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Wealthy entrepreneurs are a mobile bunch, and countries are jostling to woo them. Some 70,000 people are said to have registered interest in Donald Trump’s proposed £5mn “gold card” US visa. Many are lured by the luxury lifestyles and zero personal income tax of the United Arab Emirates. Italy’s flat tax of €200,000 a year on foreign income has been a big draw. Britain has long been a favoured destination, but Conservative and Labour moves to scrap its special regime for “non-doms” — whose permanent home for tax is outside the UK — have badly dented its attractiveness. Now, by refusing to rule out a possible wealth tax, Labour Prime Minister Sir Keir Starmer is making things worse.
The straitened UK could certainly do with more revenue. Analysts reckon chancellor Rachel Reeves may have to fill a £20bn-plus hole in her autumn Budget, widened by the £6.25bn cost of two recent government U-turns on welfare savings. Former Labour leader Lord Neil Kinnock last weekend suggested a 2 per cent annual levy on assets over £10mn could raise about £10bn a year. A wealth tax might help to placate restive leftwing Labour MPs whose rebellion forced the benefits reversals. Challenged this week to state that the government would not introduce such a measure, Starmer declined to do so.
Yet there are hefty potential costs to the wider economy. The government has already increased the tax burden on the wealthy. Reeves’ first Budget last year raised capital gains tax rates. By limiting inheritance tax relief on passing on family businesses it unsettled many domestic entrepreneurs. And Reeves made non-doms’ worldwide assets liable for IHT, removing a concession the Conservatives left in place last year after saying they would scrap the non-dom regime from 2025. Anecdotal evidence suggests many rich foreigners are leaving or thinking of doing so.
Even if it does not introduce a recurrent levy on wealth, keeping the possibility open for months could further undermine the perceived stability that has long been a UK attraction and broaden the exodus. That means a further hit to jobs, investment and tax revenues that wealth-creators do generate. With Britain’s economy contracting in May for the second month in a row, Labour cannot afford such risks to its growth ambitions.
International experience, moreover, suggests wealth taxes generally fail to achieve their aim. The infrastructure needed to verify wealth and debt valuations reduces the net tax take. Advisers are adept at avoidance schemes, and several countries have found the levies contributed to capital flight or put off foreign investors. In 1990, 12 OECD nations had recurrent net wealth taxes on individuals, but countries including Austria, Denmark, Germany, the Netherlands and France later repealed them. Only four, including Norway and Switzerland, were left by 2020.
As Britain’s Institute for Fiscal Studies has noted, recurrent net wealth taxes are a poor substitute for properly taxing the sources and use of wealth. In the UK, that should include further reforms of capital income taxes so that high returns are adequately taxed.
Starmer argued this week it would be wrong to rule out any fiscal measure months before a Budget. Labour did make trouble for itself with last year’s election pledge not to increase income tax, VAT and employee payroll tax. That tied its hands on levies that contribute about two-thirds of total tax revenues, leaving it mainly with “stealth” options to balance the books. The promise, intended to underline its fiscal discipline, looked ill-advised at the time and is becoming ever harder to maintain. Labour no doubt faces tricky choices in the months ahead. But it would be better to remove a recurrent wealth tax from being one of them.
