A wealth tax is technically feasible, but current proposals miss the mark
By Rae Deer
Earlier this year, the Institute for Fiscal Studies (IFS) published a report arguing that a wealth tax would be “difficult to design and counterproductive,” citing familiar concerns about capital flight – wealthy individuals simply “moving overseas.” While some of the IFS’s criticisms were valid, the report also contained its share of exaggeration. Yes, a wealth tax would require careful design and robust enforcement, demanding tighter financial regulations and stricter compliance measures. The IFS also raised legitimate concerns about addressing the root causes of wealth inequality, specifically, the income streams that enable wealth accumulation – rather than attempting redistribution after income has already been converted into harder-to-tax assets.
This article examines how a wealth tax might function in practice, using a simplified hypothetical example, and explores the regulatory framework necessary for enforcement. It then addresses the shortcomings of current wealth tax proposals and argues for a broader package of policy reforms targeting the fundamental drivers of growing inequality.
Part 1: Would a Wealth Tax Work? The Technical Questions
Before examining enforcement practicalities, we must first understand what a wealth tax aims to achieve. The central challenge in taxing wealth is that it typically exists as unrealised capital gains i.e. an asset has increased in value, but the owner has not sold it, meaning no income has been generated and no tax liability has arisen. A wealth tax overcomes this hurdle by shifting the tax base from income to the value of assets themselves.
Given the increasingly unequal distribution of asset wealth over recent decades, combined with fiscal pressures from demographic aging and shrinking workforces, a wealth tax could theoretically help alleviate the growing strain on healthcare and pension systems. The Office for Budget Responsibility (OBR) estimates that government healthcare spending will nearly double to approximately 14 per cent of GDP by 2067. However, modelling by the Centre for the Analysis of Taxation claims that a two per cent tax on all wealth over £10 million would raise only around £25 billion annually – roughly 0.2 per cent of current UK GDP. This would barely dent the government’s long-term funding gap, nor would it meaningfully slow wealth accumulation among the ultra-rich compared to wage earners with minimal asset holdings.
To illustrate, consider a straightforward investment portfolio consisting solely of an S&P 500 index fund (tracking the 500 largest US-listed companies). In 2025, the S&P 500 delivered a 17.5 per cent return to shareholders – the third consecutive year of double-digit returns. Most of this (around 16 per cent) came from capital appreciation, which is only taxable upon sale of the underlying shares. Just 1.5 per cent came from dividends, which would be treated as taxable income for UK shareholders at rates of 10.75 per cent (basic rate), 35.75 per cent (higher rate), or 39.35 per cent (additional rate), subject to relief under Article 10 of the US-UK double tax treaty (DTT).
Under this treaty, the source state (the US) may impose withholding tax of up to 15 per cent on outbound dividends paid to UK-resident shareholders. In principle, UK shareholders can claim relief on their UK tax liability for foreign dividend income from US companies, equal to tax already paid at source.
The following hypothetical demonstrates the outcome of a two per cent wealth tax on assets exceeding £10 million:
A millionaire has a total net worth of £20 million, with £10 million in their primary residence and £10 million invested in an S&P 500 index fund. The fund yields 17.5 per cent for the tax year (16 per cent capital gain and 1.5 per cent dividends). Assuming no change in property value, the millionaire’s wealth increases by £1,750,000 in 2025, bringing their total to £21,750,000.
Of this increase, £150,000 comes from dividends, incurring UK income tax of £45,041. The US already withheld £22,500 (15 per cent) at source, reducing the UK liability to £22,541. Assuming no shares are sold, the wealth tax proposal would levy 2 per cent on assets exceeding £10 million – amounting to £232,000 on the remaining £11,600,000. Total tax paid: £277,041. The millionaire’s net wealth still increases by £1,472,959 – a 7.4 per cent gain.
The table below summarises the net wealth position after tax, based on the calculations from the example above:
In essence, the millionaire’s wealth grows far faster than the government can tax it away at 2 per cent. This raises doubts about the secondary justification for a wealth tax: curbing the purchasing power of the ultra-wealthy. Using 2025 data, where inflation averaged 3.8 per cent and real wages grew by just 1.1 per cent , our asset-owning millionaire’s purchasing power still significantly outpaces that of the average wage earner – even after the wealth tax.
At this point, critics might object: “But the millionaire’s purchasing power hasn’t actually increased – her wealth remains tied up in assets she can’t spend! And if she hasn’t sold her S&P 500 shares, how can she pay a £232,000 wealth tax liability on just £104,959 in post-tax dividend income?” This brings us to the technical difficulties highlighted by the IFS. How should the tax be implemented? Should the millionaire be forced to sell assets? If so, capital gains tax would apply to the portion sold, requiring offset calculations.
