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Wealthy peopleVAT AIMCGTAIM VAT VAT CGTCGT CGTYour browser does not support the element. have distinctive hobbies. One of them is talking, often noisily, about moving abroad to escape high taxes. In the run-up to the Labour government’s first budget, due on October 30th, rich Britons have some cause for concern. Rachel Reeves, the chancellor, has spoken of the need for higher taxes but also pledged no further levies on “working people”. Sir Keir Starmer, the prime minister, has said that “the broadest shoulders should bear the heavier burden”.A centre-left government proposing a slightly more progressive tax system should hardly come as a surprise. But might a too-zealous programme of soaking the rich backfire on a government that says it is committed to boosting the economy and to wealth creation?Labour trailed several policies aimed at squeezing more out of the better-off in its manifesto ahead of the election: putting on private-school fees, tightening the screws on non-domiciled (non-dom) taxpayers and raising the tax on private-equity performance fees. Potentially also on the chopping block are inheritance-tax exemptions on pensions, farmland and shares listed on the London Stock Exchange’s Alternative Investment Market (). Most consequentially, the government has also hinted that capital-gains tax () may go up.Some of these are sensible reforms. The “carried interest” provision which lets buy-out barons pay capital-gains tax rather than (usually higher) income tax on their firms’ investment profits is a loophole that should be closed. The main inheritance-tax exemptions are highly distortive—among other things they push up the price of farmland (perversely hurting farmers who are seeking to expand) and channel money into the underperforming market. Putting on private-school fees has class-war overtones but is also a tiptoe towards a of Britain’s many exemptions.The situation is messier for non-doms, people who are deemed not to be domiciled in Britain and who are not liable to pay tax on income generated abroad. Ms Reeves’s Tory predecessor, Jeremy Hunt, already abolished non-dom status in his final budget in March; from April 2025, wealthy foreigners will be taxed based on how long they have lived in Britain. The Office for Budget Responsibility, Britain’s fiscal watchdog, estimates this will raise around £3bn ($3.9bn) annually. Labour’s manifesto proposed to juice that amount by opening non-doms’ trusts up to inheritance tax, but some reports suggest the Treasury now questions whether, as now laid out, the policy would raise money at all. Plenty of non-doms would sooner leave Britain than face a 40% tax on estates often largely earned abroad. is the biggest potential revenue-raiser on the list. There are also solid economic reasons to question why capital income is taxed so much more generously than labour income (see chart 1). But simply jacking up the headline rate would be an error. A better approach would be to reform the tax base, marrying a higher rate with a generous allowance that excludes gains up to (and potentially above) the risk-free return on cash, removing exemptions for the selling of business assets and ending the regime whereby capital-gains on assets are reset to zero for inheritors when someone dies.Even then, Ms Reeves should be wary of pushing too far: pinning down taxpayers’ likely response is tough. Many will either have already sold assets ahead of the budget (there are rumblings in the property sector about a glut of second homes and buy-to-let units being put on the market) or will hold onto them in case future governments pull back down.All this raises a deeper question about what Ms Reeves’s goal for the budget is. There is a decent case for cleaning up a few exemptions that advantage the wealthy and for reforming . But these policies simply aren’t big enough to deliver the tens of billions that Ms Reeves needs to stop public services from deteriorating further, let alone mend them.Nor is it clear that, overall, Britain’s tax system is insufficiently progressive: half of income-tax revenue comes from the highest 5% of earners (see chart 2). Indeed, there are plenty of growth-blocking inefficiencies that penalise the rich. A truly productivity-obsessed budget would also eliminate stamp duty for shares (a distortive financial-transaction tax) and tidy up the bizarrely high marginal tax rates that hit those with children who have incomes in the low six figures.Predicting the movements of the wealthy and footloose is difficult. Sociologists at the London School of Economics recently interviewed several dozen of Britain’s one-percenters to suss out how tolerant they would be of tax rises. The bulk struggled to imagine themselves leaving. “I can’t see myself budging. I can see myself cursing and having to pay a lot of tax,” said one. Another despaired at the feeble cultural offerings in tax havens: “You think, well, I’d quite like to go and watch an opera, well, you can forget that, there’s not a theatre in the Bahamas.”But the allure of museums and opera can go only so far. A decent offering for the wealthy—and all Britons—has to start with a faster-growing economy. It would be an own goal if Ms Reeves were to jeopardise that with too punitive a tax raid. And irrespective of where the budget ends up, plenty of the rich have been spooked. As an exercise in communications, it has already done some damage.
