An image of an iceberg house with enormous underground facilities.


We have written extensively about the extent and consequences of wealth inequality. For example this article, Why We Can’t Afford to Ignore Wealth Inequality, explained that wealth inequality is much greater, much less justifiable and much more damaging to society than we usually realise.

In his monumental book, Capital in the Twenty-First Century, Thomas Piketty pointed out that since the rate of return that investors can expect on their capital is greater than the rate of growth of the economy, if we do nothing about it, wealth inequality will tend to grow even further over time. And many others have made similar points.

But there are counter-arguments that suggest that to try to tackle these problems would be worse than useless. Are they right?

Although there are indeed many arguments given for not taxing the wealthy, none that we have seen are supported by the evidence. The arguments fall into three main camps:

  • Some argue that it would be immoral to tax the wealthiest more;
  • Some argue that it would be counter-productive to try;
  • Some argue that it would give no benefit to society.

Would it be immoral to tax the wealthy?

Some make an argument that the rich already pay more than their fair share of taxes. And of course on a £ per-person basis the rich do pay more than the poor. But as a percentage of their total economic income, including what for the very wealthy tends to be the vast bulk of their income, unrealised capital gains, the richest pay very little.

It was widely reported, for example, that Sunak pays 22% tax on his income, around half of what most people pay – but that does ignore his unrealised capital gains. Once those are taken into account, it is likely that in a normal year, he pays less than 1% on his total economic income. That means he pays around one fortieth of the rate a normal working person pays. And that is neither illegal nor unusual for the very wealthy.

There is no credible argument that the very wealthy are paying more than their fair share. Or even close to their fair share.

Would it be counter-productive to target the wealthy?

The claim we hear most often is that taxing the rich would damage the economy, and in the long run, everyone would suffer. Here, for example, is Trump’s economic adviser Peter Ferrara:

“Put most simply, penalizing investors, successful entrepreneurs, and job creators with higher taxes, to reward the less productive with government handouts, to make everyone more equal, is a sure-fire way to get less productivity, fewer jobs, lower wages, and reduced economic growth.”

If he were right, if there really were a sure-fire link between high taxes and low growth, it would be very clear in the data. But here is the history of US taxation and US economic growth.

A graph showing that higher growth happened in years with higher top rates of tax

The two periods of highest growth were 1936 to 1940 and 1941 to 1945, the wartime period during which the economy was actively managed by government and the top rate of tax was over 80%.  The 1960s and 1970s look particularly good in terms of per capita GDP growth with tax rates around 70%.  Since then, with lower tax rates, the growth has been relatively anaemic.

In other words, the data show no evidence whatsoever of any trade-off between the top rate of tax and medium-term growth; in fact quite the opposite: there is a slight tendency for higher growth in years where the top tax rate is higher.

If anything, the evidence suggests that tax cuts hurt the economy – because they prevent the government from investing in the future and helping those who need it most.

Would it do any good to tax the wealthy?

The most frequent claims here are:

  • It would not raise additional revenue;
  • It would not enable additional government spending.

Let’s first consider the revenue point. The American supply-side economist Arthur Laffer popularised the so-called Laffer curve, which suggested that tax revenues would be zero at tax rates of 0% (because no tax would be due) or 100% (because no one would bother to earn if their earnings were to be taxed away) and that they would rise and then fall again between these two points. Laffer also hypothesised argued that the US (and many other countries) were far to the right of the maximum point and therefore that tax cuts would raise more revenue and, conversely, higher taxes would raise less.

Most economists were not persuaded: as John Quiggin put it,

“Unfortunately, as the old saying has it, Laffer’s analysis contained a mixture of correctness and originality. The Laffer curve was correct but unoriginal. The Laffer hypothesis was original but incorrect.”

Wikipedia concurs, citing The New Palgrave Dictionary of Economics as saying that estimates of revenue-maximizing income tax rates have varied widely, with a mid-range of around 70% – far above today’s rates.

A more subtle argument is that, while it might be possible to raise revenue, the additional revenue would not enable additional government spending because the rich spend less than the poor, so taxing them would not reduce their consumption, would not free up real resources and would not enable additional government spending.

This also does not withstand scrutiny: the rich do spend less in percentage terms than the poor, because they save more. But on a £ per person basis, they spend vastly more. If we look at energy consumption as an example, the top 1% consume around 16% of the total.

F Scott Fitzgerald wrote in his short story, The Rich Boy,

“Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are.”

One important way the very rich are different from you and me is in their attitudes to capital and consumption.

If you are poor, you have to prioritise consumption over capital, because you need to spend what you earn to live and to feed your family. If your income reduces, you may simply not be able to reduce your expenditure by the same amount: you may have to stop saving or even go into debt.

In contrast, many very wealthy people prioritise capital over consumption. It is common for the wealthy to identify with their wealth in a way normal people do not (you hear people say, “I am a billionaire”; I have never heard anyone say anything like “I am a £300k-er” even though people with a net worth of £300k or under vastly outnumber billionaires).

So how much can the very rich spend without eating into their capital and eroding their sense of self-worth? A widely used rule-of-thumb is that spending 4% or less each year will protect your capital against inflation and market fluctuations. So if you are a billionaire, you could plan to spend £40 million this year and still expect to have as much in real terms as you started the year with. What would happen if the government instituted a 1% wealth tax? Well, your capital would need to be protected against that as well, so instead of spending 4%, you could spend 3%. That would reduce your spending from £40 million to £30 million: a 25 % reduction.

And that would free up real resources: the energy consumption of the wealthiest might reduce from 16% of the total to 12%. They might not turn their London houses into icebergs – just one fewer iceberg could free up around £10 million of construction resources for other purposes. And, of course, there are many other examples.

If billionaires seek to preserve their capital, a 1% tax would raise government revenue by £10m for every £billion of wealth subject to the tax and reduce consumption by the same amount. This means that government could spend the extra revenue without fearing that it would be extra total spending – and therefore inflationary.


There are many creative arguments for not tackling the problems caused by excessive wealth inequality – but none of them stand up to scrutiny.

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