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On 23 October, the IEA’s Editorial Director Kristian Niemietz gave opening remarks to a roundtable discussion on the UK economy’s long-term growth and productivity challenges. This article is based on those remarks.
I am currently writing a paper on wealth taxes, and I was going to say a few words about that.
However, I realise that this is not supposed to be a seminar on fiscal policy. So I am not going to bore you with technicalities.
What I will do instead is talk about why I bother writing about this topic at all. Because I think the fact that this idea has made such a sensational comeback tells us a lot about where we are right now, and where we are going.
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If somebody had asked me two or three years ago whether I wanted to write a paper on the wealth tax, my answer would have been:
No. Absolutely not. What for? What’s the point?
The wealth tax, I would have said, is a debunked and discredited idea. It has been abolished almost everywhere, and support for it is now an eccentric fringe position. Not even Jeremy Corbyn, who normally reliably embraces every bad idea under the sun, bothered to put it into the Labour Party manifesto when he had the chance. (Although he has, of course, endorsed it in the meantime.)
I would have said that writing about the wealth tax would be like writing about the window tax. It’s just not sufficiently relevant to merit a paper in its own right.
Nobody could say that today. To say that the wealth tax has made a comeback would be an understatement. It would be more accurate to say that the wealth tax is all the rage. It has become a cause célèbre. There’s something about wealth taxes in the media almost every day. According to a recent YouGov poll [ [link removed] ], introducing a wealth tax would be by far the most popular tax reform of all the major options that are currently being discussed. 75% of the public would support such a move, with only 12% opposing. It enjoys majority support across the political spectrum, across generations, across social classes, and across all regions.
How does this compare to polls from two or three years ago? We don’t know – because there aren’t any. Two or three years ago, pollsters wouldn’t have bothered to ask that question. Or if they had, it would have been pointless, because most respondents wouldn’t even have known what a wealth tax is.
How did this happen? How can an idea which has been tried so many times, and which has so clearly proved disappointing in practice, suddenly be so popular?
Sometimes, topics and policy ideas rise in salience because of an external trigger event. For example, the reason why immigration has become such a high-profile topic again is simply that there has been a massive spike in numbers. If you have two million people arriving here over the course of just three years, of course someone is going to notice. But for the wealth tax, there has been no comparable trigger event. There hasn’t been any kind of event. There has been no recent increase in wealth inequality. There has been no recent decline in tax revenue.
That’s the big difference between the populist Right and the socialist Left. The populist Right relies on external events that boost the salience of the subjects they care about, such as immigration. If immigration numbers dropped to the levels of the late 2010s, support for the populist Right would evaporate. The socialist Left is unique in that they have agenda-setting powers of their own. They can make something a thing, out of thin air. The wealth tax is a thing now, because they made it one. They have that cultural power.
The fact that we are even having this debate is, in a sense, more important than the subject itself. In the current climate, it would not be good enough to just write a technical paper on the negative economic side-effects of wealth taxes. It would not be good enough to write a paper which says ‘Here are five reasons why wealth taxes don’t work’, or ‘Here are the bad effects that the wealth tax had in Denmark, or Austria, or West Germany’.
Of course I’ll address the economics of wealth taxation too. We are an economics think tank, and that’s what we do. My target reader is someone who is superficially attracted to the wealth tax, because they simply haven’t thought about the practicalities very much, and who is still persuadable on those grounds. But it’s not good enough to just write a paper for that person. Because there aren’t enough of those.
We are an economics think tank, but we’re not just about ‘economics’ in the purely technical sense. That’s the difference between political economy and mainstream economics. A mainstream economist can tell you about the negative effects of wealth taxes on investment and capital formation, but if you ask them why wealth taxes are so popular if they are so bad, the mainstream economist won’t have an answer. They won’t even have thought about that question, and they’ll be unwilling to do so.
We have a different approach. We think economic policy debates are not just about economic modelling. They are also a battle of ideas, a battle of narratives, a battle between people who tell different stories about how the economy works.
This debate takes place within a particular context, and that context is 18 years of exceptionally low economic growth. This country is not much richer today than it was in the final days of Tony Blair’s government, which is really extraordinary. It means that an entire generation has grown up which has never known anything other than economic stagnation.
Under such conditions, economic thinking becomes more zero-sum. People are more likely to think of economic life as a series of distributional conflicts, rather than a wealth creation process. This creates a breeding ground for bad ideas. The wealth tax is the obvious example, but it’s not an isolated one. Rent controls, price controls, large-scale industry nationalisations, industrial policy – all sorts of bad ideas that we once thought had been defeated have made a comeback.
The irony, of course, is that these ideas, if adopted, would make the initial problem even worse. We could get into a vicious cycle, were poor economic growth offers a breeding ground for anti-capitalist ideas, and then these anti-capitalist ideas lead to even worse economic outcomes, breeding even more anti-capitalist resentment.
The key problem is that people – young people in particular – wrongly blame ‘capitalism’ for their economic woes. They are wrong. The culprit is very much not ‘capitalism’. It’s supply-side restrictions on economic activity, which would still be there if we had a different economic model, or even an entirely different economic system.
I don’t want to get into the reasons for Britain’s economic stagnation right now, because that would take up the whole evening, and it’s a subject on which I, and some of my colleagues at the IEA, bang on about [ [link removed] ] all the time anyway. But in a nutshell, the British economy is an economy which systematically deprives itself of the key input factors you need for economic activity, especially, the land on which, and the buildings in which, that activity can take place, as well as the infrastructure to connect them, and the energy to power them. Whether that’s the third runway at Heathrow, or lab space around Oxford and Cambridge, or London’s collapsing housebuilding numbers, or our declining electricity production.
That’s why we’ve made that issue, abundance, prosperity, growth, a theme that runs through so many of the things we do.
My paper on wealth taxes will be no exception, because in the current context, defenders of the market economy need to make clear that opposition to the wealth tax, or whatever the bad idea of the day is, does not have to be a defence of the status quo. In my case, it is very much not.
I want more people to have housing wealth. I want more people to have pension wealth. I want more people to have access to all kinds of wealth wealth.
That’s eminently possible. In the early 1990s, more than 60% [ [link removed] ] of young adults (<35 years) owned their home. That rate has since fallen by more than 20 percentage points. We could easily bring it back up again, if we wanted to. We could go over and above the previous peak. That can be done, I’ve written about how [ [link removed] ].
We have private pension wealth, i.e. assets accumulated in pension funds, worth about 85% of GDP [ [link removed] ]. That’s not bad in absolute terms, but it’s no better than the OECD average, although Britain has a much longer history of savings-based, asset-backed private pensions. Britain should be – and could be – streets ahead of the rest of the OECD on this measure. Britain should be – and could be – in the same league as Canada, the Netherlands and Switzerland, where the equivalent figure is above 150% of GDP. That can be done; I’ve written about how [ [link removed] ].
That’s the alternative to the wealth tax. It’s not the status quo. It’s a system which facilitates wealth creation, and enables large numbers of people to acquire some of that wealth.
Debunking bad ideas is not good enough. Free-marketeers need to show that we have better ideas: not utopian ones, not real-free-markets-have-never-been-tried ones, but tried-and-tested ones that have already proven their worth. There are plenty of those, and they’re all on our side.
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