Green Party policies on taxing wealth, and why they don’t need changing
The current motion to Green Party Conference on inserting a “Wealth Tax” into our tax policy platform relies on you believing 3 things, none of which are true:
1. Current Green Party policy does not include taxes on ‘Wealth’
2. The motion before conference will tax the wealth of the richest 1% of our society in an effective and comprehensive way
3. This new ‘Wealth Tax’ will raise huge sums of money to be invested in Green policy programmes.
Defining what we mean
But before I explain why each of these assertions is untrue, let me first explain why I keep using speech marks when talking about ‘Wealth’ and ‘Wealth taxes’.
It is v important to give GPEW members clear and accurate information, to allow them to make the right decisions at conference. Presenting unclear ideas that cover technically complex policy areas is a recipe for bad policy decisions and all-round confusion.
When looking at the issue of wealth and how we tax it, the party’s tax and fiscal policy working group identified 4 main types of wealth/assets - those that are:
1. Fixed and unproductive (i.e. land or natural resource rights)
2. Fixed and productive (i.e. buildings and the things attached to them, heavy machinery — some of this is moveable, but the expense and hassle makes it relatively fixed).
3. Mobile and unproductive (I.e. intellectual property rights, and small or easily transported expensive items like precious gems, paintings or yachts)
4. Mobile and productive (i.e. business investments and lending)
Each of these things has a different economic role and behaves differently from the others when taxed.
Considerations when devising a tax
Do we want to tax something?
Before we begin any discussion about wealth we need to appreciate the different types of assets that are included in that umbrella term. All too often, wealth is presented as resources that are being hoarded and locked away from the rest of the economy. But this is only party true — much of it is also being put to productive use.
Many assets already enjoy significant tax breaks in order to encourage productive investment (business capital and pension funds, for example, receive around £75bn of tax allowances each year from the UK gov’t)
Taxing productive capital will likely reduce your tax revenue as a result of high deadweight losses (reductions in output). This is why governments of all political shades tend to avoid it.
Who, ultimately, pays a tax?
There is a strange assumption in this conference motion that the person who hands over the money is the person who bears the cost (sometimes called ‘incidence’) of the tax. This is often not the case.
UK businesses, for example, pay around 85% of taxes (I.e. they hand over the money to HMRC). But the incidence of taxation mostly falls, not on business owners, but on workers and consumers.
So, if you really want to tax the richest people in society, you need to use a tax that will ensure the incidence of the tax falls on them.
What evidence is there that it will raise the estimated revenue?
Many taxes bring in more or less revenue than estimated, and that revenue is often quite volatile. With new taxes, especially novel ideas that are estimated to bring in vast sums, it is particularly important to make sure that the tax is not easily avoidable or does not lead to drops of revenue elsewhere.
The Current Green Party approach
In 2019, the Green Party conference supported a complete re-write of our tax policy chapter that included a more specific and effective approach to taxing wealth.
In that re-write, ‘Wealth’ was to be taxed in 3 different ways:
1. Land Value Tax
This would be used to tax the fixed and unproductive asset of Land (really land location and usage rights along with natural resource rights). This would raise around £75bn, which would be used to remove other taxes relating to property (which mostly fall on relatively low income residents and productive businesses).
Land Value Tax is a great idea on many levels (not enough space here to go into it fully), not least because it is unavoidable, brings in substantial revenue, falls entirely on the owner of the land, and actually increases productive output (it is almost unique in this respect; pollution and congestion taxes also bearing this characteristic)
Land also accounts for 55% of non-financial asset values, and so captures the biggest chunk of taxable wealth in one quick gulp.
2. Closing income tax loopholes
For all types of assets there are current tax loopholes in the UK tax system.
Income from dividends, capital gains and inheritance all enjoy generous allowances and lower rates than tax on income from work.
This provides an incentive for the wealthy to convert income into assets, or pretend their income is a return on investment. By treating all income in the same way for tax purposes, we can remove this loophole and raise another £20bn+ per year for public spending or redistribution.
