Is a wealth tax back on the table?
Former Labour leader Neil Kinnock's call for a wealth tax has reignited debate over how to tax Britain's richest - but economists warn the policy could backfire, driving away wealthy taxpayers and raising less revenue than hoped.
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In brief:
- Former Labour leader Neil Kinnock has suggested a 2% tax on wealth above £10 million, claiming it would raise £11 billion annually, though the government has previously said it won't implement a wealth tax.
- Helen Miller, incoming Director at the Institute for Fiscal Studies (IFS) tells The News Agents that while wealth needs better taxation, fixing existing taxes (capital gains, inheritance tax) should come before creating an entirely new wealth tax system.
- A wealth tax faces practical difficulties in measurement and calculation, plus risks wealthy individuals leaving the UK, potentially reducing overall tax revenue rather than increasing it.
What’s the story?
"The chancellor has said that we are not going to be bringing in a wealth tax,” Keir Starmer’s spokesman told journalists when asked if the PM would consider increasing taxes for the UK’s richest people.
The issue has been thrust back into the spotlight by Neil Kinnock, Labour leader during the Thatcher years, who suggested to Sky News that cabinet ministers may be sympathetic to the idea - leading to questions about whether he has insider knowledge or is simply making suggestions.
While Rachel Reeves previously ruled out a wealth tax as recently as April, Kinnock argues the government has unnecessarily constrained itself by committing to rigid fiscal rules.
His solution? A 2% tax on wealth above £10 million, which he says would raise £11 billion a year. Not only would it raise revenue, but Kinnock believes “a substantial gesture in the direction of equity fairness would make a big difference” at a time when “earned incomes have stagnated in real terms while asset values have zoomed”.
The debate comes as the top 1% of earners already contribute nearly a third of income tax - tens of billions towards public services - raising questions about whether Britain's wealthiest should pay more or already shoulder their fair share.
Is a wealth tax a good idea?
Leaving the moral argument aside about whether a wealth tax is fair or unfair, there’s also arguments on both sides about whether such a policy would, if implemented, raise revenue, or decrease it.
“Economists don't really agree on whether an annual tax on the stock of wealth is a good idea, even in principle,” Helen Miller, the incoming Director at the IFS tells The News Agents.
“I think where I'd come down on that is that, no, it's not a particularly good idea.”
Miller argues that the Chancellor does need to think about how to tax wealth, but should instead focus on existing taxes – which she says do not work “sensibly” at the moment.
“There are lots of things we should be doing first to fix how we currently tax things - capital gains, inheritance tax, council tax - before we try to design and implement an entirely new tax with an entirely new tax base, with all the apparatus that goes with that,” she says.
“So the short answer is, yes, let's think about taxing wealth. [But] I don't think we should be rushing to try and get a new tax.”
Looking at how wealth is taxed internationally, Switzerland is usually pointed to as an example of a country that imposes a wealth tax, but Miller says that while this raises revenue by a few percentage points, it’s worth remembering that other taxes in Switzerland are quite low. “They're not taxing incomes and gains at very high rates, and they kind of therefore get away with having decent sized wealth taxes.”
Elsewhere, the international experience of taxing the rich isn’t “particularly rosy,” she adds.
“The more common experience across a bunch of European countries is that countries, including Norway as an example, implement these things, they don't go particularly well for various reasons, they don't raise much money - and they get rid of them.”
Would a wealth tax scare off the rich?
Imagine the scenario - a wealth tax is introduced, a rich business owner who already pays a significant amount of tax, reacts by deciding to jet off - with his wealth - to instead live in a country with more forgiving tax laws.
“The wealthy have always used that as a threat. They've always said, ‘if you do this, we're out the door’,” Emily Maitlis says.
‘“But what happens, and it seems to be happening - everyone has got anecdotal examples - if more non-doms who are fleet-of-foot leave the country because of this policy, and the Treasury ends up taking in less money than it was before?” Jon Sopel asks.
If they do leave, not only does the government not raise the extra revenue they were hoping for, they also lose the existing revenue that person was contributing.
This is something the OBR predicted would happen when Labour introduced new rules for non-doms - UK residents whose permanent home - or domicile - for tax purposes is outside the UK.
A non-dom only pays UK tax on the money they earn in the UK, meaning many wealthy individuals could make significant savings by nominating a lower-tax country as their domicile.
But in the October 2024 budget, the Chancellor announced Labour would abolish non-dom status.
There is currently not enough hard data to say whether abolishing non-dom status has led to a significant number of wealthy people fleeing Britain.
“There aren't many of them, and in any given year, lots of them are leaving the UK, because inherently they're the kind of people who move across countries,” Miller says.
“The fact that you see some moving across the country doesn't tell you very much as that's true in every year. So you have to see, is it even more true than normal?”
But, she adds, there is anecdotal evidence - and “everyone thinks it’s happening.”
Would a wealth tax scare off the rich?
Imagine the scenario - a wealth tax is introduced, a rich business owner who already pays a significant amount of tax, reacts by deciding to jet off - with his wealth - to instead live in a country with more forgiving tax laws.
“The wealthy have always used that as a threat. They've always said, ‘if you do this, we're out the door’,” Emily Maitlis says.
‘“But what happens, and it seems to be happening - everyone has got anecdotal examples - if more non-doms who are fleet-of-foot leave the country because of this policy, and the Treasury ends up taking in less money than it was before?” Jon Sopel asks.
If they do leave, not only does the government not raise the extra revenue they were hoping for, they also lose the existing revenue that person was contributing.
This is something the OBR predicted would happen when Labour introduced new rules for non-doms - UK residents whose permanent home - or domicile - for tax purposes is outside the UK.
A non-dom only pays UK tax on the money they earn in the UK, meaning many wealthy individuals could make significant savings by nominating a lower-tax country as their domicile.
But in the October 2024 budget, the Chancellor announced Labour would abolish non-dom status.
There is currently not enough hard data to say whether abolishing non-dom status has led to a significant number of wealthy people fleeing Britain.
“There aren't many of them, and in any given year, lots of them are leaving the UK, because inherently they're the kind of people who move across countries,” Miller says.
“The fact that you see some moving across the country doesn't tell you very much as that's true in every year. So you have to see, is it even more true than normal?”
But, she adds, there is anecdotal evidence - and “everyone thinks it’s happening.”
What’s The News Agents take?
If you were to ask most people if Kinnock’s idea of a 2% tax on wealth above £10 million, is a good one, they’d probably say yes without hesitation - but when you get into the details, it’s “devilishly complicated,” Jon Sopel says.
“How do you calculate the 10 million?,” he asks.
“Is it the value of your house? The value of your pension? Your savings? Do you say, ‘if you've got 10 million quid in the bank or building society, then you're subject to it’ - there is no uniform way of measuring this.”
Emily says that when Kinnock made the suggestion, he “might have just been going off piste”, but it’s getting traction now because the government didn’t do much to shut it down.
“The government could have come out and said, ‘we're definitely not doing that,’ or they could have said, ‘it's a very good idea. We're thinking about it’.”
The reason they haven’t shut it down could be out of respect for Kinnock, or it could be because the government wants to leave options on the table ahead of the Autumn budget.
“Maybe they genuinely don't know, they are still waiting to see quite how big the black hole is going to be for the chancellor, and maybe she realises that the cardinal error was boxing yourself in too quickly on what taxes would or wouldn’t be on the table,” Emily says.
Jon adds that either way, Rachel Reeves is facing some “difficult choices”.
“And suddenly it seems the wealth tax is back in vogue,” he says.