The Financial Fairness podcast
Wealth: How can political parties close the wealth gap?
Guests: Arun Advani, University of Warwick and Ian Mulheirn, Resolution Foundation
This episode was recorded on Tuesday 17th October
In this episode, we explore what’s been happening to wealth over the past few decades and how it might affect the next election. Including:
Why does the wealth gap and wealth inequalities matter?
How important will the issue of wealth be at the next general election?
Why does inheritance tax have so much political salience - and public resistance - when it is paid by such a small fraction of estates?
Welcome to the Financial Fairness podcast with me Mubin Haq
In our new series, we’ll be exploring what policies the political parties are pitching in the run up to the general election – and what they should be offering to make our society financially fairer.
As usual we’ll have a range of experts to help us make an assessment of where we’re at – and where we need to be heading to.
You can subscribe to the series on your podcast platform of choice and series one and two are available now.
In today’s episode, we’re focussing on wealth.
We’ve already heard from Labour’s Rachel Reeves that there will be no wealth tax; and we’ve had more than 50 Conservative MPs calling for the abolition of inheritance tax.
Where are the political parties on issues relating to wealth? And what are the policies they should be adopting?
Joining me today are Arun Advani a senior economist specialising in wealth and taxes. Arun is also an associate professor at the University of Warwick. Joining Arun is Ian Mulheirn, he’s a Research associate at the Resolution Foundation. Prior to that Ian was the Chief Economist at the Tony Blair Institute.
Mubin Haq: So, Ian, can you give us a brief snapshot of what we mean by wealth? It’s clearly savings and housing but it's shares and cryptocurrencies if you're more modern. But what else does it include? Is most wealth locked up in bricks and mortar?
Ian Mulheirn: Yeah. So, I think, Mubin you find that the conversations about wealth are often a little bit confusing because people can talk about wealth in terms of the kind of vehicles that you hold it in, or they can talk about wealth in terms of the underlying assets that it’s invested in. But generally speaking, it's most simple for us to think about wealth as being held in our pensions, our houses, physical wealth and financial wealth. And to give you a sense of what wealth is, about 80% of household wealth in the UK is made up of our pensions and our houses and, of the rest, it's split between financial wealth and physical wealth.
Mubin: So, luckily, it's not in crypto currencies, which have been diving quite a bit.
Ian: Well, of course, you know, people could have in their pensions a whole massive portfolio of crypto currencies perhaps, but it seems pretty unlikely. I mean, globally, you know, most wealth is in the form of, you know, bonds - corporate bonds, government bonds, equities and property, really, that's the dominant thing although there are other forms of other assets around that people can invest into.
Mubin: You sounded like a financial adviser there you know, other assets that you could invest in…
Ian: …are available…
Mubin: …are available. And what's been happening to wealth over the past few decades? We get this impression that it's been growing, wealth inequalities are widening. But what's the actual picture and what's been happening, particularly recently?
Ian: Yes. So, we've seen a huge amount of activity in the level of wealth over the last sort of generation or so. For much of the late 20th century, household wealth tended to be around three times national income and it tended to bump around there, about three times GDP roughly, through until later in the eighties.
And then it started to go on an upward trajectory and it went very high. Before the pandemic, it was over seven times GDP. And during the pandemic, it surged even further, hitting over eight times GDP. And since then, particularly as interest rates started to rise in 2022, the value of a lot of that wealth then, we saw a sharp drop and it really fell back quite considerably. But to give you a sense in pound terms by, just before the pandemic, household wealth was worth about £16 trillion. And so that's the scale of what we're what we're looking at.
Mubin: And what's it dropped to?
Ian: So, the rising interest rates really caused a kind of repricing. We've seen house prices falling a little bit. We've seen, more importantly, bond prices falling very, very substantially. And that's why it's about £2.1 trillion off household wealth in the UK.
Ian: the other thing to think about with wealth is that it varies hugely by age as well. So, people typically build up assets and savings over their lifetime so that they can fund their retirement. So, what we tend to see is that young people have, and have always had, very little wealth, really, and people, by the time they're reaching retirement tend to have sort of the peak level of wealth. So, wealth can be extremely unequal. But a large part of the reason for that inequality is that it’s age and older people always have much more than younger people.
Mubin: Yeah. And within those generations there will be huge divisions as well. Is that right?
