What are the Barriers to Taxing Wealth?

This blog is based on an article in the Journal of Social Policy by Rajiv Prabhakar. Click here to access the article.

Politicians are usually keener to talk about rises in spending rather than taxes. This is for a good reason that raising taxes can be a thankless task. Elected politicians risk being punished at the ballot box for tax changes.  The ‘winners’ of a tax reform are often silent while the ‘losers’ can be hostile and vengeful. A ‘tyranny of the status quo’ seemingly reigns in tax reform as politicians find it easier just to stick to the status quo rather than dare to reform taxes. 

But taxes are essential for paying for public services such as health and education. Fashionable – albeit controversial – economic theories such as Modern Monetary Theory deny that taxes are needed to raise revenue for public services as it is always open to a Government with control over its own currency simply to print money. But even Modern Monetary Theory accepts that taxes are an important tool for achieving social policy goals. And taxes are a concrete way that link the citizen to the state. 

Does the tyranny of the status quo mean that reformists should just give up on changing taxes? I explore this question in an article for the Journal of Social Policy when I examine the barriers that face tax reform through a case study of a wealth tax plan in the UK. 

The Wealth Tax Commission was formed in the summer of 2020 to consider how to pay for the vast emergency spending that the Government had to do to protect both society and the economy during the Covid-19 pandemic. The National Audit Office estimates that between February 2020 and July 2021 the government has spent £370 billion on all measures to tackle Covid-19 such as the furlough scheme. Led by a team of academics and a barrister, the Wealth Tax Commission proposed a one-off wealth tax levied on all individual wealth above £500,000. The wealth tax would be charged at 1% and apply for five years. The reportsays that this tax would raise £260 billion. 

There have been repeated calls from think-tanks and scholars for the greater taxation of wealth. Part of this reflects growing concern with wealth inequality, which outstrips income inequality in the twenty-first century. Across the OECD wealth inequality is on average around twice the level of income inequality. The wealthiest 10% of households hold around half of total net wealth compared with around a quarter of total income held by the top 10% of the income distribution. The Covid-19 pandemic has added another layer to these demands – taxing wealth is seen as a way to repair public sending that has risen sharply since the pandemic.

But, these calls seem have little or no effect on policy. Indeed, over the past twenty years the trend has been that taxes on wealth – such as inheritance taxes or wealth taxes – have been cut or abolished. Rather than spending more time devising schemes for taxing wealth that never get implemented, it would be better now for reformists to consider how the barriers to tax wealth might be overcome.

My article considers two ways of breaching this tyranny of the status quo. First, the importance of framing. Tax matters are often complex and competing arguments can be put forward by both supporters and critics alike. This highlights the need to address the main case for reform – that is what is the underlying narrative. And it is important also to think about going beyond ‘science’, that is statistics – and develop a compelling narrative. 

Second, it is important to engage actively with the policy-making process. In the UK, this points to the central role of the UK Parliament as this makes tax policy. 

My article studies the media reactions to the wealth proposal and considers how the idea was discussed the Parliament. The House of Commons Treasury Committee launched a tax after coronavirus inquiry in July 2020 which examined how the tax system may have to change after the pandemic. One of the sessions of this inquiry looked specifically at the Wealth Tax Commission’s wealth tax. 

The Wealth Tax Commission provides an impressive and detailed analysis of its main idea. But, in the article I argue that it did not do enough to convince policy-makers of the need to implement this policy. Its main narrative was that this tax is needed to repair public finances stretched by the coronavirus. But, this did not resonate as Government borrowing is cheap in historic terms and the emphasis instead was on securing the economic recovery. My article suggests that it would have been better to tie this explicitly to a case for reducing inequality. Inequalities have been magnified by Covid-19 and this lays the basis for an alternative narrative. 

The paper also claims that there should be a strong advocacy for reform. The Wealth Tax commissioners were scrupulous in their impartiality. Although there is much to be commended in this, it is unclear whether this stance is enough for reform. The Wealth Tax Commission says that its job is not to say either way whether a one off wealth tax is a good or bad idea. Instead, it lays out what a wealth tax is should Government be interested in this. But this invites the question: if the authors of a wealth tax are not prepared to say this is a good idea then who is? 

This raises a wider point for tax reform. One can devote time and energy in drawing up ideas for taxes or focus instead on moving from rhetoric to reality. Doing the latter means developing a compelling narrative but also being prepared to argue the case with policy-makers.       


About the author

Rajiv Prabhakar is Senior Lecturer at the Open University.

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