A Wealth Tax will never work

Over the past few months, it seems there have been many so called experts coming out the word work and declaring that the only way to save a failing British economy is to implement a wealth tax. In fact, YouTube has become awash, with British based commentators who claim to experts in some field or other and supposedly made millions of pounds in trading for banks, claiming that we have to implement this moronic strategy to save Britain, and its working class.

In this post, I will delve in deeper and explain why a wealth tax will have exactly the opposite effect these so called experts envisage it will.

What is a Wealth tax

A wealth tax is a direct tax levied on the total value of an individual's assets, including cash, real estate, investments, and other valuable possessions. Unlike income taxes, which are based on a person's earnings, a wealth tax targets the accumulation of wealth itself.

The perceived primary goal of a wealth tax is to reduce economic inequality by redistributing wealth from the richest individuals to the broader population, often through government programs and services.

The exact implementation of a wealth tax can vary significantly depending on the intellectual capacity, economical understanding and political ideals of the stakeholders calling out for it.

Typical key aspects of wealth taxes may include:

1. Tax Rate: The rate at which wealth is taxed can differ. It might be a flat rate applied to all assets above a certain threshold or a progressive rate that increases with the value of the assets.
2. Exemptions and Thresholds: Many wealth tax systems include exemptions or thresholds below which assets are not taxed. For example, a country might exempt the first £500,000 of an individual's net worth from taxation.
3. Types of Assets: The scope of assets subject to the tax can vary. It might include financial assets, real estate, personal property, and even business interests.
4. Frequency of Assessment: Wealth taxes are typically assessed annually, but some systems may require more frequent valuations.
5. Collection Methods: Governments may use various methods to collect wealth taxes, such as requiring annual declarations of assets or conducting periodic audits.
6. Impact on Economic Behaviour: A wealth tax can influence economic behaviour, potentially encouraging the wealthy to invest in ways that minimise tax liability or to move assets to jurisdictions with lower or no wealth taxes.

Proponents of wealth taxes often see them as a crucial tool for addressing income and wealth inequality, funding public services, and ensuring a more equitable distribution of resources.

Critique of wealth taxes

Often critics of wealth taxes argue that they can discourage investment and entrepreneurship, as well as drive wealthy individuals and businesses to relocate to countries with more favourable tax regimes.

The critique of wealth taxes originate from various perspectives including economic, practical, and political angles. A few of the main arguments against wealth taxes include:

1. Economic Impact:
   • Investment Deterrent: Critics argue that wealth taxes will discourage investment and savings, as individuals may be less inclined to accumulate wealth if it is subject to high taxes. This could potentially slow economic growth and innovation.
   • Capital Flight: There is a concern that wealth taxes could drive wealthy individuals and businesses to move their assets to jurisdictions with lower or no wealth taxes, leading to a loss of tax revenue for the implementing country.
2. Administrative Challenges:
   • Valuation Issues: Accurately valuing assets, especially complex ones like privately held businesses or illiquid investments, can be difficult and contentious. This can lead to disputes between taxpayers and tax authorities.
   • Avoidance and Evasion: Wealthy individuals may use legal and illegal methods to avoid or evade wealth taxes, such as transferring assets to offshore accounts or trusts, which can complicate enforcement.
3. Political and Social Concerns:
   • Perception of Fairness: Some argue that wealth taxes are perceived as unfair because they do not consider the origin of the wealth or the efforts made to accumulate it. This can lead to resentment and political backlash.
   • Class Warfare: Critics may view wealth taxes as a form of class warfare, pitting the rich against the rest of society, which can exacerbate social tensions.
4. Economic Complexity:
   • Dynamic Effects: Wealth taxes may have unintended consequences, such as encouraging the wealthy to spend more on consumption rather than investment, which could affect economic productivity and growth.
   • Inter-generational Wealth Transfer: Wealth taxes can also impact inter-generational wealth transfer, potentially affecting family businesses and the ability to pass on assets to future generations.
5. Revenue Effectiveness:
   • Limited Revenue: Despite the high-profile nature of wealth taxes, the actual revenue they generate may be limited, especially if many wealthy individuals find ways to avoid or evade the tax.
   • Administrative Costs: The costs of administering a wealth tax, including enforcement and auditing, can be significant and may offset the revenue generated.
6. International Competition:
   • Global Mobility: In an increasingly globalised world, wealthy individuals and businesses have more options to relocate to countries with more favourable tax regimes, which can undermine the effectiveness of a wealth tax.

