In a previous article, I outlined the arguments put forward by Kate Raworth and Kate Pickett that the root of the profound unhappiness in our society is inequality. And the gap in wealth between the very rich and the rest is spectacular and growing. So, at the end of her book The good society and how we make it, Pickett proposes a wealth tax as one solution. Many people have argued that such taxes don’t work, but in his recent short book, the French economist Gabriel Zucman suggests an elegant way to do this.
Wealth inequality is unfair
The key argument for a wealth tax is fairness. At present, income is taxed much more highly than earnings from wealth. Take two people. One works 35 hours (plus) a week and earns the national average wage. The other does no work, but has investments worth £600,000, which ‘earns’ the same amount in interest. Both live here and benefit from living in a stable society and the services it provides. But the former contributes actively to providing those goods and services. The latter, in economic terms, is simply living on rent – and there are more than a million of them.
The wealth divide is deeper
And inequality of wealth is a much greater than inequality of income. A few figures for the UK prove the point:
- the top fifth of households receive about 36% of total income, but the top fifth own over 60% of all wealth
- the bottom fifth own less than 1% of all wealth and most have none
- at the very top, every one of the 50-plus billionaires in the UK owns more than 3,000 times the wealth of the average British person
- because wealth is largely untaxed and passes between generations, the gap grows. In the last 30 years, the wealth of the 200 richest families in the UK has grown from 6% of the country’s GDP to 20%
Do the numbers add up?
So, there is a lot of wealth and it is not fairly treated. So why do we not tax it? Some economists argue that, because there are relatively few, very wealthy people, a wealth tax would only produce significant sums if it applied to people with relatively modest wealth. This makes it complex and expensive to administer and since most of the moderately wealthy have their wealth locked in their houses they would be unable to raise the cash to pay the tax.
It is also true that, worldwide, many previous attempts at wealth taxes have failed. Zucman argues that this is because they were deliberately designed with exemptions for the very rich, or because they included so many people that tracing and policing the system became disproportionately expensive.
Some claim that if a country introduces a wealth tax, the very rich would move to countries with lower taxes. A study for the Wealth Tax Commission confirms that there could be a small exodus of very wealthy people. But they suggest that most very rich people have good reasons to stay. They came here for lifestyle reasons and the security of stable legal and financial institutions. They have friends, families and children in schools. And most would feel little or no impact from a small tax on their total wealth.
Tax only the very wealthy
In his recent book, We need to tax billionaires, Zucman challenges the assumptions about the numbers and proposes a very simple solution. First, target the billionaires. There is no need, he suggests, to involve a large number of moderately wealthy people. The real target should be the extremely wealthy – people with assets above €100m. In his home country, France, that is around 1,800 people. He calculates that an annual tax of 2% on their wealth would raise €20bn, 80% of that from the handful of billionaires. The figures would not be dramatically different for the UK.
And this would not mean a reduction in their overall wealth. At present the value of their assets normally rises by around 6% a year, so a 2% tax on the total would represent a 33% tax on this growth in their wealth.
They would continue to grow richer, just a bit more slowly. And, whereas most ordinarily wealthy people hold much of their wealth in their houses and might find it difficult to raise the tax, the very rich hold it in shares and financial instruments which can be sold to pay a tax bill. And spreading share ownership more widely might have its own benefits.
A simple plan
Zucman argues for a simple and efficient process. First, exclude anyone with wealth below €100 million, which reduces the number involved, making the tax much cheaper to administer. Secondly, don’t require elaborate tax returns and declarations. People would only be required to prove that they had paid 2% of their wealth in tax each year. This might be as income tax or a special wealth tax. But once that was paid, they would be free.
Pickett’s proposal for a Universal Basic Income, initially set at £75 a week for every adult, would make a real difference to more than a million people, most of whom have no liquid wealth at all. But Zucman’s proposal would create the resources for a much more generous scheme and with minimal impact on most people.
Combining the two would be a small but very significant step towards reducing the inequality which causes such distress, insecurity and political instability.
It is an appealing argument, but it would require political courage. Given the damage inequality does, so eloquently laid out by Kate Pickett, perhaps she is right that we should consider both these measures.
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