What can Iceland teach us about a wealth tax?

The country instituted an emergency tax for three years to sort out its problems. Should we?

Iceland’s remarkable recovery can serve as a lesson to the UK.

Having recently paid back its IMF loan quicker than was predicted, Iceland's unorthodox reaction to the crisis has been hailed by economists, policy-makers and the IMF itself. In addition to letting its financial system fail, the country introduced capital controls (which have been met with some skepticism as they arguably prevent foreign direct investment and therefore stunt growth) and leveraged its fiscal policy to pay off debt whilst sustaining consumption. It is this last point the UK should pay heed to, particularly as Clegg declares his support for a wealth tax.

The general theme of Iceland’s 2010 tax reform (pdf) is one of increasing tax revenue whilst offsetting the burden for lower income individuals. For instance, while fuel taxes and VAT were increased, the revenue was partially re-channeled towards public transportation and bottom-quartile households compensated for higher food, heating, and transport costs. Furthermore, in an effort to raise income without affecting consumption, the government implemented an emergency wealth tax rate for the period of 2010-2013. As of January 2011, one year after introduction, the tax rate is 1.5 per cent of net capital for single individuals with more than ISK 75,000,000 (£390,000) or 100,000,000 (£519,000) for married couples. By taxing the top 2.2 per cent of the population, the Icelandic government was able to raise 0.3 per cent of GDP in revenue every year.

However, an IMF report on the country's reform argues that the wealth tax should be abandoned as capital controls ease. Because the tax is recurring, the only thing that is stopping the wealthy from offshoring capital is the simple fact that they’re not allowed to. Therefore, IMF economists argue that the revenue from the wealth tax should be replaced by a less mobile base (i.e. real estate and high income). This does not, however, discredit the Icelandic wealth tax as a possibility in the UK; it just means that, as suggested by German scholars, it should be a one-off levy. (For an in-depth assessment of Clegg’s wealth tax go here)

Meanwhile, the biggest lesson the UK can learn from Iceland is that its recovery was at least partially fuelled by the government's struggle against depressed consumption.

Bloomberg's Omar Valdimarsson writes:

Iceland’s growth “is driven by private consumption, investment has picked up strongly and even though, when you look at net exports, those have a negative contribution to growth, it is mainly because imports have been strong, reflecting strong consumption and an increase in income and the healthy expectations of households,” Zakharova said. “Still, exports have been increasing very strongly. Last year was a banner year for tourism. These are all really positive things.”

A handful of Icelandic banknotes are withdrawn from an ATM. Photograph: Getty Images
Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
Show Hide image

Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

0800 7318496