My colleague Pecksniff recently asked the question: ‘Why, in one of the ten richest countries in the world, do we feel so poor. Where did the money go?’. The answer is easy: it went to the rich. But that is only the beginning of the issue. How did it happen, and what do we want to do about it?
What’s wrong with inequality?
Inequality is bad for a society, and bad for individuals. In their 2009 book ‘The Spirit Level’ Wilkinson & Pickett showed that on a host of measures of a good society, more equal societies were better, not only for the poor but also for the rich.
Wealth matters more than income
Some people earn very large sums, and many earn very little. So, people who seek greater equality often argue for much higher levels of income taxes for the rich. But those inequalities are dwarfed by inequality in wealth. And that has been growing much faster in recent years. In 1997, private wealth in the UK was equivalent to four times GDP. In 2024 it was six times. Almost all of that was a result, not of growing economic activity, but of rising asset prices, including houses. So the gap between those who already had wealth and those without has grown steadily. And the top 10% of people now own 57% of all wealth in the UK.
But the economy – and our collective wellbeing – grows, not through asset prices, but through work. Working creates things and provides services, making us all better off. By contrast, nothing concrete is changed when I just continue to own a house. However, we tax work (through income tax) much more heavily than wealth, much of which is not taxed at all. And revenue from wealth-related taxes is only 3.4% of GDP. This is bizarre if we want a more productive economy. We penalise people for working, but not for sitting on assets.
And inherited wealth is the primary driver of inequality. The economist Thomas Picketty has shown that over time, the returns to wealth are larger than the returns to work, and that concentration of wealth is higher now than at any time since its last peak in 1914. More recently, Morris Pearl of the lobbying group Patriotic Millionaires argued that among 400 billionaires, all but three had relatively rich parents who provided the foundation for their careers. Some, like Donald Trump inherited vast sums, but even the more modest like Mark Zuckerberg depended hugely on prosperous parents to start their careers.
Why not tax wealth?
So, the idea of a wealth tax is attractive, especially when a government, desperate for money to pay for public services, appears to be trying to balance the books on the backs of the poor and disabled.
In the abstract, wealth taxes are appealing, either as an annual tax on wealth above a threshold, or a one off windfall type tax. There are estimated to be around 25,000 people in the UK with assets over £10mn. With a 2% one-off tax, each would pay at least £200,000, and some would pay a lot more. And since rich people on the whole get a better return than average on their capital, they would probably still be better off afterwards.
However, countries which have tried wealth taxes have never succeeded in raising significant sums. Currently only three European countries tax all of a taxpayers’ wealth, and none raise more than 2% of total tax revenue. There are a number of reasons for this lack of success. They include:
Valuation. Wealth is held in a variety of forms, including houses and land, equities, government bonds, artworks and more esoteric forms like gold or yachts. To avoid owners simply switching assets to avoid tax, it must be applied to all these. But, while some assets are easy to identify and have a known public value, others would require expensive investigation. Valuation is possible – it is regularly done in the divorce courts – but there would be large administrative costs.
Productive assets. Much of the wealth of rich people is held in ‘productive assets’, like businesses and farms, which are contributing to the economy. These are already subject to Corporation Tax. If the owner has to sell some of the asset to pay tax, the result could be reduced economic activity: the opposite of the government’s intentions. This is the problem behind farmers’ protests about inheritance tax.
Taxpayer flight. Opponents of wealth taxes claim that rich people would avoid the tax by moving abroad. If that happened, the state would lose the substantial income tax which they currently pay. Supporters of wealth taxes suggest this will be rare, but it might happen with the very rich, who already pay a large share of income and other taxes.
Intrusion. To establish who is liable would involve investigation, including investigation of people whose assets ultimately prove to be below the threshold. This would be administratively expensive, and create a lot of public anger.
Ability to pay. Some people would only be able to pay by selling assets, some of which might be difficult to dispose of quickly. So, some arrangement would be needed to allow deferral of tax, which would add to the administrative costs.
Exemptions. There would be demands to exempt some assets, including primary residences. Since around a third of private wealth is held in houses, that might significantly reduce the number of taxpayers.
Alternatives
But there are alternative ways of taxing wealth. Professor Richard Murphy has calculated a variety of options, most of which he believes could be implemented quickly and without legislation.
- Equalising the taxation of capital gains with income tax would raise £12bn pa
- Restricting tax relief on pension contributions. At present people pay no tax on money put into a pension, which benefits higher rate taxpayers more than basic rate ones. Limiting tax relief to the basic rate of income tax would raise £14.5bn pa
- Charging VAT on the supply of financial services, which are used by the richest, and relatively easy to identify, could raise £8.7bn of extra tax pa.
- Charging an investment income surcharge of 15% on income earned from interest, dividends, rents and other sources, could raise £18bn pa (assuming no such charge on the first £5,000 of such income a year, and a higher allowance for pensioners).
Council Tax is the nearest we have to a wealth tax, and some advocates suggest adding new higher rate bands which would increase the charge on the richest. Because Council Tax valuations have not been revised since 1991, there are huge variations across the country, with a Band D taxpayer in Great Yarmouth paying four times as much as one in Westminster. But after the Poll Tax riots of 1990, politicians have been afraid to undertake the revaluation or more radical change. Winners might be quietly pleased, but losers would complain loudly.
Conclusion
There is widespread support for higher taxation of wealth, and there are good arguments for it on grounds of equity as well as funding of public services. But it is not clear that a general wealth tax would raise significant sums, or that it would be popular in practice. There are simpler, quicker and cheaper ways of reducing inequality in wealth, and raising the money the Chancellor needs for our public services. Campaigners should probably focus on those.
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