A bad idea that’s not been thought through – why we shouldn’t tax the rich

Everyone likes the idea of the rich paying more tax, but in practice it can end up just costing the rest of us more while they’re unaffected.

It seems like everyone is socking it to the rich these days. The latest to throw a punch was Deputy Prime Minister Nick Clegg who called for a wealth tax to be imposed on Britain’s super wealthy to help spread the burden of austerity.

Clegg isn’t the only one to try drain the bank accounts of the most fortunate in society, in fact he is just the latest in a bunch of a (largely wealthy) individuals who have called for those with more to pay up to try and get us out of the fiscal hole we are faced with.

The new plan

So what is the Deputy Prime Minister actually calling for? His plan so far is vague, to say the least. He called for a wealth tax in a recent newspaper interview but didn’t give any more detail instead saying that those of “considerable personal wealth” have got to make a “bit of an extra contribution” to Britain’s austerity drive.

Crucially he didn’t clarify what “considerable personal wealth” actually means. Is someone with a million pounds in savings the super wealthy, or is that title better reserved to billionaires?

He also didn’t expand on how you measure wealth: Would your house, your wine cellar, your art/yacht/car collection be included in the calculation? These holes have left him open to criticism saying that he is playing politics as we lead up to the Liberal Democrat’s Party Conference in September.

But in this age of Occupy Movements, riots and a growing feeling that heavier taxation is necessary in an era of rapidly growing inequality, Clegg could get what he wants. But what does this actually mean for the UK?

What have the rich ever done for us?

If the “rich” decided to follow through on their threats, up-sticks and leave would that really make a difference? In a word, yes. It could, in fact, be devastating to our economy for a few reasons.

Firstly, the top 1% of tax payers paid a quarter of all income tax revenues in 2010 according to HM Revenue and Customs. That’s the same as the entire defence budget. To make that up, council tax would have to more than double.

Secondly, the financial sector – a breeding ground for some of the country’s fat cats that Clegg is after – paid the largest proportion of all tax to the Government in 2009. And that was during a year of harsh recession for the UK after the Lehman Brothers crisis. Although revenues were down £8billion on 2008 the sector still coughed up £53.4billion in the 12 months to March 2009. Or, in context, more than half the entire education budget. To make that up we’d need to add 10p to VAT.

Or to give another example, plans for new NHS super hospitals cost in the region of £250million. These tax revenues equate to building 212 of these hospitals each year. Thus, without the taxes of the rich (and the financial sector) we could end up with a decaying transport network and run-down clinics and hospitals or with the rest of us paying vastly more tax.

Who would a rich tax really hurt?

The trouble with a wealth tax is twofold: firstly, it might encourage the really wealthy – those with access to lavish homes in tax havens and clever accountants – to leave the UK permanently meaning they never pay another penny to the UK coffers.

Secondly, the people a wealth tax tends to hit the most are not the Simon Cowell’s of this world or the bankers or footballers with their millions (and sometimes billions) squirreled away. Instead a wealth tax hits those who are wealthy relative to the average man or woman in the UK, but not so much so that they can afford to take their wealth outside of the country to avoid the tax man.

While a few high profile names might leave and set up home in Bermuda, most people in the UK who would be eligible for the new tax would have no choice but to pay the extra money and make savings elsewhere.

This could hit consumption and the profits of retailers, restaurants and bars etc. Depending on the form of the wealth tax, it may put people off owning that rare painting or Chippendale piece of furniture, preferring instead to see them (cheaply) in a museum. Sotheby’s and Christie’s must be spitting feathers!

Have other countries made it work?

Spain, for one, has extra taxes for things like expensive jewellery and furniture, however its public finances remain in a perilous state and it is still poised to apply for a bailout from the eurozone authorities at some stage in the near future.

Ireland by contrast, which has already required an emergency bailout loan from the EU and the IMF, avoided a wealth tax saying that it would cause the rich to leave Ireland just when the country needed them most. Although Ireland remains in a perilous economic state, its position may have ended up worse if the government had enacted the tax.

In this environment, fairness and economic modesty is required from the wealthy. However, to slap another tax on them could be counter-productive.

While everyone needs to pay their fair share, and soundbites about hitting the rich to help the poor will always go down well, the type of fat cat that Clegg is hunting with his plan for a wealth tax has proved as hard to catch as an Essex lion in the past, if more likely to exist. Worse, the shots aimed at them might do no more than hit innocent economic bystanders.