It's not just liberal academics who see need for a wealth tax

The rest of us have known since the last Tory Budget that huge departmental spending projected for after the General Election was unfunded. Outgoing chancellor Jeremy Hunt had deliberately not made calculations for raising taxes (or cutting services) to balance the books, lest the Tories lose votes. Which, of course, they did anyway.

The greater sin lies at the door of the new Labour government. The coming budget shortfall was known and predicted yet Reeves (below) and Starmer stayed silent.

(Image: PA)

When the much-respected Institute for Fiscal Studies pointed this out, they still kept their mouths shut.

Because to have recognised this fiscal elephant in the room would have been to admit that taxes are going to rise or spending cut – or a bit of both.

Labour were frightened to admit the truth and has opted for this deliberate pantomime so they can now blame the coming tax hikes on their predecessors. Being honest is not part of Labour’s programme.

READ MORE: How the 2026 election could rejuvenate Scottish Parliament

OK, put all that aside. So what? Let’s just raise taxes, scrap the two-child limit on benefits, pay public sector workers an adequate wage, and fund the local authorities properly. At least we’ll get something for our money rather than seeing the dosh handed over to the Tories’ friends in business.

But – again, of course – Labour is not going to go down that road. Labour will raise taxes but not to fund services or wages to any extent. Reeves is bent on “stability” and “balancing the books” in order to placate the City bankers and foreign holders of UK government debt. Filling the “black hole” is not about helping you or me (fat chance), it’s about Labour’s fear of being radical.

There is an alternative. There is a way of raising extra cash to end child poverty, to pay proper public sector wages and to fund the NHS. The answer is a wealth tax, which taxes net assets that have accumulated in the past – property, shares, paintings, yachts et al.

But of course, taxing the super-rich and the capitalist financial behemoths would be too adventurous for pusillanimous Labour. Yet wealth taxes exist in many countries, including Belgium, France, Italy, the Netherlands and (!) Switzerland. In fact, leading Democrats have even proposed a wealth tax for America.

READ MORE: Edinburgh Festivals 2024: Subscribe for £1 and get ALL our coverage

Britain has mini-wealth taxes of a sort. Paying inheritance tax is a levy on wealth, for instance. But a general wealth tax is something that Labour has always avoided – which shows just how in thrall to the status quo Labour really is. Even the whisper of a wealth tax would send Reeves and Starmer into a tizzy.

Yet only four years ago, the London School of Economics published a major study into how a British wealth tax might work successfully – and raise a staggering £260 billion over five years with a levy of just 1% on net assets. The time has come to re-open the debate on a wealth tax, especially here in Scotland. Any takers, Anas Sarwar (below)?

(Image: Jane Barlow/PA)

Just for the record, the LSE study was not just a fag packet exercise by some under-employed academics. It involved a network of world-leading experts on tax policy to provide evidence. The final work comprised half a million words across more than 30 papers, covering all aspects of wealth tax design, principle and practice. Plus the LSE discussed it intensively with both HM Treasury and HMRC.

The ultimate report was fronted by Lord Gus O’Donnell, Gordon Brown’s pick to run the Treasury. This was an establishment inside job, not some leftist propaganda piece.

How does a wealth tax work? There are umpteen variations but essentially we are taxing most types of asset, not just a specific kind such as property.

By “net wealth”, we mean a person’s assets minus their debts (such as their outstanding mortgage). After accounting for non-compliance and administration, the LSE study found that a one-off wealth tax on individual wealth above £500,000 and charged at 1% a year for five years would raise about £260bn.

By reference, income tax raises about £277bn per annum and VAT around £170bn. So a one-off wealth tax at a UK level would not solve every fiscal problem but it would be a big help, especially if focused on capital investment in the NHS, green energy and social housing.

The advantage of a one-off wealth tax is that it is retrospective – the assets have already accumulated – and so does not distort behaviour. In other words, the super-rich are unlikely to decamp somewhere else.

But a permanent, annual wealth tax might have behavioural consequences –though such an annual wealth tax can be justified on the grounds of reducing social inequality by redistributing wealth.

However, there is an even bigger argument for a permanent wealth tax. In the UK, the preponderance of wealth is held in land and property. This is unproductive and explains Britain’s poor record of investing in manufacturing and technology. A permanent wealth tax would force the super-rich to make better use of their assets rather than investing in country estates.

What about Scotland? I don’t see any constitutional restrictions banning Holyrood from introducing a wealth tax. But I dare say that Reeves and the Tory tabloids would instantly declare that such a tax would send the Scottish millionaire class heading south.

AND Westminster might be inclined – in its current anti-Holyrood mood – to intervene to block a wealth tax introduced by an SNP government. Nevertheless, that should not stop us trying.

At worst, it would be a rallying cry for the nationalist movement. I’d also enjoy Sarwar and the feeble intake of new Scottish Labour MPs squirming as they tried to defend not taxing the super-rich.

Based on the LSE study, a one-off wealth tax would give Holyrood around £25bn to play with. Again, given this is a windfall, it would be best deployed for capital spending. Specifically, we could create our own sovereign wealth fund with the cash and use the annual income to invest in the transition to net-zero. That would create jobs and boost growth permanently.

Just a thought.

READ MORE: Scottish lords cost millions but some work fewer than one day in 10

Of course, Reeves is not going to touch a wealth tax with the proverbial barge pole. So we are stuck with this new conservative government – albeit a more united and efficient one than the outgoing crew.

Also, I don’t doubt Reeves will find a few more Tory financial skeletons to justify her fiscal rectitude and tax rises. We might even see a spurt of economic growth, as investors decide Labour is good for business. But don’t expect any increase in prosperity for ordinary mortals. Wealth will continue to be concentrated in fewer and fewer hands.

A study by the Office for National Statistics in 2020 calculated that the richest 10% of households in Great Britain own 43% of all wealth. The poorest 50% own just 9%. There, in a nutshell, is the justification for a wealth tax.