For simplicity, assume our millionaire purchased her S&P 500 shares just one year earlier, realising a 16 per cent total return in capital gains for the tax year. Suppose she sells £300,000 of her portfolio to cover the wealth tax, of which £48,000 (16 per cent) represents capital gain. The latter portion would be subject to capital gains tax of approximately £10,800 (less any withholding tax paid at source in the US). After the capital gains tax, she has £289,200 left over to pay the £232,000 wealth tax liability. However, since tax has already been paid on the liquidated capital gains, this should be deducted from the wealth tax liability, reducing it to £221,200. After selling assets to cover the tax, she still retains substantial investment in the S&P 500 to generate passive income and future returns.
This simplified example illustrates how a wealth tax could create complex tax scenarios – but scenarios that are technically feasible nonetheless. Our hypothetical millionaire wouldn’t navigate this alone; like most wealthy individuals, she would employ tax advisors to ensure compliance and avoid penalties. So, a wealth tax is possible; it would be complex, but so are all taxes. Consider the OECD’s transfer pricing guidelines, which govern the tax rules applying to multinational corporations operating across multiple jurisdictions with competing fiscal claims. HMRC’s specialist staff handle such cases daily, generating an additional £16 billion in compliance yield from large businesses in 2025 alone. Similar dedicated resources could be deployed for wealth tax enforcement.
The real problem with a wealth tax isn’t complexity – its inadequacy. A two per cent tax barely dents the torrent of unrealised capital gains that have flowed to wealthy shareholders over recent decades. But before addressing the deeper causes of wealth inequality, we must examine the issue of capital flight and how it might be contained.
Part 2: Fight or Flight? Enforcing a Wealth Tax in the UK
Understanding the global challenge of high capital mobility requires a brief history of two pervasive but nebulous concepts: globalisation and financialisation. In 1998, the OECD published a report, “Harmful Tax Competition: An Emerging Global Issue,” recognising the damaging effect of tax competition on national tax bases. The exploitation of double tax treaties (DTTs) accelerated significantly after the collapse of the Bretton Woods system of fixed exchange rates in the early 1970s. The end of fixed rates coincided with the dismantling of widespread capital controls, as many countries adopted floating exchange rate mechanisms, resulting in the substantial proliferation of cross-border capital flows. Concurrent technological advances in logistics (container shipping) and telecommunications enabled large businesses to expand production and sales globally on an unprecedented scale.
Globalisation – characterised by the rise of global production networks coordinated by multinational enterprises – coincided with increased use of ‘offshore’ financial networks. Complex corporate structures typically employed conduit companies, resident in low-tax jurisdictions with extensive DTT networks to exploit exemptions and reliefs on tax liabilities. The outsourcing of labour and industry intensive activities by MNEs, to firms in developing and emerging economies, coincided with a shift towards financial and speculative activities in the capitalist core. What followed was an exponential increase in the levels of private and government debt, fuelling speculative bubbles in asset markets.
After the 2008 financial crisis, public anger over bank bailouts and austerity intensified political pressure to address tax evasion and avoidance. In the US, President Obama introduced the Foreign Accounts Tax Compliance Act (FATCA) in 2010, enabling US authorities to demand that overseas banks share information on US citizens. Leveraging its control over international payment systems (SWIFT), the US could penalise non-compliant non-resident banks with a 30 per cent withholding tax on transactions. FATCA spurred similar developments in Europe, with the EU introducing its Directive on Administrative Cooperation (DAC) a year later.
While DAC couldn’t penalise non-cooperative institutions as FATCA did, it bound EU member states to automatic information exchange and required domestic financial institutions to collect customer data. DAC effectively extended beyond the EU through the OECD’s Automatic Exchange of Information (AEOI) in 2014, which included the Common Reporting Standard (CRS). AEOI and CRS obliged member states to ensure financial institutions collected due diligence information and reported relevant data (e.g., interest or dividends received) to domestic tax authorities.
These advances in international tax cooperation were complemented by tighter anti-money laundering controls led by the Financial Action Task Force (FATF). Financial institutions and regulated businesses were required to collect customer due diligence and report knowledge or suspicion of money laundering (including tax evasion) to domestic law enforcement. For example, in the UK, banks and money transmitters must submit ‘defence against money laundering’ requests (under s338 of the Proceeds of Crime Act) before processing suspicious transactions. Failure to report can result in fines, licence revocation, and even imprisonment for responsible staff.
In principle, these updated legal frameworks, combined with judicious capital controls, should enable wealth tax enforcement. A millionaire attempting to hide income or assets offshore to evade a wealth tax would commit a criminal offence; the financial institutions, lawyers, or accountants processing the transaction would be legally obliged to report them to their domestic Financial Intelligence Unit or face criminal charges. Even if funds were moved to accounts or companies in other countries, information exchange networks give tax authorities improved tools to identify hidden wealth or income. Similarly, updates to the OECD’s model DTT have tightened residence rules under Article 4, testing a person’s ‘centre of vital economic interests.’ Owning a property or P.O. A box in a tax haven is no longer sufficient to claim residence – if one’s home, business, and family remain in the UK, that’s where the tax liability lies.
