Thomas Piketty’s groundbreaking book, Capital in the Twenty-First Century, gained worldwide attention ten years ago with its proposal for a global wealth tax. However, this idea is now facing challenges on the political front.
A US plan to tax investments of wealthy individuals is unlikely to pass Congress. The UK Labour party recently abandoned its commitment to wealth taxes, and France abolished its wealth tax in 2018. Even French president Emmanuel Macron, a former supporter of the wealth tax, replaced it with a real estate tax to attract international investment.
The idea of a wealth tax has faced opposition due to concerns about its impact. Critics highlight Norway as an example where a tax on billionaires led many of them to move to Switzerland. Furthermore, wealth tax proposals often face roadblocks in the political process. When implemented, they are sometimes easy to avoid and feature multiple exemptions, resulting in minimal revenue generation. The Organisation for Economic Co-operation and Development (OECD) reports that by 2020, wealth taxes were typically raising less than 1% of total tax revenues.
Edward Troup, former head of the UK tax authority HMRC, believes that wealth taxes are not worth pursuing due to the need to accommodate “vested interests.” He argues that the taxes end up with numerous carve-outs, such as exemptions for pensions, property, and private companies, which diminish their effectiveness. However, as governments grapple with aging populations and reduced tax revenues from salaries, economists and activists argue that wealth taxes, which enjoy broad public support, may experience a resurgence.
As evidence of this, Spain introduced a broader “solidarity tax for great fortunes” last year in response to its escalating cost of living crisis. Latin American countries, including Venezuela in 2019, and Argentina and Bolivia in 2020, have also implemented wealth taxes. Colombia became the latest country in the region to follow suit in 2023, imposing a rate of 0.5% to 1.5% on individuals with assets exceeding $750,000.
Piketty is convinced that wealth taxes will make a comeback, not just in France but also in other countries. He argues that the general population will not accept paying for societal needs like climate action, education, and healthcare if the wealthiest individuals do not pay their fair share. Arun Advani, a British academic and advocate for wealth taxes, acknowledges the challenges faced in implementing them due to the influence of well-connected individuals. However, he asserts that it is now harder to argue that these taxes cannot generate significant revenue.
Advani proposes an alternative approach to introducing a comprehensive wealth tax. Instead of tackling the difficulties associated with such a tax, he suggests improving the existing system to target increases in wealth, particularly unearned or investment income. He advocates for equalizing the capital gains tax, currently levied at rates between 10% and 28% in the UK, with the tax on wage income, which has a top rate of 45%. Advani argues that this would rectify the inequality among rich individuals earning the same amount. This sentiment is echoed by high earners like Gary Stevenson, formerly Citibank’s top trader, who views it as unfair for income from investments to be taxed differently from income earned through work.
In the UK, wealth disparities have widened significantly over the past fifteen years. Incomes have stagnated while asset prices, particularly in the housing market, have soared, making wealth acquisition more challenging for young people. Surveys indicate that the public supports wealth taxes, with a YouGov poll revealing that three-quarters of Britons are in favor of them. However, tax lawyer Dan Neidle warns that wealth taxes can be politically precarious. While they may poll well in isolation, they might lose popularity during election campaigns.
Edward Troup suggests an alternative approach of focusing on a specific asset, such as residential property, through a land value tax. Despite concerns that wealth taxes might prompt the wealthy to leave, Advani argues this is not necessarily the case. He points out that previous reforms to tax regimes, such as the UK’s non-dom system, did not result in significant numbers of wealthy individuals relocating.
Advani also highlights that governments have improved their ability to track offshore assets through enhanced data-sharing protocols with other tax authorities. Critics of Advani’s proposals argue that increasing capital gains taxes could deter entrepreneurs from setting up businesses. However, Advani contends that most entrepreneurs are unaware of the tax rates they will face when selling their companies. He suggests that providing support to entrepreneurs at the start of their journey would be more beneficial than offering reduced tax rates later on.
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