Taxing wealth will change behaviour
Of course, this should be obvious even as all too many are ignoring the point. Change taxation and you’ll change peoples’ behaviour. Yea, even about wealth, high incomes, investing and so on. It simply is not true that people will carry on investing if the taxation of having invested changes.
We can even prove this:
The problems are well known by now and are identified by the CBI: capital flight to the dominant US markets; the decline in the proportion of UK equities held by UK insurance and pension funds from 45.7% in 1997 to just 4.2% in 2022;
So, err, what caused that problem then?
A decade later it was a Labour Chancellor’s turn to mess up. Gordon Brown’s infamous raid on the UK’s pension funds seemed innocuous. He raised £5bn a year by abolishing the dividend tax credit that pension funds enjoyed at the time, slipping the measure through in his first Budget in 1997 with barely a murmur of dissent. But it was not just that pensioners lost the benefit of a 20p in the pound top up to their dividend income. The cumulative loss of the growth in funds that would have accrued from the reinvestment of those credits may have cost pensioners £250bn over the following 20 years. Worse still, the reduced incentive for UK pension funds to invest in British companies means that they and other institutional investors now own just 4% of UK-quoted shares compared with half of them in 1997.
So, err, changing the taxation of the income from investment changed how and where investment happened?
Gordon Brown was warned by officials that he risked long term damage to Britain's occupational pensions industry when he pressed ahead with a £5bn a year cut in tax relief in his first budget.
Official Treasury documents released last night under the Freedom of Information Act show that officials told the chancellor his decision to cut a long-standing tax break to pension funds in his first budget in 1997 would place an added burden on employers and could hasten the demise of final salary scheme pensions.
Gosh.
But pension funds have been claiming that the loss of their tax relief on dividends could affect millions of people. A spokesman for the former BR companies pension funds, Peter Murray, said people will have to pay more into their pension plans. "The real companies and indeed the employees in the railway industry will have to increase their contributions to the pension schemes," he said. "So that will add to the cost of railway companies and that, inevitably, will have an effect on prices and on investment." But the Chancellor has insisted that no pension contributor need suffer as a result of his multi-billion pound raid on pension fund dividend tax-credits. At a Treasury briefing, Gordon Brown said his decision to cut credit on dividend payments to pension funds was "removing a bias against investment which has been built into the tax system".
Blimey, eh?
And so to today.
A wealth tax would punish savers and hit the middle class, the Government has been warned by the Institute for Fiscal Studies (IFS). Introducing a levy on the assets of the rich would not be “sensible”, the IFS said, in a rebuff to Labour backbenchers. Taxing the same wealth each year would “penalise” people for saving and making investments, leaving the country poorer in the long run. It would also likely hit the middle classes once property and pension wealth are factored in, the think tank warned. “It is difficult to make the case that an annual tax on wealth would be a sensible part of the tax system even in principle,” said Stuart Adam, a senior economist at IFS.
They’ll not listen because of course they won’t. That prospect of having more money to spend today will far overwhelm any warning of problems in the future. But is is still true - taxing either wealth itself or the returns from wealth will change investment behaviour. Not for the better either. Which is a problem for it is investment now which creates that richer future of tomorrow.
Tim Worstall