A Labour government needs, as Harold Wilson once said, a crusade. Keir Starmer is fond of aligning himself with Clement Attlee, Wilson and Tony Blair—the first three Labour election winners, whom he now follows triumphantly as the fourth—on the grounds that each modernised the nation in their own way. There is a mission for his government in doing the same, and nowhere is the opportunity greater and the need more urgent than in taxation. The mission for 10 Labour years should be to begin a gradual shift of the UK’s tax base from income to wealth.
The wealthiest are enjoying a gilded age. This is the first era in history in which employees and asset-holders can become rich beyond the dreams of Croesus without taking serious entrepreneurial risk. The 19th-century effect described by Thomas Piketty in Capital in the Twenty-First Century—the rate of return on capital exceeding the rate of growth of output and income—is recurring. In January 2023, the richest 1 per cent of Britons held more wealth than the whole of the poorest 70 per cent.
Fuelled by three decades of house price inflation, the spell of quantitative easing, persistently low interest rates and a squeeze on wages lower down the income scale, wealth inequality is rising fast. The Resolution Foundation calculated that wealth has grown two and a half times faster than the British economy since 1980. Wealth-related taxes over that period have remained flat. Not that the wealthy are all that keen on paying their fair share. In a paper for the University of Warwick, Arun Advani, Helen Hughson and Andy Summers found that about a quarter of those with annual remuneration of at least £3m paid tax at a rate around 12 per cent.
The tax-avoidance industry is the organised desire of the wealthy to pay less than is owed. This is one of the ways in which private affluence has public effects. If the only consequences of extreme wealth were helicopter rides to Dubai, terrific wine cellars, the occasional Modigliani in the drawing room and a vast cinema in the cleared-out basement, the consequences might not spill out from behind the gated mansion walls. But in fact, they do.
The concentration of wealth is a social ill for three principal reasons.
First, the colossal accumulation of wealth impairs the stories we tell about modern Britain. The postwar political bargain was always a pledge that your children could succeed, by dint of their own hard work and talent, to a greater extent than you were able to do yourself. It was an implicit meritocratic contract and it held from the Attlee government to the Blair government. It holds no longer.
David Willetts, the president of the Resolution Foundation (and a member of Prospect’s editorial board), has pointed out that in the past 30 years, the valuation of private assets has increased from three times the country’s GDP to eight times the GDP. Inheritance matters more than it did, and what you earn matters less. This is a massive and detrimental change in the character of a society which likes to tell itself that it is dedicated to work and enterprise. When work and enterprise pay less than gifts, when individual endeavour and ingenuity are beaten by brute luck in the lottery of life, then any claim on meritocratic fairness falls.
Second, the UK is about to be hit by a tidal wave of inheritance. The death of the baby boomer generation will precipitate the largest transfer of wealth in history. The real value of inheritances is set to double over the next two decades. The Institute for Fiscal Studies (IFS) has calculated that those children born in the 1980s whose baby boomer parents are in the wealthiest fifth of the nation will receive 30 per cent of their lifetime incomes as inheritance. The inheritance for their counterparts born in the 1960s amounted to 17 per cent of their lifetime earnings. The children of poorer parents receive almost nothing. The inequality begets further inequality. This is not trickle-down economics. It is hand-me-down economics.
Rich societies are now beset by inequalities which are patently unjust
This inheritance effect was discovered by Miles Corak and given the name “the Gatsby curve” by Alan B Krueger, who chaired Barack Obama’s Council of Economic Advisers. The Gatsby curve plots how easy or difficult it is for the poor to become rich. Its central contention is that, unless you arrive in town already in possession of a large fortune, you will find it hard to get on in society. Money buys connections and connections yield more money. The philosopher John Rawls’s A Theory of Justice was a search for the definition of just inequalities. The Gatsby curve is a graphic demonstration that rich societies are now beset by inequalities which are patently unjust.
Third, the accumulation of vast wealth, especially in London, is ruining the housing market for the young. Forty years ago, it took the average couple three years to save for a deposit for a house. Today it will take almost ten years, and 18 years in London. That’s because asset prices have outstripped income growth for decades. Between 1970 and 2021, the price of an average home multiplied by 65 times. Average weekly wages multiplied by 36 times over the same period. The contract is broken and there is no solution that does not require bold action.
When Rachel Reeves, the chancellor of the Exchequer, stands to deliver her first budget on 30th October, she should say that her reforms have been inspired by the staple principles of British political rhetoric. This budget, she should say, is the harbinger of an approach that will last a decade and in which the Labour government will seek to tax merit, enterprise and work as lightly as possible. She should then go on to point out that, at present, we obey none of those principles.