Ian: That's right, yeah, absolutely. So we have huge differences in wealth within cohorts as well, partly because of differences in earnings and partly because of differences in inheritances and that kind of thing. And that is something I'm sure will come on to talk about more.
Mubin: So Arun, why does any of this really matter? Should we really be concerned about who holds wealth and wealth inequalities?
Arun Advani: I think Ian raised a really good point there which is to think about, what affects the distribution of wealth. A big chunk of it, as Ian pointed out, is this age effect. And in that sense, that doesn't matter because if you think that what you want to do over your lifetime is to build up some savings. You know, you save into your retirement because at some point you're going to retire, you're going to stop working, but you still need an income. You’ll get a bit of a pension from the government, but you’ll want to spend out of your savings. In that sense, that's not a thing I think generally we're very worried about.
Then there's two other things that we might be more worried about. So, one is the trend of that rise in wealth as you go through age. More of that depending not on your own earnings, but depends more on inheritances. And so that matters. It matters more that, however hard you work, however talented you are, however much you might believe in a meritocratic society, however much you do your own things, it will turn out that a greater share of the total wealth you have in your lifetime is what comes from your parents.
The other thing we might think matters is, particularly at the very top of the wealth distribution. People have much, much larger amounts of wealth, and it's not wealth that’s sort of smoothing out their income over their lifetime so they can spend it later on. It's just more than they're ever going to spend and it's then going to be passed on through generations, potentially there are worries about it having an impact on the political system. So, it might be that people who are very wealthy have a particularly strong interest in both preserving that wealth by lobbying very heavily for changes in policies that help them. And because they have quite a lot of money, there are political parties, or individuals, who will, listen to them. And so those are, I think, the other set of things that people worry about in terms of what happens to wealth and wealth concentration.
Mubin: Ian, do you think the public are concerned about this? How important is wealth inequality, with the public?
Ian: Well, I think it is important, and particularly because it shows up primarily, I think, in discussions about intergenerational fairness. You know, a world of high wealth is one where, not only do young people have to save an awful lot of money in order to be able to afford a decent pension and a decent house, but it's also one where you see very large inheritances. And it's much harder for people who are reliant on wage income to build up enough income and savings to look after themselves in retirement. So, we’ll no doubt see in the in the election lots of discussion about things like inheritance tax. And we’ll probably see things like falling house prices starting to play into the debate, if that trend continues as well.
Mubin: And what you're saying there is actually something really interesting. It's not really about the politics of envy, which is often how it's described, but it's more about people's living standards. The fact that they can't get onto the housing ladder or they've got a poor retirement. Is that what's at the heart of this?
Arun: I think of it, less politics of envy and more politics of security. I think the thing we really saw in the pandemic was people who had wealth had a sort of cushion and that was a real sort of sense of security for them. The pandemic was rubbish for everybody but for those people who had that kind of cushion, they could get by. And we really saw this divergence where, at the very bottom, you saw people really getting into debt because they had no income, because we were locked up at home and they might be particularly in jobs that were even more precarious and where furlough wasn't an option for them. And so for them, they really struggled. And so I think that sense that, actually a big part of what wealth is for people and a big part of the politics around wealth, is that for most people what they want and what they aspire to in wealth is to have that security.
Mubin: So, tax levels are at their highest level in relation to national income since the end of the Second World War. It's now running at about 37%. We've got much higher levels in places like France and Denmark, and Germany is running at about 40%. But have we got the balance right between income taxes and wealth taxes? So, Ian, I thought I’d ask you that.
Ian: Well, I think there is, as you say, taxes at a very high level relative to the recent history in the UK, but not that high internationally. And, there's a lot of trends, in terms of public spending, that mean it's probably going to end up having to go higher still. That's the context we're facing. In terms of the balance between wealth taxes and income taxes, I mean, on most definitions, the UK actually does tax wealth a little bit more than some other countries, but the proportion of total tax take that comes from taxes on wealth is still, in absolute terms, very small - a couple of percentage points of GDP, and there probably is scope to increase it by reforming a number of taxes, by cutting some loopholes and various other things. But I think whilst higher taxes on wealth could make some difference, it's unlikely to be a game changer in terms of the huge amounts of money that are likely to be needed to say, fund the NHS and those sorts of things. So, we shouldn’t sort of trick ourselves into thinking that wealth taxes can solve the whole problem.
