How should we tax wealth? Lessons from the 1970s.

Author:Glennerster, Howard
Position:Learning from the 1970s

Taxing wealth is in the news again. The Liberal Democrats have advocated a 'mansion tax'--a tax on housing wealth for houses worth over [pounds sterling]2 million. The Labour Opposition now supports the idea. The Institute for Public Policy Research published a discussion paper in March 2013 entitled 'Property taxes in the UK: the context for reform' (Lawton and Reed, 2013). Public frustration at bankers' accumulated wealth is evident. Could taxing wealth be on the political agenda again? Yet have we not been here before?

In 1974 the Labour Party's Manifesto promised to introduce a wealth tax. Though the Labour Party was elected and remained in power until 1979 no such tax was introduced. Can we learn any lessons from that failed attempt?

The case for taxing wealth

There was a long-standing argument for taxing or regulating inherited wealth that dated back at the very least to the Levellers in the English Civil War:

* Wealth, even of a modest kind, gives individuals the freedom to sustain and plan their lives. It should be available in some measure to all (Winstanley, quoted by Hill, 1975, 134).

* Concentrations of wealth put excessive political power in the hands of a few (Mill, 1848, 1970 edition, 376-80).

* An individual's wealth is a product not just of their own endeavour but the activity of the wider community. What would property be worth in the absence of policing, fire protection, good order and enforceable contracts? So, all wealth should, Thomas Paine argued, return to the wider community on death and then be redistributed on the birth of a child and on marriage. This would give all citizens and couples an equal start in life (Paine, 1791/2, 1969 edition, 267). A miniscule version of this idea lay behind the Child Trust Fund introduced by the Blair Government and abolished by the present one.

* There is no natural right to inherit. Property rights derive from the state which has the right to determine how far they should be handed on to others at death. As William Harcourt put it in advocating what was to become the Estate Duty in 1894: 'The state has the first title to the estate ... Nature gives a man no power over his earthly goods beyond the term of his life' (Hansard 16.4.1894, col. 498).

* Hugh Dalton, the future Labour Chancellor, who taught public finance at the London School of Economics, began advocating a capital levy in 1918. He became interested in the ideas of the Italian economist Rignano and like him advocated a heavier tax on inheritances that had been passed down for a generation or more (Dalton, 1922).

These ideas may have been buried in Labour memory and fed the Trades Union Congress demands for a wealth tax in 1974. But it was more modern economic reasoning that had led the Labour Party to study the case for such a tax from the 1950s on.

The driving spirit here was Nicholas Kaldor, Reader and then Professor of Economics at Cambridge:

* Taxing work at the very high levels at which incomes were taxed in the 1940s (over 90 per cent at the top end) was a major disincentive to work and, at the very top, gained little revenue. A switch to taxing wealth would bring economic advantages.

* Moreover, wealth was more unequally distributed than income and it made no sense to tax it less than income. That merely encouraged inefficient shifts between the two.

* An important element in tax fairness lay in the principle that taxes should reflect 'taxable capacity'. Those reaping capital gains, or receiving gifts and inheritances, were in a better position to bear the 'tax burden' than those who were not. So were owners of wealth.

* Thus in addition to taxing such additions to current resources he advocated an annual wealth tax taxing away a small percentage of a person's wealth each year as was the case in some other European countries (Kaldor, 1955, 33).

He went on to argue for such a tax as a member of the Labour Party's Finance and Economic Affairs Committee in the late 1950s and again before the 1964 and 1970 elections. It was only in the run up to the 1974 election that, as a deal to gain TUC support for wage restraint, the idea was to find its way into the Labour manifesto.

But it had never been widely discussed or been the subject of detailed practical planning. Other economists who were sympathetic to some taxation of wealth did not favour this approach (Atkinson, 1972; Sandford, 1971). This is a point to which we shall return. However, in February 1974 a Labour Government was elected with a promise to introduce an annual tax on all wealth above a given, yet to be decided, level at a, yet to be decided, rate (Labour Party, 1974). How did this proposal fare?

A favourable initial response

The Inland Revenue had been alert to the possibility that Labour might want to introduce a wealth tax as early as 1963 when its first recorded notes on...

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