Also, by taxing wealth at the point of receipt/transfer, it is more likely that the incidence of this tax will be borne by the asset owner and not anyone else.
3. Taxing asset transfers
The final method, designed to prevent avoidance of UK taxes by those in possession of moveable assets, is to tax overseas asset transfers in the same way we would tax income.
This is a much trickier exercise, and without international co-operation, might not be feasible for individuals and households. However, it should be possible for businesses and those with significant UK assets.
The policy deliberately avoids direct attempts to tax household items, financial holdings and productive assets. This is because the evidence strongly suggests that they are too difficult to define, pin down and collect tax revenue from.
For the last two, there also seemed to be a high risk of significant deadweight loss and depressed tax revenues elsewhere.
The new approach, agreed in 2019, provided a more secure and robust plan that stood up to scrutiny in the GE2019 manifesto and campaign, and delivered greater projected revenues to support the Green plan for government.
But, for reasons that still baffle me, senior members of the party have waged a 2 year campaign to convince the party that this more effective policy on taxing wealth doesn’t exist and that we need to bring back the old policy.
The Conference motion
On their 3rd attempt, the proposers of the motion have finally got it onto the conference agenda, and in a position where it is likely to be debated and voted on. At the previous conference it failed to get enough support from ordinary members to make the full plenary debate, so this time our policy development committee were persuaded to ‘accredit’ the motion so that it will be discussed. This happened despite unanimous opposition from the party’s Tax & Fiscal Policy Working Group.
The motion itself is rather vague in terms of defining wealth, outlining mechanisms or describing impacts.
But the background paper has a little more detail. And deep within it is an allusion to a definition of wealth. I will ignore the rather odd comment suggesting land value tax is a tax on incomes from Land (it isn’t; it’s a tax on the unimproved value of the land), and instead address the main focus of its intent: household financial assets.
So, to be clear, this motion is a proposal to tax the financial assets of households with a value of more than £3m.
The motion quite rightly ignores pension wealth and moveable physical assets (those of you who think that it’s proposing the taxation of yachts and sports cars are in for disappointment), and is therefore left only with financial assets.
What are these financial assets?
These assets are defined in the ONS survey on which the background paper’s justifications are based, and include:
• Cash in bank accounts
• ISAs
• Stocks and shares
• Govt bonds and gilts
• Insurance policies
The problem with trying to tax any of these, is that it creates an incentive for the asset owners to shift their money elsewhere, including out of the country altogether.
This could lead to ‘capital flight’ that the motion suggests can be easily overcome using ‘capital controls’.
But it doesn’t define what it means by this. Capital controls could mean anything from taxing assets transfers to banning overseas investment by UK investors. But all would require significant intervention by government in household finances and effective cooperation and coordination between tax jurisdictions (the latter would be a good thing btw, but hardly in our power and not a great basis for a new tax that we want to introduce in the short term).
The background paper suggests all of this is straightforward and simple. It isn’t.
But let’s assume it is. Let’s assume there is no capital flight and that all those wealthy households keep their assets in the UK. What would the impact of this tax on household financial assets be?
Any answer has an element of conjecture, but there are some obvious potential outcomes.
Firstly, the households could simply move their wealth into assets that this motion is not proposing to tax, such as pensions or physical belongings. We might be able to tax the latter with higher VAT, but we can do that anyway- no need for a convoluted tax on financial assets to get us there.
But even if the wealth stayed in financial assets, the likelihood is that those assets would simply demand a higher rate of return. So, government bonds would need to pay a higher rate to attract the same level of bond purchases; or banks would need to charge borrowers a higher rate of interest to attract the same level of savings; or companies would need to provide a higher rate of return to maintain share values/prices. If they didn’t, the money would simply go elsewhere.
In other words, even if successful, the incidence of this tax would probably land on taxpayers, borrowers and productive businesses, who would each have to pay a bit more to access this finance.
And this is the gaping hole at the centre of this policy proposal: financial assets (as defined here) are mostly engaged in productive investment. If we tax them, the likelihood is that we will simply increase costs to those productive actors in the economy who are making use of the finance these ‘assets’ represent.