Mubin: Arun, what about Capital Gains Tax? Because we’ve got different levels of taxation.
Arun: Capital Gains Tax is a tax that most of us will never pay. So, if you own your main home, it's not covered by capital gains tax. But if you own a second or third or fifth home and you buy it and at some point you sell it for a profit, then you pay capital gains tax. If you buy some shares, not through an ISA, and it increases in value and you sell it at some point, you pay capital gains tax. So, that’s what capital gains tax is. And we've had, in the UK, every possible system for capital gains taxation you could ever have. At various points we’ve taxed it in the same way as income; we've taxed it at a flat rate, which is what we currently do; we’ve taxed it at a rate that depends on how long you've held the asset.
Most people who spend time thinking about taxes would agree that the current system isn't working. Certainly, it's costly in terms of how much money is not being raised that would be raised if you taxed in the same way as income and …it's not really effective in the sense that it leads to a lot of tax avoidance. It leads to people choosing to structure their incomes in a form that gets the benefit of a lower tax rate. The main rate that most people who are paying it are paying is 20%. Those are people who would otherwise be paying 40 or 45% income tax and a couple of pence in National Insurance contributions. And so that gap is pretty large. We did some work a few years ago, it showed about a quarter of people who had incomes of about £2 million were paying 47% - but about a quarter of people at that level of, income plus capital gains, were paying a rate of 10%. And that's you know, that's really crazy and hard to justify.
Mubin: And in terms of how they get the 10%, just so I can unpack that. What are they invested in?
Arun: The two ways that people with high incomes end up with a 10% tax rate on capital gains tax is either, what used to be called Entrepreneurs’ Relief, it's now called Bad Relief - I think someone at the Treasury is having a bit of a joke there - and if you set up a company that you own a large enough share of and you own it for a couple of years, then you can get the change in the value of the company between the value at set up and the value when you sell or dissolve, as a capital gain. And so in practice what that means is, if I'm a consultant, I can set up a company, get all my money paid into the company, don't take that out as an income, don't even take it out as a dividend - which is taxed at a 38p rate if I'm at the highest rate - but just leave the money in the company. Borrow against it if I need to but leave the money in the company. And then at some point when I'm done, I liquidate the company. That means I don't have to find a buyer; I just liquidate and say it's gone. I sign the paper myself, the company is gone and the money gets paid out to me and I get it paid as a capital gain. So, the value between zero when I bought a company with no value, and when I get rid of it, that increase in value is all treated as a capital gain and I get a 10% rate. So, that's the Bad Relief.
The other one is called Investors’ Relief. If I buy certain share classes and I own them in the right way, I can get a 10% rate still on up to £10 million.
Mubin: And how many people are actually doing this, and what would be the solution?
Arun: So, the number of people who are actually getting the kind of benefit every year is small, it's a few thousand people. It is huge amounts of money. More than half of all capital gains go to just 5,000 people in any given year. So, it's incredibly concentrated. And, you know, 90% of them are going to people with more than £100,000 in gains.
The thing to do would probably be tax the increase in value of an asset that's not inflationary. Tax at the same rate as someone's income, so that people don't have any incentive to try to move income between different sources. That also saves you having to have a kind of army of bureaucrats at HMRC trying to police the boundaries and working out is this really income, is this really a capital gain? We don't care. If it turns out they’re taxed at the same rate, no one needs to spend time arguing about it.
Mubin: And roughly how much would that raise? Just so we've got some idea of how many hospitals we might build.
Arun: Ah, I haven’t priced it up in hospitals. That's a good idea, actually. I think I once priced it in nurses and now I can't remember the number of nurses, but it's I mean, if you equalize the capital gains tax rate without doing the inflationary bit, you get something like 16, 17 billion, so it’s pretty big.
Mubin: But 16, 17 billion is not to be sniffed at.
Arun: That's definitely the upper end. It's going to be less than that by the time you account for inflation. But we don't really know how much less. I mean, certainly more than ten, I would guess.
Mubin: Okay, the reason why some of this is becoming so important, why we're talking about tax quite a lot is, not only that we've got these high rates that we touched on before in terms of national income, but we've got these huge pressures on public spending. So, do you think we will see many reforms happening to wealth taxation to try and bridge some of this gap or you know, Ian, you were saying earlier, well, it's not going to resolve all of the problems, but it might help. Is it on the cards at the moment, any sort of talk about this?
