A wealth tax would be ethically wrong and economically destructive

It was John Maynard Keynes who put it best. “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist,” he wrote.

Remarkably, as the clamour for wealth taxes demonstrates, the thinker who has re-emerged, yet again, as the guru of the moment is one Karl Marx, buried in London’s Highgate Cemetery 130 years ago and supposedly long since consigned to the dustbins of history.

Marx, of course, was not the first to argue that there is such a thing as ill-begotten “unearned” income, the fruits of capital in the form of rent, interest, dividends or capital gains, not to be confused with earned income from selling one’s labour. But somewhere deep in Britain’s collective consciousness, even among passionate opponents of socialism, some Marxist ideas remain influential, albeit in an implicit, cultural sort of way. A “heavy progressive or graduated income tax” and a war on inherited wealth were key demands in the 1848 Manifesto of the Communist Party; they were scandalously extreme by the standards of the day but are mainstream today. No wonder, therefore, that Marx’s influence can be detected in the present debate, even if many supporters of wealth taxes will express horror at the thought.

Yet regardless of its intellectual origins, a tax on people’s assets is ethically wrong, economically destructive and would damage growth and job creation, with the poor and middle classes suffering intense collateral damage.

I refer specifically to a wealth tax, not just a mansion tax, as the genie has been let out of the bottle. It is now acceptable to call for taxing wealth, not just income, consumption or transactions; and the gaping holes in Vince Cable and Ed Miliband’s plans for a mansion tax someone who owns a hundred £1m homes would pay nothing; someone in negative equity with a mortgage of £2.5m and a home worth £2.2m would be hammered mean that any tax will end up being much broader, as some Liberal Democrats have already argued. It will either have to hit more homes or include other assets, such as paintings, bank accounts and pensions.

Taxing already acquired property drastically alters the relationship between citizen and state: we become leaseholders, rather than freeholders, with accumulated taxes over long periods of time eventually “returning” our wealth to the state. It breaches a key principle that has made this country great: the gradual expansion of property ownership and the democratisation of wealth. We need more of this, not less. A wealth tax like the old window taxes, levied because it was too hard to assess people’s income is a sign of failure: we can’t raise enough by taxing current economic activity, so we tax again the already taxed fruits of past activity. It is a pre-modern, obsolete concept. Wealth taxes also violate a state’s original mission, to protect the life, liberty and property of citizens.

The idea that those who happen to own a home in parts of the country where the price has gone up above a certain arbitrary threshold “don’t deserve” their “windfall” sets a dangerous precedent. It implies officials can determine whether or not a gain is “fair” or not; and if this applies to property, it should logically apply to everything else. Are all investment gains potentially undeserved? If winners in Kensington and Chelsea should be taxed on gains, then should we subsidise losers in Wales and Northern Ireland, where house prices have collapsed?

What about the argument that the outcomes of rigged markets are illegitimate, and thus ripe for taxation? Tragically, all contemporary markets are rigged to a greater or lesser extent, not just central London homes, with myriad firms and individuals benefiting from protections, regulations, quantitative easing, public spending, subsidies or other privileges. The answer is to liberalise markets; but conceding that any transaction that doesn’t derive from a properly free market is ripe for taxation is tantamount to casting doubt on all private property.

But enough philosophy. The debate in Britain is shockingly parochial: proponents never bother to explain why wealth taxes would work here given that they have failed abroad. After years of seeing its most prominent entrepreneurs leave the country, together with their billions, often relocating to Britain, Sweden abolished its wealth tax in January 2007, one reason behind its recent economic renaissance.

Most other European countries have ditched their wealth taxes, starting with Austria in 1994 and followed by Finland, Germany, Denmark, the Netherlands and Luxembourg. Countries such as the US, Australia, Russia, New Zealand, Japan or Canada never had one in the first place.

Unfortunately, some countries have reintroduced wealth taxes since the crisis, though these have been sold as temporary, emergency measures.

Italian prime minister Mario Monti’s version has generated massive anger, turning into a crippling attack on the middle classes, with around three quarters of primary residences hit and £2.9bn raised in 2012. Monti is pledging to cut it; Silvio Berlusconi, his main rival, has promised to abolish it. Spain’s temporary wealth tax has been extended for a third year until 2014; it targets pricier homes.

The French have always been behind the times, retaining their window tax until 1926, 75 years after it was repealed in Britain; they are now doubling their wealth tax. Yet it has dragged down the French economy since the 1980s and was the original reason London became France’s sixth largest city. Hundreds of billions of euros have left the country; even with the lower rate, at least 700 to 800 of the wealthiest taxpayers have been relocating annually specifically to avoid it. Economist Eric Pichet found that the tax has cut GDP growth by 0.2pc a year, triggered capital outflows of £172bn in the 10 years to 2008 and reduced overall tax receipts by twice the amount raised by the tax. As he put it, the “wealth tax impoverishes France, shifting the tax burden from wealthy taxpayers leaving the country on to other taxpayers”.

America fortunately doesn’t have a proper wealth tax. It relies on property taxes at a local, county level to finance spending but rates are disciplined because homeowners can easily move. Rates are rarely punitive; their aim is not to cripple the rich. Britain’s property taxes including council tax and stamp duty, but excluding relevant VAT are the highest as a share of GDP of any OECD nation and are far more significant than America’s.

The pro-wealth tax crowd’s refusal to acknowledge other countries’ experience is its Achilles’ heel. The policy has been a disaster wherever it has been tried. It is, of course, vitally important to do more for the poor and the aspiring classes, but the solution is to kick-start the economy through radical supply-side reforms, creating jobs and opportunities. We urgently need to create new wealth in Britain and spread it wide and far, not devise ever more elaborate ways of expropriating and squandering already existing wealth.

Allister Heath is editor of City AM