‘Tax wealth, get growth’

I’m a millennial, which means that my financial future will depend less on how hard I work than what I inherit. House prices have risen twice as fast as earnings in my lifetime. The boomers got a worker-based economy, we’re getting a wealth-based one. But while our economy changed, our tax system didn’t – and it’s made us all poorer.

 Since Thatcher came to power, wealth as a proportion of GDP has doubled; since 2010 alone, dividend payments have done the same. Wealth, rather than income, has become ever more important in our economy. But while the times have been ‘a changing’, the tax system has not.

 You may say that is unfair, but I have another concern. Our tax system, designed for a bygone worker-based economic era, has been making us all poorer. 

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 Instead of taxing this growing wealth and the payments from it, governments doubled down on taxing earnings. While wealth has doubled as a proportion of GDP, the tax revenue gained from it has increased by only 35%. By contrast, tax revenue from workers has risen faster than GDP.

Owning wealth, and the effective tax break that comes with it, benefits the people and places that are best-off. If you’re in the top 1% you have 51 times the wealth of someone in the middle. Over 20% of dividend payments go to the top 1%. Over half of all capital gains (the growth in wealth) go to just 5,000 people every year. 

 At a time when life is unaffordable for so many, the wealth bias in the tax system has meant less money for you and more for the people and places who own wealth. 

 Let’s look at how this works in practice. Let’s compare company owners to their employees. 

 Company owners, who own the wealth stored in the company, can lower their tax bill because of our wealth-biased tax system. Dividends – payments from company wealth to shareholders – have been taxed at a lower rate than wages. A company owner can pay themselves in dividends, while their employees are paid in wages. Overall, company owners, when compared to their employees, were able to reduce their tax payments on the same amount of income by 13%.

In a similar vein, landlords (especially those without mortgages) can pay lower taxes than the people that rent from them. Landlord profits only attract income tax rather than the national insurance you pay on earnings (nor the student loan payments either). Capital gains (the profit you make when you sell an asset) have also been taxed at a lower rate than income from work.

Put all of this together, add in a bunch of additional reliefs, and we end up in a situation where the average person receiving £10m per year pays a lower rate of tax than someone on the average wage of £35k.

This Labour government has increased taxes on capital gains, dividends, and landlords to help fix this. We’ve done so because the wealth-over-worker bias in the tax system has been making us all poorer. It has been making us all poorer by reducing investment, spending by workers, and sucking money from regions into London.

Firstly, the wealth bias reduces the incentive for people to work hard and invest, while increasing the incentive to kick back and reap (passive) wealth rewards. Consider dividend taxation. If a company owner sees their business make profit, they could choose to reinvest this money in the business or they can take the money out in dividends. When taxes on dividends are lower, it increases the incentive to take out profits in dividends rather than keep money in the business and invest.

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By contrast, increasing dividend taxes (as we did in the Budget) reduces this incentive and leads to more investment. This is not a theoretical benefit – when France increased their dividend tax rate, they saw investment rise significantly.

Secondly, our wealth-biased tax system means less money for workers, meaning less local spending and less growth. When owners of wealth have the extra money, they are more likely to save it. By contrast, when workers have more money, and when so many are struggling, they spend the extra cash they receive. Extra local spending translates into higher investment as businesses respond to rising sales. By shifting tax from workers onto wealth, we are increasing local spending and, yes, growth.

Thirdly, the wealth-bias in the tax system helps London over elsewhere. Around half of those with over £1m in wealth live in more-affluent London and the South East. This means when we don’t tax wealth, we must make up that revenue from workers who are more likely to live outside of London and the South East. A wealth-biased tax system widens the gaps between the greater London region and everywhere else. 

 By reducing the wealth-over-worker bias in our tax system, we’ll boost growth and investment everywhere, and especially outside of London. There is one form of wealth payments that successive governments of different parties have taxed precisely because it is so beneficial for growth. Windfall profits.

Windfall profits are the purest form of wealth payments – profits earned not through additional effort, but through the luck of ownership. Consider the windfall profit North Sea oil and gas companies received when Putin’s invasion caused prices (and their profits) to skyrocket. Companies have no incentive to reinvest windfall profits, which go from workers to wealth. They accrue to shareholders in the City of London and often those who live abroad. This is why this government, the last government, the government before that, and the one before that, have all taxed windfalls.

When oil and gas went up dramatically in price leading to windfall profits – we taxed them. The Energy Profits Levy has raised £11bn. When privatised utilities made record profits, Gordon Brown taxed them to invest in jobs. Margaret Thatcher, of all people, did similar with windfall bank profits in 1981 too. Taxing these windfall payments and investing them in the economy means more, not less, growth.

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We have to raise revenue to get energy bills down, invest in our nation’s defence, and create prosperity outside of London. But taxing is more than about raising cash, it’s about growth as well. If we want people to spend more, businesses to invest more, and places outside of London to grow, we must tax in the right way.

Tax wealth. Get growth

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