Our bold proposals would raise £15bn per year from the UK’s wealthiest citizens, which we would use to revive public services and create a citizens’ wealth fund
Much of the anger in today’s politics stems from an ongoing stagnation in living standards, coupled with the sight of a small minority becoming infinitely richer. Britain is one of the most unequal societies in Europe, where success increasingly depends on where you live and who your parents are. Forty-four per cent of UK wealth is owned by 10% of households, while just 9% of wealth is owned by the bottom half. This looks set to continue, with more than half of the net increase in wealth between 2010 and 2014 captured by the top decile of households.
Yet although wealth inequality is twice as great as income inequality, which has on some measures actually fallen slightly in recent years, it has strangely received far less attention.
Of course, expectations of a better life cannot be met without wealth creation. And this needs investment and technological progress through innovation, which in turn requires rewards for the risk-taking entrepreneurs who make it happen. In other words, it is far easier to create a fairer society when the size of the pie is growing. That is why my party recently set out proposals to replace business rates with a far more investment-friendly land value tax. But what particularly frustrates about wealth inequality in Britain is that it is not obviously the result of productive activity, and has widened primarily thanks to asset price inflation, especially that of property. And this inequality is now so deeply rooted that relying on the doubtful existence of a trickle down effect is no longer enough, if indeed it ever was.
Britain’s wealth gap entrenches power and privilege both between and within generations, by generating additional income for asset owners while restricting opportunities for those with little or no wealth. Through gifts and inheritances, these inequalities are passed down to future generations. Those without wealth struggle to acquire property, fund education and training, deal with unexpected income shocks, or pursue their own business and creative ideas. Worse still, wealth inequality is likely to worsen in the coming years due to weak wage growth, rising household debt, automation and falling rates of home ownership and saving. Meanwhile, the money being passed down through inheritances to a lucky minority is projected to grow.
We must demand a better future for Britain. If we want to create a society where everyone has the chance to succeed, we need to give people the skills and resources they need and create a more level playing field. That in turn requires tackling inequality through policies that promote a fairer distribution of wealth.
That is why the Liberal Democrats have today put forward a bold set of proposals to give everyone a stake in our economy, which will be debated by party members at our autumn conference in Brighton next week. They follow closely on the work of the thinktanks The Resolution Foundation and the Institute for Public Policy Research, which have reached similar conclusions on the policies needed to address Britain’s deep economic divides. They recognise the need for the country to have a serious conversation about tax; something Boris Johnson, with his thoughtless calls for Trump-style tax cuts, is desperate to avoid.
To start with, we would overhaul inheritance tax by taxing recipients – rather than givers – on all large gifts they receive, not just those they inherit. Each person would have a generous £250,000 tax-free lifetime allowance, above which income tax rates would apply. This would close a major loophole that allows people to hand down wealth entirely untaxed if the transfer is made more than seven years before death. It would mean that unearned gifts are taxed at the same rate as earned income from employment.
This principle – taxing wealth and work in the same way – is at the core of our proposals. We would also tax capital gains at income tax rates, and abolish separate tax-free allowances for both capital gains and dividends. All income, be it from employment or wealth, would be eligible for the personal allowance, so that those who depend solely on income from assets would not be unfairly penalised. These changes would also remove the existing incentive for the well-off to shift employment income into other forms – such as capital gains or dividends – to minimise their tax bills.
Another area in urgent need of reform is pension tax relief. Not only does it cost the government £41bn annually, but the existing system of relief is deeply regressive, with 63% of all relief going to the top 15% of taxpayers. We would rebalance it by introducing a flat rate of relief on pension contributions, encouraging lower earners to save for their retirement while cutting tax breaks for the richest. We would also limit the tax-free lump sum people can withdraw from their pension pots, restricting it for those with the largest pots while leaving over three-quarters of pensioners unaffected.
These reforms would ensure that Britain’s wealth is taxed more equitably, thus promoting a fairer distribution of wealth. Our estimate is that they would raise £15bn per year, which we would put to work by boosting spending on public services, launching an ambitious programme of lifelong learning and creating a citizens’ wealth fund to invest on behalf of the country.
As is now painfully clear, cuts to the essential public services we all rely on have gone too far, resulting in falling levels of service and difficulties in recruiting staff. An ageing population risks worsening the situation in decades to come. We would therefore devote a share of the revenue raised from higher wealth taxation to better fund our essential public services.
Secondly, Britain’s workers risk being left behind by our changing economy if they aren’t equipped with the skills and knowledge needed to flourish in the future workplace. We believe that an ambitious programme of lifelong learning – funded in part by wealth taxation – is the only solution, with people empowered to improve their skills throughout their careers through publicly funded accounts.
Last but not least, the citizens’ wealth fund, established using a share of the revenue raised, would enable the country as a whole to benefit from the returns to investment typically only available to the wealthy by investing in stocks, bonds and other assets. To ensure its independence, the fund would be kept at arm’s length from government and run by professional fund managers, with robust accountability measures and a strong emphasis on sustainable and ethical investment.
Combined, these reforms would go a long way in turning fairness and opportunity from mere catchwords into a genuine reflection of people’s everyday lives.
This article from Rt Hon Vince Cable MP Leader of the Liberal Democrats was first published by the Guardian on 13th September 2018