How a Labour wealth tax could completely backfire

Starmer Wealth Tax

Labour is understood to be considering options for an extra wealth tax as the party looks for ways to raise revenue.

The party has ruled out increasing income tax, corporation tax and National Insurance Contributions (NICs) if it gets into power.

But Paul Johnson of the Institute for Fiscal Studies, a think tank, said it would be a “considerable surprise” if Labour did not raise other taxes over the next five years, owing to the fiscal pressures facing the next government, which include reducing NHS waiting times, child poverty and national debt.

The party’s silence has fuelled speculation that it could raise capital gains tax and inheritance tax instead. A document seen by the Guardian showed that these measures combined could raise £10bn for Labour.

But in the – currently very likely – event of a Labour victory, the shadow chancellor may also be tempted by a proposal for a new 2pc tax on the super-rich that is gaining momentum overseas.

Rachel Reeves last year ruled out a wealth tax under Labour but previously voiced her support for such a levy.

“We need a radical overhaul of the tax system because our current system of wealth taxation isn’t working,” she wrote in a 2018 pamphlet.

“Wealth inequality in the UK is almost twice as deep as income inequality. [...] New innovations like automatic information exchange and country-by-country reporting are expanding the potential for international tax transparency and collection. They also open up new possibilities for taxing high levels of wealth in a globalised world.”

This week, French economist Gabriel Zucman published a G20-commissioned report outlining how a levy on the world’s 3,000 billionaires could raise between $200bn (£158bn) and $250bn per year to combat global inequality and tackle the climate crisis.

The idea was explored by the G20 for the first time at the start of the year – with Brazil, Germany, Spain and South America all getting behind the campaign.

So far a number of organisations have backed the proposals.

Susana Ruiz, of charity Oxfam International, said: “This is a sensible and serious proposal that is in every government’s strategic economic interest. All G20 countries should support Brazil’s push to secure the first-ever global deal to tax the super-rich.”

But others have not been so supportive. The Tax Foundation, a non-partisan think tank, has urged policymakers to shy away from policies like this – warning that a global tax would be “highly improbable” and a barrier to economic growth.

The 2pc tax on billionaires

Mr Zucman’s argument is that, without more effective taxation, the world’s richest will continue to get richer.

“Billionaires and the businesses they own have been major beneficiaries of globalisation,” he wrote in his report. “This raises the question of whether contemporary tax systems manage to distribute these gains appropriately, or instead contribute to concentrating them into a few hands.”

Forbes estimates that there are currently around 2,800 billionaires globally, with a combined net wealth of $14.2trn.

According to Mr Zucman’s report, the average wealth of the top 0.0001pc has increased by about 7pc annually net of inflation since 1987 – more than double the 3pc growth rate for average wealth.

Most of the super-rich get their wealth from assets such as companies. Many also take advantage of loopholes and holding companies which help to lower their tax bills.

Mr Zucman’s proposal would target the ultra-rich rather than the rich. With a 2pc global tax, he estimates that the tax rate of billionaires would become “no lower than that of middle-class workers” – with only those who currently dial down their income to pay less tax significantly affected.

Pascal Saint-Amans, former tax director at the Organisation for Economic Development, said the fact these proposals were now being scrutinised by several major economies was significant.

“It is very interesting to see that the G20 are saying ‘we should focus on this’. Brazil will be trying to get others on board and it is likely that leaders of several countries will say they want to work on this. For example, will a new Labour chancellor support this? Perhaps.”

Do wealth taxes work?

Only four countries in the Organisation for Economic Co-operation and Development (OECD) currently have a wealth tax – Colombia, Norway, Spain and Switzerland.

Many others have introduced taxes on wealth only to repeal them in recent decades. The most recent being France – who abolished its wealth tax in 2018.

There are a number of reasons why these levies have failed in the past. For one, they have generated relatively little in revenue for the government.

In 2022, the revenue from wealth taxes accounted for just 1.19pc of GDP in Switzerland and a mere 0.19pc in Spain, according to research by the Tax Foundation think tank. This is partly due to tax loopholes and also the existence of tax policies in other destinations that favour the wealthy.

Cristina Enache, of the think tax, said: “As tempting as wealth taxes might look, especially when so many international organisations note them as a way to reduce wealth inequality, their limited capacity to collect revenue and their negative impact on entrepreneurial activity, savings, innovation, and long-term growth should make policymakers consider their repeal instead of boosting them.”

Another issue with wealth taxes, Ms Enache said, is they can raise legal challenges.

The Dutch Supreme Court ruled in June 2024 that the Netherlands’ wealth tax is discriminatory because it assumes how much income people earn on their assets. This judgement is costly for the Government, who will now have to fork out billions of pounds in compensation to investors who paid too much tax.

Perhaps one of the main and most obvious reasons why wealth taxes are thought to fail is because billionaires are hyper mobile. When a country raises its taxes, there is very little to stop the global elite from packing their bags and heading overseas – taking their money and businesses with them.

This was what happened in Sweden which abandoned its own levy in 2004 after business owners – including TetraPak founder Ruben Rausing, Ikea founder Ingvar Kamprad and industrialist Fredrik Lundberg – left the country.

Exit taxes

In theory, every nation needs to be on board for a global tax to work – otherwise, billionaires will just move to countries that have refused to sign up, where the tax does not apply.

But Mr Zucman has argued there are various ways to tackle the flight of the super-rich. One is by implementing and strengthening “exit taxes”.

A number of European countries already impose these. Norway has increased its own exit tax to 37.9cpc in order to soften the impact of raising the wealth tax rate from 0.85pc to 1.1pc. Now those leaving Norway who have accumulated over €43k in wealth must pay the exit tax immediately, in interest-free instalments over 12 years or with interest after 12 years.

Another tool that could be used to limit the movement of billionaires to non-participating countries is the “tax collector of last resort” mechanism.

This would enable participating countries to claw back tax from billionaires residing in non-participating countries. So if one country failed to claim the tax revenue, another country could grab it in instead.

But both of these mechanisms still require greater cooperation and transparency.

Mr Saint-Amans said: “Exit taxes would make sense but you need cooperation. We already have automatic sharing of information between tax authorities. This could expand.”

Mr Zucman has said that ownership information could help here. Most of billionaires’ wealth comes from business ownership.

He wrote in his report: “The mere inclusion of beneficial ownership information in country-by-country reports (e.g., listing individuals owning more than 1pc of the stock) would allow tax authorities to capture most of their wealth, facilitating enforcement”.

There are doubts over whether the countries with the highest number of billionaires – China and the US – would ever support the tax.

Mr Saint-Amans said: “So far, in the US, talk of a wealth tax has just been political rhetoric for the government. If Donald Trump wins the next election, he is likely to say ‘over my dead body’”.

Mr Zucman also acknowledges that a global tax could lead to the super-rich moving their wealth into assets that are harder to value.

“For instance, firm owners might be less willing to list their companies on the stock market,” he wrote. The Tax Foundation has argued that this is the proposal’s “fatal flaw”.

The details of the 2pc global tax will be discussed again at the G20’s meeting of finance ministers next month. The countries on board with the policy will be looking at ways to address these issues.

But it will still require a lot of work before anything resembling a wealth tax becomes a reality.

Mr Saint-Amans said: “The G20 needs to move from a high-level idea to an action and the question is how do you do this? Is it the UN deploying a working group to deal with international methods? Or is it an ad-hoc group of countries working together? The fact that we have this push to the right in Europe only adds to the uncertainty.”

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