In the first of a two-part series on the first Budget of the new Labour government, Patrick Diamond and Colm Murphy discuss the question of wealth taxation.
There has been consistent speculation that Rachel Reeves’ first budget on 30 October will levy additional taxes on wealth accumulation and owners of capital. Prospective measures include equalising the rate of capital gains with income tax, reducing tax relief on private pension contributions, and increasing the effective rate of inheritance tax paid by the rich.
If true, the Chancellor’s turn to wealth taxes will be pitched as one of necessity. Reeves will insist that her hand has been forced by a combination of the public spending ‘hospital pass’ from the last government, to quote the IFS’s Paul Johnson, alongside her own pledge at the last election not to increase ‘taxes on working people’, National Insurance, income tax or VAT. Capital gains and inheritance taxes are among the few remaining options she has available.
If wealth taxes do increase at the Budget, it will be viewed as a bold move by the Chancellor. Previous Labour governments largely avoided levying taxes on wealth. Despite its symbolic value for his party, Ramsay MacDonald’s first government swiftly abandoned pledges to impose a capital levy in 1924 in the face of both fierce opposition from the wealthy alongside uncertainties about its yield.
True, after 1945 Clement Attlee’s Ministers imposed an excess profits tax and a one-off capital income levy, while the Chancellor in the 1970s, Denis Healey, threatened to tax the rich ‘until the pips squeak’. But post-war Labour governments generally avoided imposing wealth taxes. Instead, they turned more often to progressive taxation of income. As historian Martin Daunton argued, this stored up political problems by the 1970s, as greater numbers of working-class voters were drawn into paying income tax. When real incomes rose, these voters became increasing resentful towards the state’s alleged profligacy, laying the political foundations of Thatcherism.
New Labour too chose not to increase wealth taxes in the 2000s. Tony Blair and Gordon Brown’s fatalistic understanding of globalisation – of a world of footloose capital in which wealthy investors chase lower tax jurisdictions – encouraged the Treasury to keep taxes on the wealthy and large corporations low by international comparison.
Pre-election promises on direct taxation of income now mean that wealth taxes are on the agenda. However reluctant, an announcement by the new Chancellor of increasing taxes on wealth would signal a new direction for Labour governments in Britain.
In fact, this course correction is long overdue. The case for greater taxation of wealth has never been more compelling.
One can point, firstly, to the sheer scale of wealth inequality. The ONS calculated that the wealthiest 10% of households in the UK now hold 43% of the wealth. The share of total wealth owned by the top 0.1% has more than doubled over the last thirty years. Growing wealth disparities undermine social cohesion and amplify inequality across generations.
Second, shifting some of the burden of future tax increases from income to wealth and property eases the pressure on the working age population. Workers have seen not only their living standards squeezed over the last fifteen years of real wage stagnation, but also face the highest tax burden since the late 1940s. As opposition leader, Keir Starmer observed that those ‘who earn their money from property, dividends, stocks, shares—capital gains tax, these should all be looked at as a broader, fairer way of raising taxes’. He was correct to make that point.
Finally, the government should make the UK tax base more resilient. The demographically driven rise in demands on the public sector and the urgent necessity of capital and green investment are in conflict with the fiscal implications of constrained economic growth, increased public debt, and uncertainty about future interest rates. Taxes on wealth and property – from a restructured capital gains tax to reformed property, council, and land taxes – can be part of the solution to securing more robust public finances.
Yet in truth, given the scale of social, capital and green investment that is required to increase the productive capacity of the UK economy and reduce social inequality, wealth taxes on their own will not be sufficient to resolve the fiscal challenge. In the next blog, we will consider further options, notably revising the fiscal rules and raising direct tax rates.
Patrick Diamond is Professor in Public Policy at Queen Mary and a former Head of the Number 10 Policy Unit. Dr Colm Murphy is Lecturer in British Politics at Queen Mary and the Deputy Director of the Mile End Institute.