Accumulating wealth isn't the same thing as creating it

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‘Wealth’ is a strange thing. Most of us know whether we’ve got it or not, but that’s not the same as knowing what it is, or where it comes from. And that’s important when it comes to the question of taxing it, a question which has gained a lot of prominence recently. Partly because identifying what it is isn’t exactly a straightforward task, it’s far from easy to tax it; it is a great deal easier to tax income arising from it, as discussed in a previous post. There’s also a lot of confusion between being wealthy and creating wealth, as some of the reports suggesting that millionaires and wealth creators will leave the UK if they are taxed at a higher rate illustrate.

For most of us, our ‘wealth’ is almost entirely a result of home ownership: take away the ‘value’ of our homes and we have very little left. That property-based wealth certainly seems to be growing, but who is actually ‘creating’ that extra wealth? It’s not home owners – they do nothing except buy a house and watch the monetary value increase over time. Another form in which much of the UK’s private ‘wealth’ is held is stocks and shares. But those who buy shares aren’t investing in the companies – the companies don’t see a penny of the value of share sales. Most business investment comes from commercial loans, not share issues. The value of those stocks and shares might increase over time, adding to the total stock of wealth, but who is ‘creating’ that extra wealth? It certainly isn’t the shareholders, yet they are the ones benefitting from that increase in value. Most of those who can be described as millionaires in the UK are actually wealth accumulators, not wealth creators.

It means that we need to examine rather more carefully the bleating of those who claim that taxes on wealth (or the income derived from wealth) will drive wealth creators to leave the country. Most of them aren’t even wealth creators in any meaningful sense in the first place. There’s also a question about the extent to which they can really take their wealth with them. They can certainly sell their homes and their shares and take the monetary value with them – but the assets won’t have moved. It’s obvious in the case of bricks and mortar that the homes will stay in the same place under new ownership, but so, in general terms, will the real assets underpinning share values. Even in the case of a successful business built up by a successful entrepreneur (which might be a genuine case of wealth creation) who decides to emigrate and take his wealth with him, the way to realise the best value for his assets is to sell them to a new owner, not to destroy them. And the extent to which people can continue to own assets whilst domiciled elsewhere and avoid UK taxes in consequence is a matter of UK taxation policy, not an automatic result.

There are some good arguments against trying to assess and tax wealth. There are even some not-quite-so-good arguments against doing more to tax income arising from wealth. Fear that a few whingeing millionaires will emigrate just isn’t one of them.