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Does history suggest that wealth taxes help to improve the public finances?

Any proposal to tax wealth has to be financially worthwhile and politically practicable. History suggests that the financial clout of proposed wealth taxes is often negotiated away and that their political appeal depends on a sufficiently strong sense of inequality.

Does the economic history of the UK suggest that new wealth taxes are an effective response to the increased national debt and deficit caused by Covid-19? The evidence suggests that calls for new wealth taxes are more important as indicators of concern with inequality than as additional sources of public revenue. The tax treatment of capital assets does require reform, but central to this is the politically sensitive topic of the tax treatment of owner-occupied housing.

When have calls for increased taxation of wealth been made in the past in the UK?

Calls for wealth taxes typically emerge during periods when increased pressures on the public finances are allied to a heightened concern with perceived inequalities in the distribution of the economic and social resources of a country. Calls for a levy on capital were common during and after the two world wars, with distinctions being drawn between different groups of wealth-holders.

In the First World War, the trade union leader Ben Tillet distinguished between the ‘landed gentry (who) had given their sons nobly and freely with the industrial classes’ and ‘the capitalist class (who) were sitting at home in comfort and security behind the bodies of better men than themselves’ (Briggs and Saville, 1971; Chick, 2020). In the Second World War, John Maynard Keynes thought that the national debt might be eased by a ‘capital levy of some 5% of accumulated wealth’ that would reward ‘the risks, the labours, and the abstinences of wartime at the expense of the old wealth which they will have served to safeguard’ (Chick, 2020; Keynes, 1940).

The bulk of such calls for the increased taxation of wealth failed to be implemented. After the First World War, estimates of the yield from any capital levy were steadily planed down from an initial expectation of £115-200 million to no more than £42-50 million. This sum was considered insufficient to justify disturbing the capital markets.

In 1920, when a more focused tax on war wealth was proposed, the initial estimated revenue of £1,000 million was halved to £500 million by the chancellor of the exchequer, Austen Chamberlain. Nevertheless, Chamberlain did prefer a levy on wealth made from the war to a broad levy on capital since this war ‘wealth has come to men too rapidly and they have waxed fat while the mass have grown poorer’.

Yet even this idea of a war levy was eventually dropped. In the cabinet, the only member arguing strongly in favour of the wartime levy was Winston Churchill, who wanted to avoid the appearance of a ‘class’ government, viewing a failure to gain working class support as the ‘greatest danger to capital’ (Chick, 2020; Daunton, 2002).

Financially, while a levy on war wealth was a better-targeted alternative to a capital levy, the wartime ‘exceptional’ excess profits duty (EPD) had much greater appeal in terms of raising revenue. As its revenue of £284 million formed 36% of the total revenue of government in 1918/19, it was decided that the ‘exceptional’ EPD should continue after the war.

In 1929, Keynes’s view was that it was better to have one shilling extra on the income tax ‘than to have the disturbance of a capital levy’ (Keynes 1925; Chick 2020). Ten years later, Keynes’s interest in a capital levy was primarily as one means of reducing inflationary excess demand in a war economy, and as a counterpart to a scheme of deferred wage payments.

Was a wealth tax ever imposed in the UK?

The Labour government of 1945-51 was elected with a clear commitment to owning and taxing capital assets. All the capital assets of the electricity, gas, transport and other service industries were nationalised such that by 1951, public investment accounted for one-fifth of total national fixed capital investment. Hugh Dalton, a former lecturer on economics and inequality at the London School of Economics and the Attlee government’s first chancellor, increased the death rate on estates over £21,500 to a maximum of 75%, a rate that was raised by Hugh Gaitskell, when chancellor, to 80% in 1950. The Attlee government also launched a large programme of social housing construction at a time when the national debt stood at 240% of GDP.

These initiatives came on top of an interwar redistribution of wealth from the super-rich to the rich, and following the Second World War, there was a further widening of this wealth among the top 20% of individuals. The share of wealth owned by the top 5% fell from over 75% before the war to under 40% by 1976-80. For the top 10% of wealth-holders, their share of wealth fell from 85% before the war to 50% by 1976-80 (Feinstein, 1996).

Was that the end of calls for the further taxation of wealth?

Calls for greater taxation of wealth continued after the Second World War, but the objective changed. Many more people than before now paid income tax, and leading advocates of redistribution largely agreed that the scope for further redistribution through taxing income was limited. What came to the fore were longstanding concerns with the distribution of wealth, not least in terms of the different access to power and cultural assets that it afforded to different groups in society. With a shift to greater concern about reducing inequalities of access and opportunity came pressure to make capital assets available to more people.

Coinciding with increasing concerns about the disincentive effects of income tax at both the top and bottom of the income scale, economists like Nicholas Kaldor began to argue for a move to expenditure basis for taxation rather than an income basis (Thirlwall, 1987). Such a system would explicitly ask in tax returns about an individual’s capital assets, and not about their income.