Why Wealth taxes will have unintended consequences

The pros and cons defined by both sides highlight the complexities incurred by the implementation of a wealth tax. While proponents see it as a tool for addressing inequality and funding public services, critics warn of its potential to disrupt economic activity and create new challenges for governments and taxpayers.

Personally, my views are more on the sceptical side of the Wealth taxes. This is based mostly on my libertarian bent that Taxation is theft , and taxes of all varieties have never had their intended consequences, and once implemented these taxes are never repealed.

It's been proving time and again, that the worst organisations to implement taxes are governments. It is almost guaranteed, that any potential windfall from a wealth tax, will be lost either in some kind of corrupted scheme, or even more likely will only move on to the hands of other wealthy organisations and will never find its way to where it was supposedly needed most.

It is a peculiarity of supposed democratic systems that the most common laws passed by governments are the laws of unintended consequences.

In his book, Daylight Robbery - How tax shaped our past and will change our future Dominic Frisby discusses Britains long complicated relationship with various taxes, providing insight as to how history, time and again has shown the terrible consequences that misguided, poorly thought through or outdated tax legislation can have.

Book ReviewEconomics

Daylight Robbery

In Daylight Robbery, Dominic Frisby traces the origins of taxation, from its roots in the ancient world, through to today. He explores the role of tax in the formation of our global religions, the part tax played in wars and revolutions throughout the ages, why, at one stage, we paid tax for daylight or for growing a beard. Ranging from the despotic to the absurd, the tax laws of the past reveal so much about how we got to where we are today and what we can do to build a system fit for the future.

Dominic Frisby

Read more

The dire performance of government

Governments in general have proven to be nothing but useless, and each successive administration blaming the problems it experiences on the previous. In the UK, we have had direct experience of this delusion.

In 1997, a labour government came in and as result blamed all the misgivings of tenure-ship on the 18 years of the previous Conservative government. Then in 2010, a conservative government came to power, and blamed all the misgivings of its tenure-ship on the previous Labour government, then in 2024 a Labour government came to power and the pattern repeats and will continue to repeat ad nauseam!

Taxes will never be a mechanism to affect change, at least any meaningful or beneficial change. It can be said with almost complete certainty that, any form of taxation will never have any success in addressing inequality, in any society.

Ultimately, taxation does nothing but fuel the corrupt machinations of centralised governments. Corrupt centralised governments will never address inequality because it will never be in their incentives or interests to do so. All governments will ever do, is tinker around the edges of problems they will never solve them.

Impossibility of measuring wealth

To the naive, it would seem it would be easy to measure wealth. In truth it is very difficult.

People with money, will always go to great lengths to hide their money. This is true irrespective of how much money, people have. There are many, many reasons for this and they are all really plausible and often not even for nefarious reasons. Most of it comes down to simple privacy, security and safety reasons.

Even once you've supposedly discovered what the wealthy own, you simply start to uncover yet another problem, which how exactly are you going to value it. As the old adage goes:

By the time one has actually determined what is owned and what its financial value is, how are you going to tax it? Then every year you're going to have to g through this process again.

The result is, governments will have to employ an army of tax inspectors to do the negotiations, an enormous number of specialist valuers, and legions of lawyers to take on the wealthy who are going to object to every single thing that is put to them as to that valuation and the tax charge that is being proposed.

This will not be the most effective use of Tax authority resources. This on top of the fact, that Tax authority resources are never used effectively anyway. Huge amounts of waste and inefficiencies exist within these organisations anyway.

Proponents of the Wealth tax, will often attempt offer an alternative proposal, which they will attempt imply is a simpler solution. This invariably, follows a path of increase the tax on the income from wealth, and on capital gains derived from the sale of that wealth, when the wealthy, inevitably, eventually buy or sell things.

Once again, this is a completely naive and ill thought through proposal. The fact is, there will be no incentive for the wealthy to dispose of things, when they can merely take a loan out against things. Leveraging assets for loans, is a non-taxable event, it is also a common practice that the wealthy engage in.

Here in lies the nub of the problem, of what is supposedly referred to as a progressive tax system , which increases tax rates as peoples income rises.