Ian: Yes. So I think we should be clear that, as Arun was just saying, you know, there's a significant amount of money available here just from doing some fairly sensible, economically efficient, but also equitable reforms. And so I think, you know, it's a bit of an open goal, at least for economists, if not for politicians. Now, of course, the Labour Party has been very reticent to go there. They've sort of been quite clear that they don't intend to introduce any wealth taxes. I mean, how you define that is an open question, but they're certainly signaling that it's not their intention to go there. And while they have outlined a few taxes, some of which are wealth related, it's not really of this kind of scale yet that the types of reforms we've just been discussing to capital gains tax would bring in. And so at the moment, this isn't on the cards, but I think, you know, once we get past the next election, whichever party wins power, they are going to have to raise some taxes almost certainly. I mean, given the state of all sorts of public services from crumbling schools and prisons to NHS waiting lists. So, I think we are going to see tax rises and, if you're looking for fair and equitable and economically efficient ones, you could do a lot worse than taking a look at capital gains tax.
Mubin: Arun, you were involved in the Wealth Tax Commission and talked about having a regular or possibly a one-off wealth tax. Where do you think that's got to in in terms of parties taking that up, given that Labour said no wealth taxes?
Arun: Yes. During the pandemic, I ran, with a couple of colleagues, the Wealth Tax Commission looking at the question of whether the UK should have a wealth tax. Some other countries, you know, Norway, Switzerland, so you know, in that sense a very big range of countries. Switzerland is at one end, the country that you always think of like people fleeing off to. Norway at the other end is, you know, thought of as the high tax end of the world. Those are both countries that have a wealth tax. And so we wanted to think about whether something like that was relevant for the UK.
We had three conclusions.
The first conclusion we had was we didn't need a mass market wealth tax of the sort that either Switzerland or Norway has. In both of those cases, those are countries that either don't have inheritance tax or don't have capital gains tax. We have both of those. And so a sort of wealth tax on top to sort of substitute for those didn't really make a lot of sense.
Second thing was, given that it was the pandemic, and we didn't know whether we're going to “need to pay for COVID”, we said if there was going to be the need to do some big tax rises, something like - to pay off some of the debt or, you know, do some of the rebuilding afterwards - something like a one-off wealth tax would be an economically efficient and fair way to do it. We said that would be much better than doing something like National Insurance contributions rises, which is what politicians love to do and is in fact, indeed, what they did. And we said that really specifically because, in terms of who had the broadest shoulders We thought a one-off wealth tax made much more sense.
The third conclusion we had was around an annual wealth tax. So, a regular wealth tax starting at a high threshold. And we said there that, if you have a concern about wealth concentration, you should have an annual wealth tax starting at a higher threshold. So, something like £10 million, that would cover about 22,000 people in the country. So, a very small share of the country. And doing something like that would raise a reasonable amount of money. So we said at the time, said a 1% tax at above £10 million would raise about £10 billion. Now that's over 11 to 12 because a few years have past, is sort of like adding 2 pence to the basic rate of income tax.. So, it's sort of big in that scale.
Where are we politically? The answer is I think no one is particularly going for it. I mean, certainly it's not something the Conservative Party have been discussing very much. Labour have ruled it out. So, I don't think that there's much political scope for something like that happening now. I think what the Commission ended up doing that did have more of an effect was it gave people a sense of scale for actually how much money could be raised from wealth taxes. As Ian said, you know, we're not we're definitely not going to be sort of paying the whole government budget based on reforming our tax system to get rid of income taxes or something and just taxing wealth. That's clearly off the table. That's not a sensible thing to do. On the other hand, starting from where we are for thinking how to raise the next ten, 20, 30 billion pounds, there are lots of sensible reforms we can do to wealth taxes., Actually if you get a bunch of economists in a room, and we disagree about lots of things, but we basically agree on a lot of these reforms because they are tidying things up, getting rid of loopholes. And the government might well want to do some of those things, whatever colour it is after the election, because they are going to be in need of cash.
Mubin: Ian, did you have any thoughts in relation to a regular wealth tax? Because it can be quite tricky in terms of assessing people's wealth each year?