The main weakness in this enforcement framework is the relatively small penalties levied against non-compliant banks for failures of anti-money laundering compliance – often little more than a cost of doing business. For instance, UBS was fined just $20 million by US authorities in 2026 (around 0.25 per cent of its £7.8 billion FY25 profit) for failures to report over $10 billion in potentially suspicious transactions. Until regulators impose substantially larger fines, large financial institutions will continue treating AML compliance failures as manageable business expenses.
Even if these gaps are closed and wealth taxes are properly enforced, such measures won’t address the underlying causes of growing wealth inequality. Ultimately, wealth taxes are little more than a sticking plaster over structural reforms originating in the late twentieth century that have enabled a systematic transfer of wealth from wage earners to asset owners.
Part 3: Addressing the Cause, Not the Symptom
To address the underlying cause of wealth inequality, we need to ask the question: where do rich people get their wealth from? As alluded to in the first section, wealth primarily comes from owning property like stocks and shares. Shares generate wealth in two ways: 1) dividends: paid to shareholders after tax on profits; 2) capital appreciation: where share prices increase. As the S&P 500 example illustrates, the latter has become increasingly significant in recent decades, as firms have been permitted to engage in share buybacks to artificially inflate their share prices. This creates major taxation challenges because capital gains can’t be taxed until shares are sold – only then do they generate income for the shareholder beyond dividends. Even so, the wealthy can benefit from asset appreciation by leveraging their holdings to borrow money cheaply. Borrowed money isn’t income for tax purposes, and the interest can even be deducted from tax liabilities in some jurisdictions. Rather than selling shares to repay loans, the ultra-wealthy can simply keep borrowing and rolling over debt indefinitely – enjoying their wealth without generating taxable income in their state of residence.
Before the Thatcher and Regan reforms of the late 20th century, share buybacks were illegal – perceived as a form of market manipulation that distorted economic signals. The shift toward ‘maximising shareholder value’ from the 1980s onward, alongside broader financial deregulation, was designed to resolve the ‘principal-agent problem’ by tying CEO remuneration to share price, ostensibly making corporate leaders more accountable to shareholders. In practice, these neoliberal reforms have fuelled speculative asset bubbles into the twenty-first century. Alongside deindustrialisation and labour outsourcing to developing countries, the financialisation of large non-financial corporations is a major part of the wider inequality story. Ending share buybacks should therefore be integral to any policy platform aimed at preventing further wealth concentration.
Another critical issue is the growing power of shadow banks and asset managers, who exploited low interest rates after the 2008 financial crisis to leverage debt and purchase stocks and shares, further inflating asset bubbles. Asset managers now control vast swathes of global stock markets with minimal regulatory oversight. These financial giants need to be reined in to ensure their investment activities align with productive national industrial strategies, not stock market speculation.
Ending share buybacks and reducing large non-financial corporations’ access to market finance would slow asset price inflation, reducing the relative wealth of asset holders compared to wage earners. This would simultaneously encourage firms to prioritise fixed capital investment to boost productivity, revenues, and profits – enabling shareholders to be remunerated through (taxable) dividends rather than (unrealised) capital gains.
4. Conclusion
A wealth tax is technically feasible, but it falls far short of addressing the fiscal challenges facing states in the near future. This raises serious questions for the Left about whether too much political capital is being spent on campaigns for a wealth tax when lower-hanging fruit is available – both in terms of revenue raising and addressing the underlying causes of wealth inequality. For instance, similar revenues could be raised by simply increasing corporation tax from 25 to 30 per cent, aligning with many other OECD nations, whilst remaining well below historic levels.
Ending share buybacks requires international cooperation – especially from the US, which is home to the world’s most advanced financial markets and a global safe haven for wealthy elites. Preventing large listed firms from buying back their own shares not only curtails their ability to inflate share prices but forces them to remunerate shareholders through more easily taxable dividends. It would also encourage firms to invest in tangible fixed capital. To attract investors with good dividends, firms would need to invest in productive fixed capital and innovations to increase revenues and profits, rather than relying on market manipulation of share prices through buy-backs. Increases in fixed capital formation would have the added benefit of helping to address the fiscal challenges of demographic aging, by enhancing overall productivity in the economy as the active workforce shrinks and inactive workforce grows through retirement. Put simply, reversing growing wealth inequality, and meeting the fiscal demands of the future, requires nothing less than reindustrialisation and the ‘de-financialisation’ of our economies. A wealth tax may play a small role in that strategy, but it is not a panacea or a solution to the broader structural issues that need to be addressed.