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29 January 2015

Why the Green party’s wealth tax policy won’t work

The Greens' wealth tax numbers just don’t add up.

By Tom Papworth

The Green party has come under the spotlight as the general election looms and they look in with a chance of winning 1m votes. This is a good thing; as parties grow in significance it is right that their policies be scrutinised. Among their headline-grabbing promises is the introduction of a wealth tax on the wealthiest 1 per cent, which they claim will raise £21bn to £43bn a year.

Does this claim bear up? Can the Greens really hope to raise that much?

Let us start with the Green party’s figures for how much wealth there is in the UK:

The total wealth of households in Great Britain was £8.4tn in 2006/08, £9.0tn in 2008/10 and £9.5tn in 2010/12 at then current prices. In 2015 at the next general election it is reasonable to assume that total wealth will stand at around £12tn at 2015 prices. All the subsequent calculations in this briefing are done for 2015 and in 2015 terms.

This £12tn figure can at best be described as optimistic. The trajectory between the three actual figures suggests an increase of 7.14 per cent rise between 2006/8 and 2008/10 and a 5.55 per cent rise between 2008/10 and 2010/12. Note that the rate of increase is declining, but to be kind to the Greens we will assume that the average of those two figures is projected to 2015. This would lead to a total level of wealth of £10.1tn by 2012/4 and £10.7tn by 2014/6.

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In fact it is the decline in trajectory that is likely to continue. The 2006/8 figure was taken at the depth of the repression; the 2008/10 and 2010/12 figures represent the recovery of asset prices to pre-crash levels. Now that pre-crash levels have been reached, rates of growth have tailed off, which is why house price inflation has slowed and the FTSE has been broadly flat (though volatile) for the last couple of years.

Thus we are obliged to conclude that the Green party’s statement that “it is reasonable to assume that total wealth will stand at around £12 trillion at 2015” is simply exaggeration aimed at puffing up the revenue from their wealth tax. 

So how will this revenue be collected? The Green party states that:

We think it is fairer to target the super-wealthy and apply the tax to the top 1 per cent – households that have assets of over £3m – around 300,000 people. We favour a 1 per cent or 2 per cent tax on individual assets of £3m and above. This would raise approximately £21bn to £43bn a year.

Would it?

The Green party assumes that the top 1 per cent own 17.9 per cent of wealth in the UK. If one accepts this and their £12tn figure, that equates to £2.14tn. 1-2 per cent of that is £25 – £50 bn. Okay so far. But unfortunately, dodgy methodology is again applied: as a proxy for wealth distribution, they rely on the distribution of income, while arguing that, “because wealth is generally distributed more unequally than income, this will underestimate the share taken, for example, by the top 1 per cent.”

(Note, by the way, the use of the phrase “the share taken”: there is no sense that this wealth is created; rather it is treated as a given resource that is naturally collectively owned, shares of which people “take”. This is a highly dubious position).

The Greens are correct that the distribution of wealth is not the same as that of income. Sadly, the difference may not work in their favour. According to Professor Frank Cowell at the London School of Economics, the wealthiest 1 per cent of the UK own a fraction over 10 per cent of UK wealth. Assume that 2014/6 total wealth is around £10.5bn (a more realistic assumption than the Greens’ ambitious figure) and that equates to a little over £1tn. As a result, the 1 – 2 per cent tax would raise something more like £10 – £20bn. That’s still a lot of money, but it’s a hell of a lot less than the £20 to £40bn that they claim.

In fact, it would be a miracle if the tax raised more than a fraction of even our recalculated amount. No serious economist would suggest that a tax could be so efficient, or so void of dynamic effects, that it would collect all that such a simple application of arithmetic would imply. And case studies from Europe make grim reading for Green party politicians eager to spend other people’s wealth. As Andrew Neil pointed out to Natalie Bennett on the BBC’s Sunday Politics on 25 January, the French wealth tax, which kicks in at £800,000 (much lower than the Green’s £3m) raises under €4bn a year.

Many Green party supporters, and indeed wealth tax supporters more generally, will shrug these figures off. For most, this is about “soaking the rich” and levelling down in pursuit of greater equality. But for any objective observer this is deeply troubling. A political party can hardly hope to be taken seriously if it obviously massages numbers to boost its manifesto and create attention-grabbing soundbites. And a party that plans a massive increase in public spending must be fatally weakened by a hole in its budget of between £10 and £40bn.

Tom Papworth is Associate Director for Economic Policy at CentreForum, the liberal think tank.

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