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
Getty Images.
Show Hide image

Brexit is teaching the UK that it needs immigrants

Finally forced to confront the economic consequences of low migration, ministers are abandoning the easy rhetoric of the past.

Why did the UK vote to leave the EU? For conservatives, Brexit was about regaining parliamentary sovereignty. For socialists it was about escaping the single market. For still more it was a chance to punish David Cameron and George Osborne. But supreme among the causes was the desire to reduce immigration.

For years, as the government repeatedly missed its target to limit net migration to "tens of thousands", the EU provided a convenient scapegoat. The free movement of people allegedly made this ambition unachievable (even as non-European migration oustripped that from the continent). When Cameron, the author of the target, was later forced to argue that the price of leaving the EU was nevertheless too great, voters were unsurprisingly unconvinced.

But though the Leave campaign vowed to gain "control" of immigration, it was careful never to set a formal target. As many of its senior figures knew, reducing net migration to "tens of thousands" a year would come at an economic price (immigrants make a net fiscal contribution of £7bn a year). An OBR study found that with zero net migration, public sector debt would rise to 145 per cent of GDP by 2062-63, while with high net migration it would fall to 73 per cent. For the UK, with its poor productivity and sub-par infrastructure, immigration has long been an economic boon. 

When Theresa May became Prime Minister, some cabinet members hoped that she would abolish the net migration target in a "Nixon goes to China" moment. But rather than retreating, the former Home Secretary doubled down. She regards the target as essential on both political and policy grounds (and has rejected pleas to exempt foreign students). But though the same goal endures, Brexit is forcing ministers to reveal a rarely spoken truth: Britain needs immigrants.

Those who boasted during the referendum of their desire to reduce the number of newcomers have been forced to qualify their remarks. On last night's Question Time, Brexit secretary David Davis conceded that immigration woud not invariably fall following Brexit. "I cannot imagine that the policy will be anything other than that which is in the national interest, which means that from time to time we’ll need more, from time to time we’ll need less migrants."

Though Davis insisted that the government would eventually meet its "tens of thousands" target (while sounding rather unconvinced), he added: "The simple truth is that we have to manage this problem. You’ve got industry dependent on migrants. You’ve got social welfare, the national health service. You have to make sure they continue to work."

As my colleague Julia Rampen has charted, Davis's colleagues have inserted similar caveats. Andrea Leadsom, the Environment Secretary, who warned during the referendum that EU immigration could “overwhelm” Britain, has told farmers that she recognises “how important seasonal labour from the EU is to the everyday running of your businesses”. Others, such as the Health Secretary, Jeremy Hunt, the Business Secretary, Greg Clark, and the Communities Secretary, Sajid Javid, have issued similar guarantees to employers. Brexit is fuelling immigration nimbyism: “Fewer migrants, please, but not in my sector.”

The UK’s vote to leave the EU – and May’s decision to pursue a "hard Brexit" – has deprived the government of a convenient alibi for high immigration. Finally forced to confront the economic consequences of low migration, ministers are abandoning the easy rhetoric of the past. Brexit may have been caused by the supposed costs of immigration but it is becoming an education in its benefits.

George Eaton is political editor of the New Statesman.