Wealth tax is becoming, or has become?, a core Lib Dem policy. Nick Clegg shakes his head alongside his Cabinet colleague the Chancellor of the Exchequer announcing that the coalition government will not introduce a mansion tax. Vince Cable is back on the World at One the next day defending it.
There has been much discussion as to whether wealth and mansion taxes are fair. But fairness is a very subjective concept. Some think that wealth taxes appropriately ask the rich to shoulder relatively more of the financial burden imposed if we needlessly insist on the financial orthodoxy that the government budget must be balanced. Others think that very rich people can manipulate their affairs to artificially decrease their income and so should be taxed on their wealth. Yet others think that assets bought out of taxed income should not be double taxed.
But there is also the question of the practicability of wealth and mansion taxes. The only two points at which wealth can be taxed is at sale, or at the death of the owner. This already happens through stamp duty and inheritance tax. Otherwise it is possible to tax only income, not wealth. Wealth and mansion tax proposals in fact rely on the assumption that the value of someone’s house or asset is a surrogate measure of their income. This assumption is untrue, unkind, and unnecessary, thus failing the three great moral criteria. Income tax is the fairest progressive tax on individuals, since even sales taxes are notoriously regressive. But to remain fair it must also leave a fair proportion to the income earner.
The only other way a wealth holder or mansion owner can pay tax on their wealth or mansion is by a forced sale of their asset or house. This is a very illiberal idea, and would in any case have huge impact on the housing and other asset markets. Taxing their savings is the only other resort. We effectively do this anyway through low interest rates and a little inflation. But this returns us to the fundamental question : such tax proposals are in fact proposing a tax on the income of those who own certain assets above a certain value. It makes no sense. We can in fact only tax their income. We should therefore scrap all wealth taxes, including any mansion tax proposal, and Council tax, and rely on the classic mix of income, sales, inheritance, corporation etc taxes. Liberal politics should also eschew its growing tendency to slag off the rich. The vilification of any target group in society is illiberal and worrying, but sadly tends to characterise any society coping with difficulty.
Current wealth tax proposals are also driven by the obsession with balancing the government’s books. But the economy is suffering from a deficit of demand. The last thing we need is higher taxes : we need higher spending. Lib Dems who have escaped the mansion tax should get out and spend their savings. Vince could lead the way! Happy Christmas.
* Geoff Crocker is a professional economist whose book A Managerial Philosophy of Technology is published by Palgrave Macmillan.