Norma Cohen is an Honorary Research Fellow at Queen Mary University of London and former FT reporter. With the highest levels of government borrowing and taxation in decades, the current economic situation is like that of the 1920s. In this piece she argues that, by looking at the parallels between the two periods as well modern research, we can see that wealth taxes will not solve the problem of growing inequality.
Picture this: Britain, after years of national emergency, faces a government debt burden which, relative to national income, is the highest it has been in decades. Moreover, tax rates are also at their highest this century. The national emergency has had another side effect; it has increased the value of wealth held by the nation’s richest households, while that held by its poorest stagnates.
This yawning gulf between those who have sacrificed and those who have grown rich has led to a widespread — and growing — demand for a tax on wealth.
Britain 2021? Think again. The year is 1917 and the ‘national emergency’ is the first world war. When compulsory manpower conscription was enacted in 1916, demands grew for conscription of wealth as well. Moreover, since the outbreak of war in 1914, prices soared as food and goods became scarce leading to stagnating living standards. It was clear that some were raking in outsized profits at the expense of the working class and pressure grew on the government to crack down on profiteers.
Spiralling inflation amid capital scarcity forced Britain to offer increasingly generous terms to its lenders. Those with capital were able to loan money to government at rates approaching 6 per cent compared with the 2.5 per cent prevailing at the end of the 19th century. Unlike those fighting at the front, rentiers could enjoy that interest income from the safety of their armchairs. Sacrifice was increasingly unequally shared.
Calls for wealth taxes were rife. According to Martin Chick, an economic historian at the University of Edinburgh, this was due primarily not to ballooning budget deficits, but the growing disparity between rich and poor. “The calls for a levy on capital made during and after the first world war illustrate the thesis that proposals for wealth taxes are better viewed as expressions of concern with perceived inequality and inequity, rather than primarily as effective ways of raising additional revenue,” Chick wrote in a paper for the Wealth Tax Commission.
Given not only the current levels of government debt and spending, but also the fact that inequality is on the rise, it’s unsurprising that wealth taxes are once again on the agenda.
Research from the Resolution Foundation think-tank found that the pandemic has widened wealth inequality substantially because of the outsized effects it has had on asset values. While the median family has gained £7,800 in wealth per adult — largely reflecting rising house prices — the richest 10 per cent of households have gained a little over £50,000. The poorest 30 per cent of the wealth distribution gained just £86 per adult on average in additional wealth. Earlier this week, a group of 30 millionaires wrote to Chancellor Rishi Sunak urging him to tax them more and cut proposed tax hikes on workers.
But are they any more likely to happen now than in the years after the first world war?
In answering this question, it’s worth recalling why they weren’t introduced despite bitter class tensions.
While Prime Minister David Lloyd George had promised “a land fit for heroes” — the 1920s equivalent of Johnson’s “levelling up” — howls of outrage came from the middle and upper classes. They succeeded in labelling expenditure on the working classes, particularly through improved housing and access to education, as “waste”. Newspaper barons, Lords Rothermere and Northcliffe, supported their campaign.
Their howls were, therefore, loud. And effective.
Britain retained its Excess Profits Duty on businesses which had done well out of war at a higher level than initially intended, but any efforts to either raise social spending or cut regressive taxes through a wealth tax were batted down by those higher up the income scale (who had, it must be said, bore the brunt of stiff wartime tax hikes).
The death knell came from an analysis by a parliamentary commission in 1927 that concluded that such taxes were likely to raise much less revenue than forecast. For all their political upheaval, wealth taxes would deliver very little reward.
How similar is this to the situation today? While the need to service and repay wartime debt was more pressing then than now, wealth taxes remain unpopular. Fewer countries today impose them than they did as recently as 1990, according to a 2018 report from the Organisation for Economic Cooperation and Development.
The reasons why wealth taxes are falling out of favour, according to the OECD, are very similar to the reasons they failed to take hold in Britain after the first world war; they are inefficient and raise too little revenue.
Assessing ‘wealth’ has always been a complex process. The 1920s proposals advocated taxation only of wealth in the form financial securities, particularly government War Loans. But even Treasury ministers who favoured such a tax feared a collapse in values if owners were forced to sell heavily to pay tax bills. At the same time, much wealth was held in the form of property and land. These are not fungible. While one share in, say, British Telecom, is worth the same as any other, calculations of wealth might be straightforward. But that is not true of much other wealth. While houses trade hands frequently, values of individual properties cannot be determined accurately without a buy offer that matches a sale.
Perhaps most important, the OECD concluded that wealth taxes are more distortive and less equitable than other forms of taxation such as capital gains tax or well-designed inheritance and gift taxes. The unfairness of wealth taxes comes from the fact that, if levied regularly, payments are required even if the taxpayer has not earned any return on the underlying assets.
So what’s a better fix? Britain’s solution in the 1920s was broadly to tax the income of the living and the wealth of the dead. Estate duties were raised to 40 per cent from 20 per cent and taxes on incomes of the highest earners were retained. That worked. Studies of inequality in Britain date its decline not from the advent of the welfare state designed by Beveridge in 1945 but rather, from the outbreak of the first world war in 1914.
Wealth taxes are not a necessary step towards reduction of inequality, but we may need other forms of taxation that levy payments on transfers of wealth instead. Housing and land are the most widely held forms of wealth in Britain. A good first step would be to close the loopholes allowing those inheriting this form of wealth to avoid paying tax on property gains.
There are better ways than wealth taxes to promote economic equality
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