entering coalition with the Tories, wants a wealth tax. By that he means imposing a “time limited” annual levy on the personal assets of the rich, over and above income tax.

A tax rate of half of 1 per cent has been mentioned, but Clegg won’t reveal all the details till his speech to the Liberal Democrat conference. Nor has he said how long such a wealth tax would be in force, or how much it would raise for the Treasury. Altogether then, a rather vague proposal but nevertheless one which garnered Clegg gratifyingly massive amounts of media attention.

Of course, publicity for the beleaguered Mr Clegg might be the whole point of this seemingly fruitless propaganda exercise. Tory Chancellor George Osborne was quick to shoot down the idea in flames. No one in their right mind thinks that Osborne – who slashed the top rate of income tax from 50p to 45p only in March – is going to tax Russian oligarchs or Middle Eastern oil billionaires out of London.

Nevertheless, associating the Lib Dems with a wealth tax does Clegg no harm. Quite the opposite. Where the Lib Dems are losing most electoral support is among left wing voters who switched to the party from Labour in 2010, to keep out Tories in marginal constituencies. The Conservatives lie second in 39 of the 57 seats currently held by the Lib Dems. Clegg is sending out a none-too-subtle message to those tactical voters that they should stick with him or risk returning David Cameron to Downing Street come 2015.

However, we should not dismiss the idea of a wealth tax simply as a Lib Dem public relations stunt. If it enters the next Lib Dem manifesto, it could well end up becoming actual policy in any Miliband-Clegg coalition after the general election. I predict that calls to “soak the rich” will prove very popular in future contests, whatever George Osborne thinks.

Besides, wealth taxes do exist. Iceland introduced an emergency wealth levy in 2010, of 1.5 per cent on single individuals with assets of more than £390,000, or £519,000 in the case of married couples.

This affected only 2.2 per cent of Iceland’s 320,000 population, but yielded a not insignificant revenue equivalent to 0.3 per cent of GDP in each of the three years the tax is slated to run. Very crudely, 0.3 per cent of UK GDP would give the Treasury £7.5 billion a year in extra income.

However, before you get carried away, there is a big caveat in how the Icelandic wealth tax functions. Sensibly, the Icelandic government banned the export of capital by its citizens (and by foreigners). So there was no escaping the tax by moving to Europe or America, or keeping your loot in a Swiss numbered account. (The Icelanders did other sensible things, by the way, such as jailing their corrupt bankers.)

In the UK, the political and commercial influence of the City of London would block any ban on the rich transferring assets abroad. The City is, after all, the world’s biggest off-shore banking haven for plutocrats, oligarchs, arms dealers, oil sheikhs, African despots, Iranian nuclear sanctions busters, and assorted money launderers.

On the other hand, you might get away with setting a lower levy than in Iceland, and relying on inertia to bring in the money, as they do in France, which has had a permanent wealth tax (l’impôt de solidarité sur la fortune, or ISF) since 1988.

However, before both Clegg and the Socialist Workers Party shout “vive La France”, you should note that the French courts have made it unconstitutional to levy any tax which is merely confiscatory. This month the courts told the new Socialist government in France that it must cap a proposed increase in the ISF.

The truth is that most Western European countries have abolished their wealth taxes in recent years. The Swedes got rid of theirs in 2011 because it raised only £400m per annum but kept over £140bn of Swedish-owned capital outside the country.

A wealth tax is also arbitrary, complicated to administer and raises only modest amounts relative to the trouble of collecting it. Do you fancy paying tax (out of your income) because your grandmother left you a Scottish Colourist painting? And paying it every year?

Would novelists and composers – often cash poor – relish paying tax on their intellectual rights, as is the case in France? OK, you can start exempting particular kinds of assets from the wealth tax, but that’s a slippery slope.

There is one wealth tax that is relatively easy to administer: a so-called “mansion tax” on expensive homes. After all, you can’t hide a Docklands penthouse. But the UK already has the highest property taxes (as a proportion of GDP) among the OECD industrial countries.

It’s unpopular to say this, but the problem in the UK is not low taxes – it’s the opposite.

At this instant, with a big debt overhang, growth is being inhibited by high consumption taxes and high national insurance premiums, especially employer paid. We need tax cuts to boost demand, while we abolish the debt mountain.

Certainly, the gap between high and low incomes (not wealth as such) is too high, because average incomes have stagnated for over a decade. We need to put average incomes on a higher growth curve. This has less to do with equality and more to do with generating incentives and maintaining effective demand. Why not cut employer national insurance while raising the national minimum wage?

In 1974, Labour Chancellor Denis Healey threatened to “squeeze the rich till the pips squeak”. Denis always enjoyed his bully-boy image. Yet he soon dropped the idea: “In five years I found it impossible to draft [a wealth tax] which would yield enough revenue to be worth the administrative cost and the political hassle”.

Are you listening, Mr Clegg?