Taxation in the UK follows the path of least resistance leading to the most revenue. Between 2023 and 2024, the government raised £1.1 trillion in receipts, 42 per cent of which was taken in income tax and National Insurance contributions. Value added tax, which is notoriously regressive, provided a further 16 per cent. British businesses contributed 9 per cent of the annual tax take, too great a share for what is, in effect, a levy on enterprise. Taxes on capital and property are, by comparison, conspicuous only by their absence. Council tax accounts for 4 per cent of receipts and all levies on capital between them account for 3.5 per cent.
British taxation is a philosophical shambles, but it would not be too difficult to clear it up. John Stuart Mill supplied the governing idea for taxation when he distinguished between earned and unearned income. In an image he used often in his work, Mill despaired of the idle rich and the wealth that “fall[s] into their mouths as they sleep”. The distinction between earned and unearned income informed HH Asquith’s 1907 budget and David Lloyd George’s 1909 budget. In 1907, Asquith increased the standard rate of the estates tax. In 1909, Lloyd George brought forward a tax of 20 per cent on any increase to the value of land, but a House of Lords packed full of landowners saw it off.
The distinction between earned and unearned income was barely heard of again until 1978, when James Meade reviewed the tax system for the IFS with an expert panel that included a young Mervyn King. The Meade report concluded that unearned wealth was a suitable target for taxation: “Capital produces an income which, unlike earning capacity, does not decline with age and is not gained at the expense of leisure.”
There is certainly public backing for action along these lines. A 2023 YouGov poll showed that three-quarters of people in the UK supported a wealth tax, not least because none of them are likely to be liable for it. But taxation is a practical affair, prey to the many distortions of individual behaviour. A tax has to work. The money has to flow and avoidance has to remain low.
There has always been a practical objection to a straightforward wealth tax. Not much is known, in detail, about the scale and extent of British wealth. The absence of reliable data is an impediment in itself. The Labour party committed to a wealth tax in 1974. The manifesto read, “We shall introduce an annual Wealth Tax on the rich; bring in a new tax on major transfers of personal wealth; heavily tax speculation in property”. The National Farmers’ Union, the City and the Bank of England all came out against it. A campaign in defence of the English country house attracted a million signatures.
Denis Healey reflected in his memoirs that: “You should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”
The design obstacles are serious. Spain recently introduced a tax on the very wealthiest which raised a derisory amount. Indeed, the range of countries levying a wealth tax has been declining. In 1995, 12 countries collected a form of wealth tax. Today, only five OECD countries do so: Colombia, France, Norway, Spain and Switzerland. But perhaps there is a feasible way forward in the recommendation of the 2020 Wealth Tax Commission, led by Arun Advani, who is also a fellow at the IFS. Precisely because data was so hard to come by, the commission proposed narrowing the focus of analysis to households with a net worth of £10m or more.
This single levy on the wealthiest households could provide the inaugural deposit for an institution that might, over time, transform the problem of excess inheritance: a British sovereign wealth fund. It is easy to assume that sovereign wealth funds are the preserve of less than democratic nations, with a dividend derived from the good fortune of natural resources. In fact, there are 70 such funds worldwide, including in Singapore, New Zealand, France and Ireland, as well as in 10 American states. Forty of the funds have been created since 2005. The UK should, of course, have invested the proceeds of North Sea oil—£166bn between 1980 and 1989—but, foolishly, successive Conservative governments gave the money away in tax cuts.
The pressing question is where, beyond a one-off levy, will we find the money to capitalise the fund? The organisation Global SWF has reported that half the capital in sovereign wealth funds comes from the sale of commodities and the other half comes from foreign exchange reserves, budget surpluses, the issuance of securities and proceeds from land sales and privatisations. In his excellent book The Inequality of Wealth, Liam Byrne goes through the options. We could solicit voluntary contributions. We could deposit the value of the public stake in the banks (£30bn). We could enlist the proceeds from the Crown Estate. We could fold in the money from dormant bank accounts. We could, as Singapore did, use our foreign currency reserves.
The purpose of the sovereign wealth fund is to bring to the public the benefit of superior investment returns, and to create a common wealth by granting every citizen a share in prosperity. Singapore puts the dividend into an individual savings account. We could instead provide a larger capital sum for every person when they get to the age of 25. Byrne estimates that a viable sovereign wealth fund needs £180bn in the bank. Some of the work is going to have to be done by wealth taxes, so what options do we have? There are three repositories of wealth that are each better sources of revenue than levies on income and work: property, inheritance and land.