Ian: Yeah, I think Arun's right to make the distinction between the bulk of wealth in the country held by the typical person with a house and a pension and not much beyond that and the hyper wealthy, that you may want to treat those people quite differently. And on the former, you know, this is where sort of 80, 90% of the wealth in the country is. You know, we've had this 30 year surge in the value of of housing and pension wealth, but it hasn't necessarily changed the kind of income that people can expect in retirement or the quality of the house they're living in, even if the price of it has risen. And that's why standing wealth tax is tricky for them. But at the hyper rich end, there's a whole set of different set of considerations that come into play and some of the things that Arun talked about are really quite important. The only other thing I'd add is that we talked a bit before about the pressures on the Government's budget now and in the next five years, but if we look much further ahead, ten, 20, 30 years ahead, if we look at the projections from the OBR about, you know, public services and what they might cost with an aging society, it's almost inevitable that we're going to need to find more tax. And so, do we need to look more broadly for tax revenues than we have, the kind of places we've looked in the past? Because in a generation's time, our tax system will probably have to look quite different if it's to not be a drag on the economy.
Mubin: I think one of the things I'm picking up from what you're saying is, we can tax those who are more in the super rich camp, but it's not going to raise a huge amount of money, it's not going to resolve all the problems. We had Torsten Bell, your boss, Ian, on here and he said Jeff Bezos does not live in Barnsley, which I think summed it up quite nicely. Is that something you'd agree with? Not that Jeff Bezos lives in Barnsley because he clearly doesn’t, but that you know, it's not just about taxing the super rich, the base needs to be broader.
Ian: Yeah, I think that's right. I mean, maybe Jeff Bezos does have a house in Barnsley. I'm not sure, he’s probably got quite a few, but I mean, I think that is clearly the case. I mean, I think there's two points to make here. One is that, you know, we're not in the same situation as the US where this growth in the hyper rich has really exploded in recent decades and an increasing concentration of wealth at the very top end. In the UK, it's much less clear cut. than it is perhaps in the US, where some of these issues are a lot more stark.
Arun: One thing that's worth remembering, is that these taxes often affect just a smaller group of people and because they don't raise huge amounts of money and take a bit more work than just, you know, 1p increase in the value of National Insurance contributions, they often get left behind, even though they would be sensible. And so I think there's a bit of a risk sometimes of saying, well, this tax doesn't raise a huge amount of cash relative to something else I could do and takes a bit more work, so I'm not going to do it. An example of that, which actually is currently Labour Party policy is reform to carried interest. So, carried interest is the way in which private equity managers get paid. They work to just try to increase the value of some, assets they've bought, some companies they bought and the way in which they're paid is treated as a capital gain, even though it's really the return to their labor. So, for anyone else that would be employment income and at the level of money they're getting paid, they'd be taxed at 47p –45p plus 2 pence in NICS - but we've agreed for some reason that these people are taxed in a way that's classed as a capital gain. Now, if you were to reform that, you'd raise less than £1 billion a year. So, it's not a huge amount. It's not going to pay for very many of those hospitals. And so in that sense, you know, almost why bother? And the answer why bother is twofold. It's first, not really fair that they're paying a tax rate that's sort of comparable to a nurse. The second thing is,
It's not really fair they’re paying such a lower tax rate than a banker, who's working just as hard in pretty much the same industry getting paid pretty much the same amount of money, but the banker, because they happen to work in a bank, is paying 47p while the private equity manager is paying 28p. That doesn't really make that much sense. And so it's not just about rich versus poor, although that's definitely part of it, it's also about just fairness among high income people.
Mubin: Yeah, so and I think fairness is something that a lot of people can rally behind in terms of trying to improve a system. Let's talk about some of the taxes, which might affect a much broader section of the population, what the parties are saying about this. So, let's take, for example, council tax or stamp duty. Ian, what might we see there? We've seen a lot of parties burnt around property reform in the past, so any chance of any movement there?
