The taxes that would genuinely address inequality

One big idea is not going to solve inequality – especially taxes that just target income. Together, these smaller taxes that target wealth will do a lot better at truly addressing inequality.

Inequality ideas: wealth vs. income

One big idea to solve inequality! That’s what we need. Tax the rich. Tax businesses. Set an arbitrary amount of income you can earn, then tax the rest to oblivion. Stop people from becoming millionaires.”

I’ve heard a lot of the above. No doubt well intentioned, but (whisper it) a touch simplistic. Inequality is the result of a lot of smaller issues, problems and decisions that were sometimes taken decades ago. One big idea alone isn’t going to solve it. Some even argue that a certain level of inequality is actually intrinsic to our system, and what we are arguing about is the level we are willing to put up with.

It’s not very sexy, but rather than one big idea, it might be that a lot of smaller tweaks is what we need to readjust this level, and engineer things so that people’s position in the economic hierarchy is not static.

So no, this is not my one big idea to solve inequality. These are a few smaller ideas – taxes that a government could raise or introduce that would genuinely address inequality by targeting wealth rather than income.

Capital gains tax

It’s an oft-repeated fact (usually to prove some truism around the idea of something being temporary) that income tax was introduced in Britain as a temporary measure to fight the Napoleonic Wars. Income has been the key tax that people have focussed on ever since – when you think of tax, you think of tax on income. This has been exemplified by the recent moves to take people “out of tax” via the personal tax allowance – it’s all about income tax.

Is this the right way of thinking? Maybe not. There are any number of statistics at the moment that tell us that the wealthiest however-many-percent own most of the wealth in this country. The richest have got richer. Income is definitely part of that, but look at the language. The wealthy own wealth; income is only part of that, and in many ways a small part. The rest is made up of assets: property, shares, capital, all these things that aren’t counted as income, and so are not taxed in the same way. This focus on income tax neglects other taxes that perhaps are more important.

Take Capital Gains tax. This is the tax you pay on any gains your capital makes over time; when you sell property, for example, the profit you make on that is considered a capital gain, not an income. The same applies to any profit you make on shares you sell or dividends you receive. The rate you pay on this is linked to the income tax rate you pay, and is usually much lower. For example, if you pay the highest rate of income tax (45%), you will pay between 20% and 28% on any capital gain.

Now here’s a questions: why? Why is the profit you earn on shares, for example, treated any differently to income? In a world where the richest are rich by dent of how much they own, rather than the work they do, why should capital be taxed at a lower rate than income? Shouldn’t we be charging the same rates on capital as on income? The money this capital generates is income in a sense, so why not just treat it all the same?

There could, of course, be some exceptions – for example, if you sell the house you live in, that could be exempt from a higher rate of capital gains tax. But the key point would be that any profit you make on your assets would be treated no differently to income. This would be part of a move away from exclusively focusing on income taxes and towards wealth taxes, in order to actually make a dent into inequality. And it wouldn’t be the only thing to look at…

Inheritance tax

Take inheritance as an example. This is always explosive, as some argue that it’s natural to want to leave your children whatever assets you have gained to give them every advantage in their own lives. On an individual basis, there is absolutely nothing wrong with this impulse, and you might argue that it’s laudable to want to do this. But when groups of people do this, what it creates is entrenched inequality based on how well their parents did. It forms what’s known as a glass floor – a baseline for children of wealthy parents beneath which they cannot drop – and exacerbates inequality no-end. And notice again – the problem isn’t income. It’s wealth.

Taxes on inheritance are incredibly unpopular, but what if we hypothecated an inheritance tax to go into a social fund that guaranteed everyone a certain amount of money when they turned eighteen? Individuals could do whatever they wanted with this, allowing it to act as a community inheritance. It would ensure that people who don’t have parents that are able to leave them anything would have something to counteract entrenched inequality.

A new council tax

Finally, at least for this article, we need to look at council tax. This replaced the poll tax in the early nineties. In terms of how it works, what you pay depends on the band of your property, which in turn is based on a valuation of the property. The problem here is that that valuation has not changed since the nineties. Imagine what has changed in that time: how much house prices have fluctuated, what’s considered valuable, how areas have changed. It’s phenomenally out-of-date.

The tax itself is also regressive. The lower your Council Tax band, the more, proportionally speaking to the value of the property, you actually pay. Essentially, the rate at which you pay in band C has not increased enough from band A. It’s in desperate needs of modernising, and in doing so you would simultaneously help the poorest, and contribute to taxing wealth, as taxing property is again taxing an asset.

A wealth of opportunity

These three taxes are just a few small changes, and many more will be required to properly address inequality. But that’s the point: lots of small ideas, rather than one big one, may be what is required to resolve the issue. The tweaks I’ve provided will not solve inequality on their own. But combined with other similarly targeted ideas and they just might. It’s going to take lots of “little” ideas to solve the problem, rather than one big one.

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Adam Taylor

Adam works in the higher education sector and commentates on policy and current affairs.

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