The Institute for Fiscal Studies (IFS) has cautioned that an annual wealth tax would introduce "complexity, distortions and unfairness," urging policymakers to carefully weigh the trade-offs involved in tackling various forms of inequality. The IFS's Deaton Review, a six-year research project, found that an annual levy on wealth would have "serious drawbacks" and create problems across policymaking.
Key Findings from the Deaton Review
Researchers at the non-partisan think tank warned that politicians need to better define the specific inequalities they aim to address before implementing radical policies. The report highlights that factors influencing wealth inequalities, such as age, inheritance, and savings, are difficult for officials to fully understand. Valuing wealth itself would be a "huge undertaking" for the government, the report noted.
"Wherever the boundary was drawn between what did and did not constitute taxable wealth, any feasible annual wealth tax would inevitably create complexity, distortions, and unfairness around the boundary," the report states. "These problems would be especially acute at the very top of the distribution, where wealth is less likely to take the form of arm's-length assets that can readily be identified and valued."
Political Context
The new report serves as a fresh warning for thinkers across the soft-left flank of British politics. Last year's Budget was mired by wealth tax speculation amid widespread calls from Green Party campaigners and Labour MPs for a new levy. Green Party leader Zack Polanski claimed before last year that a wealth tax of 1% on assets over £10 million could raise tens of billions of pounds annually. He recently added that he would make the policy a "day one" priority.
Labour MPs including Clive Lewis and Bell Ribeiro-Addy separately wrote to Chancellor Rachel Reeves to introduce an "extreme wealth" tax in the Budget.
One-Off Wealth Tax Also Problematic
While a one-off levy would "in principle be an economically efficient way to raise revenue," the IFS warned it could prompt households and businesses to change behavior and undermine other streams of tax receipts. The think tank cautioned that savers would be penalized by a wealth tax, while existing taxes on capital income, pensions, profits, and inheritance are already "deeply flawed."
The IFS added that a broad-based tax on land would have "practical advantages" compared to a wealth tax.
Expert Advice
Helen Miller, director of the IFS, advised policymakers to focus on specific forms of inequality, whether in income, opportunity, or health. "Progress starts with being clear-sighted about the nature of inequalities, the range of policy options – which extend far beyond the tax and benefit system – and the inevitable trade-offs that policymakers will face," she said.