Kaldor’s ideas resurfaced in 1978 in the report of the Meade committee (Meade; Meade Report, 1978) on the structure and reform of direct taxation, publication of which followed divisive and unsuccessful efforts by the Labour government to introduce a wealth tax in 1975 (Glennerster, 2012). The Meade report sought to improve tax incentives to earn and to save, and also favoured a move to an expenditure basis for taxation.

On the inheritance of unearned assets, the Meade report proposed moving from taxing the dead donor’s estate to instead taxing the wealth inherited by the beneficiaries. For all inheritors of wealth a record would be kept of their lifetime accumulation of wealth and, above a threshold, a progressive rate of taxation would be applied. The existence of a tax-free threshold was designed to encourage estates at death to be divided tax-efficiently between beneficiaries. This was in line with contemporary efforts to reduce the concentration of wealth.

How were these ideas received?

While the Treasury was generally supportive of the Meade report’s recommendations, by far the biggest opponent of the proposed reform of the tax system was the Inland Revenue. It went to enormous lengths to discredit the idea of an expenditure tax. But the Conservative party in opposition, and then in government with Margaret Thatcher as prime minister, steadily shifted the tax system towards an expenditure basis, as income tax rates were reduced, VAT increased and tax relief offered for life-cycle savings.

Where the Conservatives fiercely disagreed with the Meade report was on any suggestion that further taxes should be imposed on capital, capital accumulation being regarded as an important incentive for enterprise. Like the Attlee government, the Thatcher government was very interested in the distribution of capital assets, albeit now in the privatisation of housing and industrial assets rather than their nationalisation.

What lessons might be drawn from the past?

The evidence from economic history suggests that introducing new taxes on wealth in an effort to increase revenue is likely to prove to be disappointing. Yet at the same time as there are doubts about the taxing of wealth as a source of revenue, the fact that wealth taxes are being discussed again reflects a wider concern with inequality and inequity.

Although the size of the national debt will often be adduced in fiscal discussions, there are better reasons for reforming the taxation of wealth. The national debt has risen to 100% of GDP, but this is considerably lower than the 240% of 1945. Given the current low real interest rates and the long-term structure of debt redemption, the servicing of that debt is practicable. A rate of economic growth higher than the rate of interest on the debt will reduce the ratio of the national debt to GDP (Crafts, 2020).

More importantly, the current calls for wealth taxes build on a longstanding concern with a widening of the returns on capital and labour, which the pandemic has emphasised. While jobs are lost and businesses shut, the prices of assets (housing and shares) rise. Yet if there is a genuine political will to tax wealth, then the sensitive issue of the tax treatment of owner-occupied housing needs to be addressed.

Since its abolition in 1963, owner-occupiers no longer pay Schedule A taxation on the imputed rental income from owner-occupation. Those renting in the private sector do effectively pay tax. In 1965, owner-occupiers were granted exemption on their principal residence from the new capital gains tax (CGT). On death, not only is CGT not applied, but in addition, considerable thresholds are extended to owner-occupiers.

While inheritance tax has become a largely ineffectual irritant, contributing barely 0.5% to total tax receipts, there is no compensation in the form of a more realistic local tax on property. To the tax advantages of owner-occupation, which discouraged a more efficient use of the housing stock, were added changes in the availability of finance for the private purchase of housing, which contributed to the price of housing as an asset rising faster than incomes.

In the interwar period, concerns with a perceived inequality of suffering were sufficiently strong for Churchill to favour the taxation of wealth as a means of shoring up the capitalist system itself. From the mid-1970s, efforts were made to improve access to capital and/or to reduce its concentration.

While the Conservative government under Margaret Thatcher reflected a revivified view of the accumulation of capital as an incentive for enterprise, there was also a sharp interest in making that access to capital open to a broader cross-section of society. Yet over time, because of what happened to asset prices, that ambition was doused. Nevertheless, it remains an approach that is much more likely to attract broad political support than an explicit tax on wealth. It might also attract less resistance from HM Revenue and Customs.

To improve access to capital assets, the arguments and recommendations of the Meade report, many of which were echoed in the Mirrlees report 33 years later (Mirrlees, 2011), could profitably be revisited. So too could the tax treatment of owner-occupied housing, this being politically justified on the grounds of addressing inequity and intergenerational inequality in the housing market. This is unlikely to be an opportunity to raise substantial revenue from the tax treatment of wealth, but it could be a politically adroit moment to make the tax treatment of wealth much fairer.

Where can I find out more?

Who are experts on this question?

  • Martin Chick, Professor of Economic History, University of Edinburgh
  • Martin Daunton, Emeritus Professor of Economic History, University of Cambridge
  • Howard Glennerster, Professor Emeritus of Social Administration, London School of Economics
Author: Martin Chick (University of Edinburgh)
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