Why Scotland will be all the poorer if the SNP brings in a wealth tax
More than a dozen European countries that once had wealth taxes abolished them because of their negative effects
As we approach the Scottish Parliament election, the fog of war is dissipating and the battle lines are becoming clearer. The SNP and Greens are both on the side of introducing a wealth tax; it’s Green Party policy and the SNP conference voted in favour last October.
Now our SNP government has commissioned Ipsos-Mori at a cost of £40,000 of taxpayers’ money to produce a report summarising what a wealth tax might look like and what it might achieve. John Swinney clearly believes his Scottish Government is awash with money to burn. He doesn’t need a report, I can tell him for free, it would be a very bad idea.
Wealth taxes are not new; they are tried occasionally by avaricious governments around the world but inevitably raise less revenue than anticipated and are eventually repealed.
The reason is straightforward, having worked hard and bought assets or made investments from income that is already taxed, people resent being taxed again simply for having that “wealth”. They change their behaviour to avoid the tax liability including moving to a different country where the liability is lower or, more likely, does not exist.
More than a dozen European countries used to have wealth taxes but abolished them, including Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands and Sweden.
France introduced a wealth tax in 1988 but eventually repealed it in 2017 after it was accepted it was causing serious harm to the economy and France’s public finances. It was estimated to be costing France seven billion euros annually in lost revenues, roughly double what it raised.
The capital flight from France over the 29-year period was huge; in 2015 alone, over 10,000 millionaires left France of which some 7,000 were from Paris. Economic growth was reduced by 0.2 per cent per annum and the tax burden had to be picked up by other remaining taxpayers.
Scotland does not have as many millionaires as Paris, let alone France, but we could expect Scots millionaires to behave the same and simply move south or leave the UK altogether.
Sweden had a wealth tax for even longer – nearly 100 years – but it was abolished in 2007 with virtually no impact on public finances from losing the small revenue it raised. It was estimated to have cost 1,500 billion Swedish kroner in lost tax revenues.
Austria abandoned its wealth tax in 1993 due to its high administrative costs and the economic burden on enterprises. Likewise, Finland scrapped its wealth tax in 2006, motivated by the negative effect it was having on enterprises – a problem low-growth Scotland cannot afford to suffer.
Germany scrapped its wealth tax in 1996 with very little impact on public finances because it raised only 0.8 per cent of total tax revenues. German economists who considered its re-introduction found it would reduce economic growth by 0.33 per cent, investment by 10 per cent, employment by 2 per cent and tax revenue by €31bn. Countries beyond Europe have also scrapped their wealth taxes, including India in 2015.
The SNP might learn from Labour’s past experience. It had included the introduction of an annual wealth tax on the rich in its 1974 manifesto but abandoned the plan. It was going to include major transfers of personal wealth, heavily tax speculation in property and include a new tax on property companies.
The then Chancellor Denis Healey later commented he had tried but eventually gave up because “in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and the political hassle”.
Chancellor Rachel Reeves was lobbied to bring in a wealth tax but resisted the demands from Labour’s left, arguing it would be counter to her strategy of supporting economic growth. Rachel is brighter than John. Wealth taxes lower capital stock by encouraging capital flight, impacting on new investment vital to generate economic activity. This in turn leads to low wage growth and further depresses tax revenues.
The impact of a wealth tax peculiar to Scotland within the UK is not difficult to predict. Already there are some 40,000 Scots who leave the country every year to go to other parts of the UK or overseas, which reduces tax revenues and contributes to skill shortages.
The answer offered by some is to demand greater immigration into Scotland. With no shame, this demand is often made by the same people advocating higher taxes, including a wealth tax. Surely the better approach would be to encourage more Scots to stay in Scotland and contribute to the tax revenues by building businesses and growing the economy?
What Holyrood has to do is recognise there is nothing virtuous or progressive in having higher taxes than the rest of the UK. It is undermining the economy, it is making the public finances precarious and our public services are failing, while fewer jobs are being created and incomes are lower.
The answer is to reboot our private sector economy by making Scotland the most attractive tax location in Britain. That means reducing our business and personal tax rates to attract entrepreneurs back and encourage those already toiling to stay. We need to stop losing talent and start encouraging economic growth.
The wealth tax advocated by the SNP and Greens would turn Scotland into an economic wasteland reliant on a public sector unable to raise the revenues to maintain high-quality services. It would be the antithesis of a successful Scotland and encourage the ‘McBrain Drain’ to grow faster and become larger.
In contrast, Malcolm Offord’s Reform UK is proposing to cut Scottish taxes to be the lowest in the UK. Can Scotland afford another term of the SNP?
Brian Monteith is a former member of the Scottish and European parliaments and editor of ThinkScotland.org
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