Property, unlike income, is hard to hide and taxes on it are hard to evade. In a regime in which domestic residences attract no capital gains tax, property becomes a prime investment. That doesn’t mean that all property taxes make both political and economic sense. Making the domestic residence subject to capital gains taxation—treating it, for tax purposes, as the investment choice it is—would terrify any political strategist charged with winning the next general election. Stamp duty is a poor tax for the different reason that it provides an incentive for people not to move house when they might like to. The problem for the politicians is that stamp duty now raises £1.6bn a year, and abolition would probably lead to higher house prices.
But the UK’s property obsession ought not to go untaxed. If anywhere offers a windfall of unearned gains, it is the property market. The aggregate value of UK housing has risen by 75 per cent over the past decade, pushed by the play of supply and demand and the uplift of low interest rates, rather than by the genius of millions of domestic investment gurus. A tax on properties worth more than £1m would raise money and would also redress the imbalance between north and south. All of England from Birmingham northwards would contribute just 2 per cent of the revenue; 60 per cent of it would come from four London boroughs.
The quickest way to achieve this objective would not be a tax on property as such but a long overdue revaluation of council tax. Council tax is currently designed explicitly to ignore the growth in private wealth. It is also pegged to what a house was worth in 1991 or, bizarrely, what a new build would have been worth had it been built in 1991. The Starmer government needs to summon the courage to confront this absurdity. The poll tax casts a long shadow in British politics. But 1991 was many years ago, and there are too many indefensibly regressive anomalies in council tax to let it stand. The owner of a house worth £52,000 in Blackpool pays a higher council tax than the owner—let’s call him Charles—of a priceless palace on the edge of Belgravia. It would not be difficult to add a few extra layers to council tax bands to ensure that the top band does not end, as it does today, at £320,000.
Passing down the heirloom is often part of the incentive for acquiring it in the first place
Soon this giant stock of housing is going to be passed on. Everyone knows the line that Benjamin Franklin stole from Daniel Defoe, which in its original form, in The Political History of the Devil, reads, “Things as certain as death and taxes can be more firmly believed.” With inheritance tax, the two great fears come together. No tax is more disliked than inheritance tax, even though no more than 5 per cent of estates actually pay out. A regular, above-inflation lifting of the threshold, which started at £100 in 1914, means that inheritance is largely a phantom tax.
It is easy to understand the hostility. Loving parents think of the family as a single unit and children as extensions of themselves. Passing down the heirloom is often part of the incentive for acquiring it in the first place. This is the bond between the generations, the material expression of the human desire to leave a legacy. For this reason, some countries—India, New Zealand and Russia—permit their citizens to pass everything down.
There is weight to this argument, of course. But not so much as to dispose of the problem. When inheritance tax was introduced in 1894, the chancellor of the Exchequer, William Harcourt, reminded parliament that there is no natural right to inherit wealth. “Nature,” he said, “gives a man no power over his earthly goods beyond the term of his life.” If we believe genuinely in merit, in labour and in enterprise, as we purport to do, we must conclude that a gifted fortune answers to none of them. As a parent, I have earned the money. As a child, I have not. We are too generous with inheritance tax. The threshold for payment is too high and the rate of the levy too low. The bold reform—and, again, it is one a reforming chancellor should take on—would be to replace inheritance tax with a lifetime receipts tax. The levy should fall not on the person who has earned at least some of the money. It should fall on the person who has earned none of it.
The third option for capitalising the sovereign wealth fund is the boldest of all. Winston Churchill once pointed out that the landowner “has only to sit still and watch complacently his property multiplying in value… without either effort or contribution on his part”. John Stuart Mill made the same point. Land is, he wrote, “a monopoly, not by the act of man, but of nature”. Land therefore has a series of virtues as a source of revenue. It is static, unlike income or profit, which can both be moved and hidden. It is usually owned as the result of an inheritance, rather than an upshot of clever entrepreneurial work. It encourages development and it captures for the public purse a part of the benefits accruing to landowners from investments in infrastructure.
Land taxation could transform British fiscal policy. The 60m acres of land in the UK have a total value approaching £5 trillion. A tax of 1 per cent would raise £50bn for the sovereign wealth fund. Or it could be used to cut income tax by a third, or to eliminate corporation tax altogether. If we were brave enough to levy a tax on land at 2 per cent, we could abolish council tax, stamp duty and business rates, and leave money over to fix social care.
If a British government cannot respond to the trend towards wealth accumulation, its rhetoric on opportunity will be hollow. The Gatsby curve threatens the contract by which we have lived, and the consequences are baleful. The fluid melancholy of F Scott Fitzgerald’s prose leaves us with a metaphor for the unaccountable Gilded Age: a body prostrate in a swimming pool. The Labour party came into being to further the interests of the least well-off. That mission now demands that the burden of taxation moves from income to wealth. It will be best to proceed slowly, but to bring philosophical clarity and elementary justice to the British system of taxation is a mission worthy of Attlee, Wilson and Blair.
