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Work and prosperity
25 February 2013

Tim Montgomerie is wrong about wealth taxes, but so are his critics

Montgomerie Tim Politics ShowLast week, our esteemed editor, Mr Timothy Montgomerie, made the case for taxing wealth in preference to income (The Times (£)). In doing so, he provoked a fierce reaction from his fellow rightwingers.

The counter-arguments varied widely in their intelligence. At the stupid end of the spectrum was that old cop-out about more growth or less spending being a better alternative – as if either would mean not having to think about the balance between different forms of taxation.

For a much smarter response, you could do worse than Allister Heath, who, in the Daily Telegraph, is persuasive on the (im)practicalities of specific proposals for taxing wealth – such as the ‘mansion tax’ favoured by Vince Cable and Ed Miliband. For example:

  • “...someone who owns a hundred £1m homes would pay nothing; someone in negative equity with a mortgage of £2.5m and a home worth £2.2m would be hammered…”

Given such problems, wealth taxes, however tightly defined to begin with,  would “end up being much broader... either [having] to hit more homes or include other assets, such as paintings, bank accounts and pensions.” The Chancellor would end up as a common burglar, rooting around our homes, looking for valuables.

The implication is of a fundamental threat to property rights:

  • “Taxing already acquired property drastically alters the relationship between citizen and state: we become leaseholders, rather than freeholders, with accumulated taxes over long periods of time eventually ‘returning’ our wealth to the state.”

Furthermore, there’s something undeniably primitive about the whole approach:

  • “A wealth tax – like the old window taxes, levied because it was too hard to assess people’s income – is a sign of failure: we can’t raise enough by taxing current economic activity, so we tax again the already taxed fruits of past activity. It is a pre-modern, obsolete concept.”

Yet, Tim Montgomerie’s critics are on much shakier ground when it comes to the trump card in the case for wealth taxes, which is that much of the wealth in question is derived – either by accident or design – from "rigged markets". Allister Heath half-acknowledges the point, before skirting around it:

  • “Tragically, all contemporary markets are rigged to a greater or lesser extent, not just central London homes, with myriad firms and individuals benefiting from protections, regulations, quantitative easing, public spending, subsidies or other privileges... but conceding that any transaction that doesn’t derive from a properly free market is ripe for taxation is tantamount to casting doubt on all private property.”

There are more than a few things left unexplored in that phrase “to a greater or less extent”. While it is true that the only place  you'll find a 'pure' market is an economics textbook, that doesn't mean we shouldn't draw a distinction between money that is earned through genuine wealth-creating effort and the fruits of idle or destructive speculation.

The trouble with wealth taxes, though, is that they target asset classes, not the means by which those assets are obtained. Indeed, in the real world, they would most likely fall hardest upon decent hard-working people, because rent-seeking fat cats, who tend to be experienced in the tax-dodging arts, would shuffle their assets out of the way. 

One final observation: In regard to the point about rigged markets, Allister Heath says that “the answer is to liberalise markets”. A true conservative would respond that markets aren’t liberalised, they are enforced. But, either way, let’s try some serious market reform before reaching for the blunt instrument of wealth taxation.

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