Governments cannot afford to ignore a wealth tax

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This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every Thursday

Energy prices continue to drown out all other economic conversations. But in this week’s Free Lunch we will talk about other things. Not to be contrarian for the sake of it. But in the past two weeks I have already bombarded you, dear readers, with my reflections on energy prices (on the peculiarities of how they are formed, on their political effects in Europe, and on the vast international wealth transfers they entail).

I want to hold off on another volley until we have details of the support package of new UK prime minister Liz Truss and of the EU’s co-ordinated plan to change its energy market structure to bring prices down. Both are expected after this newsletter’s deadline.

In addition, I have some Free Lunch housekeeping that will fill up this edition of your global economic policy newsletter. I have been enjoying comments and feedback on recent pieces and would like to share some of it with you — much of it indeed on the energy crisis. I am also happy to announce that the last instalment in our series of video spin-offs, Free Lunch on Film, has just been published: on why I think a net wealth tax would be a good idea.

The last thing first. Like with the previous two instalments (on universal basic income and climate techno-optimism), the idea is to kick the tyres on an economic idea that I have a lot of time for but that is, to put it mildly, controversial. In each film, I try to talk to people about what I think are the most solid arguments on all sides of the issue — and it may or may not surprise you that it is often easiest to find my strongest critics among my best FT colleagues.

Longtime Free Lunch readers will know that I think a well-designed net wealth tax is a good economic policy. Because it taxes net wealth at the same rate regardless of its return, it rewards those who invest productively relative to those who keep their wealth idle. In other words, it rewards competent capitalists over poor or lazy ones, acting as a handmaiden of capitalism. In addition, (higher) net wealth taxes would restore some fairness to tax systems that fail to put the greatest burdens on the broadest shoulders, ie the shoulders of those with so much wealth they can easily avoid incurring any taxable income or gains at all.

Why is this particularly relevant today? Because we may be facing a winter of bleeding public budgets all around Europe. Consider the numbers swirling around: a €65bn energy support package in Germany, rumours of a plan in the triple-digit billion pounds in the UK, €280bn already allocated across the EU as a whole. Whether now or later, national treasuries will be on the lookout for more revenue to fill in the holes. And in the video, I point out that the tax base most have not looked at for a long time is net wealth.

That tax base, however, has become much more fertile ground for a solid tax yield in the past three to four decades. Wealth has grown much faster than national incomes, as the chart below shows:

Ratio of net national wealth to net national income

And more of those national incomes are now rewarding capital owners than in the past, as the income share going to pay wages has fallen:

More of national income is going to capital owners

In addition, as rich economies have accumulated much more wealth, that wealth has become more unequally distributed:

Share of total net personal wealth owned by the 1 per cent wealthiest

And yet governments’ revenues from taxes levied on outright wealth have not increased. As the film points out, of the countries that used to have an annual net wealth tax, only Spain, Norway and Switzerland still do. Do watch it and assess for yourselves the arguments as to whether this has been a good or a bad idea. What is clear is that the taxation of wealth has not tracked the evolution of wealth itself. A winter of pressured public (and private!) finances is a good time to reconsider whether it should.

Now to your comments. Some have already come in about the wealth tax video. Giordano writes to point out that while the Netherlands doesn’t formally have a wealth tax, it charges income tax on the “deemed income” from certain assets, which is set by formula and so is, in practice, a tax on asset values.

In last month’s newsletter about energy prices, Tessa takes issue with my description as a “bizarre confluence of bad luck” of the many mishaps in energy generation in the past year: weak wind, depleted hydroelectric reservoirs, low river levels hindering coal barges, nuclear and gas liquefaction outages all did harm to which Russian president Vladimir Putin has added. All, she argues, “are the results of the physical impacts of climate change, eg outages in French nuclear plants to due insufficient water due to drought. So it is very likely they will all persist together in future years.” It’s a good point, and she may be right (though what I hear on French nuclear is that water shortages are only one cause of the outages and not the biggest). My limited understanding of the meteorology of climate change is that it is making extreme weather more frequent without necessarily making it more systematic. So even if we should expect more freak weather events, we may be allowed to hope they won’t regularly all occur at the same time. Am I clutching at straws?

And finally, Nigel writes that the outsize arithmetical effect of energy price rises on inflation we are seeing makes him think that if we want to keep prices stable, we may not want to rely on slow-working interest changes from central banks. Change in value added tax, in particular, could target consumer prices much more quickly and accurately. It is an attractive idea. What do Free Lunchers think?

Other readables

  • For those who can’t wait for more readings on energy, the researchers at Bruegel propose a grand bargain on energy policy in the EU, where European Commission president Ursula von der Leyen has set out what Brussels wants energy ministers to agree in order to bring electricity prices down. My colleagues have put together a comparison of energy prices in Europe. And the New Economics Foundation has issued a proposal that is an alternative to energy price freezes: a free allocation of energy to households, with higher marginal prices for extra consumption.

  • Sergei Guriev and Elias Papaioannou have distilled down to 80 pages the academic literature on the political economy of populism.

  • Peter Kellner succinctly sets out the political impossibility of low-tax conservatism in today’s Britain.

  • Ivan Krastev reflects on what the late Mikhail Gorbachev meant for his generation of east Europeans. In a phrase redolent of Czesław Miłosz’s The Captive Mind, he writes: “He freed us from the psychological abyss that tomorrow is nothing more than the day after today.”

Numbers news

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Unhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here



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