Wealth is taxed at much lower rates than income

A large proportion of wealth in the UK has been acquired through asset price growth on main homes or in assets that have not been sold for a long time, and have grown in value tax-free. Other wealth has grown through forms of saving that are exempt from tax, such as pensions and ISAs. Some wealth derives from income that was taxed when it was earned, but many wealthy people receive a lot of their income in the form of capital gains. These are usually taxed at a much lower rate than income from work, and are also subject to generous tax reliefs. These inconsistencies in the tax regime enable and encourage people to minimise their tax bill by restructuring the way that they receive their income. The only really effective way to reduce wealth inequality at the top end would be to introduce an annual wealth tax, although a one-off wealth tax would be effective at bringing in a large amount of revenue quickly.

The top 1% of earners pay a larger share of income tax than ever before, but this is because of increasing income inequality. In fact, there is a lot of variation in the amount of taxes paid by the rich, and a large minority pay much effective rates of income tax that are much lower than the headline rates, largely due to the proportion of their income that comes in the form of capital gains or income from investments, both of which attract much lower tax rates than income from employment. They also benefit from various tax reliefs. None of this requires any form of tax avoidance. Our failure to tax income from wealth effectively undermines the assumption that personal direct taxes are progressive, and offends the principle of ‘horizontal equity’ (that tax contributions should be equal across individuals with the same ability to pay). And it is particularly egregious when wealth inequality has reached such extreme levels (discussion).