Financial assets are highly mobile and largely productive and, therefore, taxing them can be both difficult and counterproductive.
At this point, you can accept or reject this reasoning as you wish. But the evidence on the matter is clear.
The evidence
The motion’s background paper talks about international examples of this approach working successfully, but the comparisons are mostly erroneous. If you want the Swiss, Dutch or Spanish wealth tax, then you probably need the rest of the Swiss, Dutch or Spanish tax system as well.
But even then, the outcome is not as impressive as the motion’s background paper suggests.
Spain’s wealth tax raises just 0.5% of tax revenues, with Norway does slightly better, raising just over 1% of tax revenues.
This motion is suggesting UK wealth tax revenues that would equate to about 7% of total tax revenues. No country in the world has ever come anywhere near that figure.
Switzerland is the only country that has come close (usually around 3% of tax revenues), but there are some important ways in which this differs from the proposal in this motion: it includes property revenue, it is based on global wealth, Swiss taxes on the incomes of the very wealthy are generally much lower than in the UK (as low as 10% in some cantons), and it is self-reported. Yes, that’s right, the rich just say how much they’re worth and then pay between 0.3% and 1% of that. There is no way of knowing how much actual wealth is really being taxed. Switzerland is also, of course, a tax haven in its own right. There might be lots of illegitimate reasons why a wealthy person would rather pay a wealth tax in Switzerland, than be resident for tax purposes elsewhere.
It really is nothing like the proposal before us here.
The nearest comparable tax to this is the one that existed in France for a number of years. The background paper is correct in pointing out that it raised a fairly small amount of French tax revenue over a couple of decades, but it strangely omits the broader impact of the tax on government revenues. The only comprehensive academic study done on this tax found that for every €1 it raised, the government experienced a €2 fall in revenue elsewhere. And for reasons largely laid out in this article (capital flight and deadweight loss).
The background paper also mysteriously fails to mention the UK governments own attempts to impose such a tax in the 1970s. After several years of trying, they eventually gave up after concluding that any likely revenue raised would be too small to justify the cost of collecting it (in fact the conclusion of Labour supporting proponents of the tax was that it was much easier to tax the transfer of wealth, i.e. income at the point of receipt, which is exactly what the current Green Party policy of a ‘Consolidated Income Tax’ does).
This motion is guilty of using cherry-picked ‘policy-based evidence’ rather than being an example of ‘evidence-based policy’.
The evidence of trying to tax financial assets in this way, when examined in full, tells us that it raises little or no (or even negative) revenue and is very difficult to collect.
So what would be the point of doing it?
The answer is presumably political. Our spokespeople get to sound more radical and redistributive than the other parties and appeal to disaffected prorgressive/left wing voters.
Of this, I am not convinced. The Green Party’s own research shows us that among green-leaning voters, it is our lack of economic and financial credibility that features heavily in their reasons not to vote Green in a general election. We are not going to win round those people, or others, by promoting policies that don’t work or where we demonstrate a lack of understanding of their ultimate financial or economic impact.
So, this motion should be rejected if we are to build or maintain our credibility on fiscal matters.
In summary
• We already have an set of policies that tax wealth in an effective and redistributive way, based on an open-minded review of the evidence and the experience of other countries that have attempted to tax wealth. Those policies have already helped build a powerful manifesto in 2019, and have withstood the tough scrutiny of a general election
• This motion only seeks to attach taxes on one element of wealth (financial assets). It retains obvious loopholes and most likely will produce unintended and unwanted behaviours and outcomes
• The tax proposed here will almost certainly raise little or no revenue (if we are to believe the evidence)
• All of the above means that our credibility on fiscal matters will suffer- and all for a proposal that doesn’t work and will almost certainly never be implemented.
On this occasion our spokesperson and parliamentary team have got it wrong. Let’s follow the evidence and build our credibility, rather than following a slogan that will undermine it.
Martin Farley is Convener of the Green Party’s Tax & Fiscal Policy Working Group
