There are better ways than wealth tax to promote economic equality

Norma Cohen is an Honorary Fellow at Queen Mary University in London and a former FT journalist. With the highest levels of government borrowing and taxation in decades, the current economic situation is similar to that of the 1920s. In this article, she argues that by examining the parallels between the two periods as well as the research Modern day, we can see that wealth taxes will not solve the problem of growing inequality.

Picture this: Britain, after years of national emergency, faces a public debt burden which, relative to national income, is the highest in decades. In addition, tax rates are also at their highest this century. The national emergency had another side effect; it has increased the value of wealth held by the richest households in the country, while that held by the poorest stagnates.

This yawning chasm between those who sacrificed themselves and those who got richer has led to widespread – and growing – demand for a wealth tax.

Great Britain 2021? Think again. We are in 1917 and “the national emergency” is the First World War. When compulsory labor conscription was enacted in 1916, demands for the conscription of wealth also increased. In addition, since the outbreak of war in 1914, prices have skyrocketed as food and goods became scarce, causing living standards to stagnate. It was clear that some were raking in disproportionate profits at the expense of the working class, and pressure increased on the government to crack down on profiteers.

Rampant inflation amid scarcity of capital forced Britain to offer increasingly generous terms to its lenders. Those with capital could lend money to the government at rates approaching 6%, up from 2.5% at the end of the 19th century. Unlike those who fought at the front, the annuitants could benefit from this interest income thanks to the security of their seats. The sacrifice was more and more unequally shared.

The calls for wealth tax have multiplied. According to Martin Chick, economics historian at the University of Edinburgh, this was not primarily due to inflated budget deficits, but the growing disparity between rich and poor. “The calls for a capital levy launched during and after the First World War illustrate the thesis that the wealth tax proposals are better seen as expressions of concern over inequalities and perceived inequalities, rather than as effective ways to generate additional income, ”said Chick. written in an article for the Wealth Tax Commission.

Considering not only current levels of debt and government spending, but also the fact that inequality is on the rise, it’s no surprise that wealth taxes are back on the agenda.

Research from the Resolution Foundation’s think tank found that the pandemic has dramatically widened wealth inequalities due to the disproportionate effects it has had on asset values. While the median family earned £ 7,800 in wealth per adult – largely reflecting rising house prices – the richest 10% of households earned just over £ 50,000. The poorest 30 percent of the wealth distribution earned an average of just £ 86 per adult in additional wealth. Earlier this week, a group of 30 millionaires wrote to Chancellor Rishi Sunak urging him to tax them more and cut proposed tax increases for workers.

But are they more likely to occur now than in the years following World War I?

In answering this question, it is worth remembering why they were not introduced despite bitter class tensions.

While Prime Minister David Lloyd George had promised “a land fit for heroes” – the 1920s equivalent of Johnson’s “leveling up” – screams of indignation came from the middle and upper classes. They have succeeded in labeling the expenses on the working classes, in particular through the improvement of housing and access to education, as “waste”. Press barons Lords Rothermere and Northcliffe supported their campaign.

Their screams were therefore loud. And effective.

Britain kept its Excess Profits Duty on companies that had done well in the war at a higher level than expected, but all efforts to increase social spending or cut regressive taxes through ‘a wealth tax were rejected by those higher up the income scale (which had, it must be said, borne the brunt of the sharp wartime tax hikes).

The death knell came from an analysis by a parliamentary commission in 1927 which concluded that such taxes were likely to generate much less revenue than expected. Despite all their political upheavals, wealth taxes would yield very little reward.

How similar is this to the current situation? While the need to service and repay the war debt was more pressing than it is today, wealth taxes remain unpopular. Today, fewer countries impose them than they did in 1990, according to a 2018 report by the Organization for Economic Co-operation and Development.

The reasons why wealth taxes fall out of favor, according to the OECD, are very similar to the reasons they failed to gain a foothold in Britain after World War I; they are inefficient and generate too little income.

Evaluating “wealth” has always been a complex process. The 1920s proposals called for taxation only of wealth in the form of financial securities, especially government war loans. But even treasury ministers who favored such a tax feared a collapse in values ​​if homeowners were forced to sell heavily to pay the tax bills. At the same time, much of the wealth was held in the form of property and land. These are not fungible. While a stock in, say, British Telecom, is worth the same as any other, the wealth calculations can be straightforward. But this is not the case with many other riches. While houses frequently exchange hands, the values ​​of individual properties cannot be determined with precision without an offer to purchase corresponding to a sale.

Perhaps more importantly, the OECD has concluded that wealth taxes are more distorting and less fair than other forms of taxation such as capital gains tax or inheritance taxes. and well-designed donations. The unfairness of wealth taxes arises from the fact that, if they are levied regularly, payments are required even if the taxpayer has not obtained any return on the underlying assets.

So what is the best solution? Britain’s solution in the 1920s was largely to tax the income of the living and the wealth of the dead. Inheritance tax was increased to 40 per cent instead of 20 per cent and taxes on the income of the highest earners were maintained. It worked. Studies of inequality in Britain date its decline not with the advent of the welfare state conceived by Beveridge in 1945, but rather with the outbreak of World War I in 1914.

Wealth taxes are not a necessary step towards reducing inequalities, but we may need other forms of taxation that levy payments on wealth transfers instead. Housing and land are the most widely held forms of wealth in Britain. A good first step would be to close the loopholes allowing heirs of this form of wealth to avoid paying real estate capital gains tax.

About Christopher Easley

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