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Economists suggest wealth taxes could generate £10bn to address Tory budget deficit

by July 29, 2024
July 29, 2024
Economists suggest wealth taxes could generate £10bn to address Tory budget deficit

Rachel Reeves could swiftly find approximately £10bn annually to address half of the fiscal deficit left by the Conservatives by increasing taxes on soaring levels of unearned wealth, according to leading economists.

New research by the independent Resolution Foundation, published today, reveals that while Britain is a nation of “booming wealth,” its wealth taxes are “busted,” presenting an opportunity for the Chancellor of the Exchequer to secure desperately needed funds by taxing the richest.

The report highlights that wealth levels have surged from four times the national income when Labour was last in power to six times the national income today, despite recent interest rate hikes.

However, the study notes that Britain suffers from significant “wealth gaps,” where a family in the top 10% of the wealth distribution holds £1.3m more per adult than a family in the middle.

Overall, the Resolution Foundation’s study shows that wealth inequality is nearly double that of income inequality. It points out that on the eve of the pandemic, three in ten families had less than £1,000 in savings, leaving them without a real safety net.

This vulnerability was starkly revealed during the cost of living crisis, as many families struggled with rising prices and household bills.

The report indicates that while wealth has become increasingly concentrated at the top, wealth-related taxes have remained low, at around just 3% of national income.

Key wealth taxes, such as inheritance tax (IHT) and capital gains tax (CGT), are deemed poorly designed to tax wealth effectively. The report suggests these are ripe for reform in the Labour Chancellor’s first budget this autumn, aiding Reeves in achieving her fiscal goal of reducing debt as a proportion of GDP by the end of the parliamentary term.

The report notes that IHT offers numerous generous reliefs, allowing the very wealthy to pay a low effective rate. Limiting or ending these reliefs could generate up to £2bn annually while promoting fairness.

Additionally, aligning capital gains tax rates with income tax rates could reduce incentives for the wealthy to manipulate remuneration to avoid tax. Raising CGT rates on shares to match the dividend tax rate could, for instance, generate up to £7.5bn annually.

Combined, these two measures could bring in £9.5bn a year, supporting Reeves as she tackles challenges in public spending.

Simon Pittaway, Senior Economist at the Resolution Foundation, commented: “For decades, Britain has enjoyed a wealth boom, only slightly diminished by recent interest rate increases. Consequently, wealth has grown from four times national income when Labour was last in office to six times national income today.

“However, too many families have been left out of this wealth boom. Over one in four people say they couldn’t cover an unexpected expense of £850, highlighting that too many lack a basic financial safety net that even moderate wealth levels can provide.

“Wealth taxes have failed to keep pace. Modernising our wealth taxes, eliminating leakages, and reducing distorting behaviours could enhance our tax system’s efficiency and generate crucial revenue for the exchequer.”

Stuart Adam, Senior Economist at the Institute for Fiscal Studies, added: “The government could certainly raise a few billion pounds from reforms to capital gains tax and inheritance tax.” He noted that both taxes currently include reliefs “that are hard to justify,” such as the exemption of pension pots from inheritance tax at death.

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Economists suggest wealth taxes could generate £10bn to address Tory budget deficit

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