Let’s make the country poorer!

One of those rallying cries which we don’t think would gain all that much support if people understood it. But here we are, people are using it:

An annual wealth tax of 2% on assets of more than £10m would affect only 20,000 people and would go part of the way to redressing the inequality between wealth and income. The revenue could be invested in local councils, schools, the NHS.

Leave aside, for a moment, all the guff about wealth inequality. Also, the obviousness of having run out of what we’re willing to give them to spend the greed with which they’re eyeing up any other pots of money they can confiscate. Concentrate just on the one thing here.

Capital and investment. A useful way of thinking about the wealth of the country is that it’s the capital of the country. Add our labour to the capital and we gain the income of the country - GDP. Not that we’d want to have to defend that all too formally but it’s a useful manner of thinking all the same. So, selling off the wealth in order to fund current spending would be selling the family silver to keep beef arriving on the table. This makes the future poorer - there is less wealth, less capital, to add to our labour in the future therefore output, GDP, will be lower.

Yes, this does work. The usual obervation about developing countries is that they’re capital poor. That’s both why they’re poor and we should be - according to some at least - shipping our capital to them. Little capital means poverty.

So, that selling off the family silver in order to fund current meals is contraindicated for the long term wealth of the nation. Spending upon local councils, schools, the NHS, is current spending. It is not investment. Thus taxing wealth to fund those things - converting capital into current spending - makes the country poorer in the future. This is despite how so many call councils, schools, the NHS, “investment”. That’s just because those same people have grasped that “investment” is thought of as a good thing therefore they describe whatever spending they want to persuade us of as investment.

The conversion of wealth into current spending makes the future poorer. So, let’s not do that, eh?

Tim Worstall