The Prime Minister has ruled out a wealth tax so long as he is leader of the Labour Party. The promise may have been driven by recent polling, but it is sound economics nevertheless.
 
A wealth tax is defined as a tax on the ownership of net wealth: a person’s assets minus debts.
 
The tax would apply to various asset types. It is, therefore, different to other taxes, which either tax the transfer of wealth (inheritance tax) or the increase in wealth (capital gains tax).
 
Proponents of a wealth tax see it as a way to increase tax revenues and reduce (wealth) inequality.
 
But implementing an annual wealth tax would bring problems.
 
Regular wealth assessments create high administrative costs. People with a high share of illiquid assets, which can be hard to value, might not have sufficient cash to pay their tax bills. The tax would change behaviour and lead to tax evasion and tax avoidance (the wealth tax elasticity estimated in the literature can be as high as 43%).
 
A wealth tax could lead to disruptions of savings, an incentive to spend wealth, a reduction of labour supply, emigration, and shifting wealth into exempt asset classes (or offshore).
 
And remember that the wealthiest do not mainly own property. They own shares, and they are mobile.
 
The incentives and disincentives created by a wealth tax could have adverse macroeconomic effects and reduce long-term economic growth. Furthermore, it is unclear whether a wealth tax is the most efficient way to achieve desired outcomes compared to other taxes.
 
In principle, a one-off wealth tax could avoid creating distortions. It would have much lower administrative costs and a negligible effect on behaviour. But government would need to find a way to credibly promise that the measure would not be repeated – a very hard trick to pull off. An annual wealth tax would be very different from a credible one-off.
 
Proponents of an annual wealth tax typically want to redistribute wealth rather than achieve better economic outcomes. In Germany, the debate about a wealth tax is typically framed as a “Neiddebatte”, a debate which is fuelled by jealousy.
 
The evidence suggests an annual wealth tax has little economic benefit to offset its substantial economic downsides and significant administrative costs.
 
The Green Party continues to support a wealth tax. Labour would be on solid ground if it kept a coherent tax system as a bottom-line.