Ian: Yeah, well, I think you're right to raise council taxes. In a sense, the kind of major form of standing tax on the stock of wealth that we have in this country. It’s the biggest revenue raiser expected to bring in about £44 billion next year. And so council tax is a really big deal. And in economic efficiency terms, you might say, well, land is a good thing to tax because you can't move it, you can't change how much of it there is and so we should look at taxing it more. But I think really the priorities on council tax are more about reforming it to make it fairer because in England and Scotland, the tax is based on house values from back in 1991. These are massively out of date that caused a lot of unfairness between different households of similar types. It's also very regressive. You know, a house that’s worth £100,000 pays about 1.2% of the value of that house in council tax each year in England, whereas one that's worth £1,000,000 pays about 0.2% of the value of their house. So, it’s currently very regressive in terms of how the tax is levied. I think the real priorities are trying to make the council tax system both fairer and more efficient. That is a politically huge challenge and whether we'll see much action on that, I don't know. What is interesting is that in Scotland we've already got some moves to make it more progressive. The SNP has already made moves in that direction a few years ago. And in Wales, it looks like they are similarly trying to revalue all properties and keep the valuations up to date. England is really stuck in the past on this one unfortunately.
Mubin: We've talked a lot about tax, but one way we can actually increase people's wealth is actually give them some assets, make it easier for people to get onto the housing ladder.
Are the parties doing anything there? I know you've got your Generation Rent hat on as well being a Trustee there, but Labour have said, we’re going to build one and a half million more homes. Is this going to lead to more people having a home?
Ian: Well, I think we're likely to see not a huge impact on prices from that. So, you might, on standard kind of assumptions and what the ONS projects household formation to be over the next five years, you might expect to see about 5% off house prices, all else equal. You don't know what else might happen in that time, house prices might fall quickly anyway. And that may make it easier in terms of people being able to put together the deposit. But it's not really going to be a game changer in terms of homeownership and who owns housing wealth. I think the other thing that the Labour Party has mentioned that they are interested in is looking at reforming the mortgage market because who owns housing is really dependent on who is able to borrow money to buy houses, whatever price they are. And that could be quite a significant boost to homeownership for younger people if those reforms go ahead.
Arun: It's worth saying, it’s both who’s able to borrow and who's able to save. And I think just one thing to remind people of is that if you're working full time on the minimum wage, you're paying income tax and you're paying national insurance, then you go home and pay your landlord. Your landlord will pay income tax. They won't pay National Insurance on the rent that they're receiving. And so when you think about who's going to buy that next house that Labour's committed to build, is it going to be the current renter who's working full time minimum wage and trying to put something away after income tax and NICS? Or is it going to be the landlord who doesn't have the National Insurance contributions? It's slightly crazy that we have people being able to get income from rent and not having to pay National Insurance contributions on those where everyone else is paying NICS.
Mubin: Yeah, so what you're saying, it's still stacked in the favour of those who have got wealth and may be the beneficiaries of this going forwards.
One thing that has really been in the headlines a lot recently has been inheritance tax and a number of Conservative MPs talking about abolishing it. Arun, could you just say a bit more about inheritance tax?
Arun: Yeah, so inheritance tax at the moment works in quite a messy way. It's the value of the stuff that you leave at death is what's taxed. But there's some threshold of it that’s tax free. So, the same way that when you get an income from your normal job, you have a personal allowance - that’s the bit you get tax free before you pay tax - there's something like that for inheritance tax. And so the minimum of that is £325,000 tax free, On top of that, if you own a property, and you're going to pass it on to your kids or grandkids, then you can have an extra £175,000. So, that tops you up to half a million. And if you have a spouse, then you can share the value that they have as well, so you get £1,000,000 – you get half million each that you can kind of combine up. So, for example, when I die, my allowances will pass to my wife if I die first, as well as my wealth. And so when she dies, she has £1,000,000 that she can pass on to our kids before any tax is paid. And so it's only paid on the bit above that.
Mubin: Lucky kids, Arun!
Arun: Well, yeah if I get to that level of wealth. The thing that's worth remembering is that in practice what that means is that only about currently about 4 to 5% of estates are actually paying inheritance tax.
Mubin: And should we really care if it's abolished? It raises about 7 billion I think, something like that. How much should we care about this?
Arun: I think we should care for two reasons. So, the first is a revenue reason. And people often say and I also historically have said, you know, it's £7 billion, it's not a lot of cash. Now, one thing to highlight is that it’s going to rise really fast. I mean people who've died recently were born at times when wealth was rising really fast. And so actually even within ten years, we expect that to more than double – we expect it to go up to £15 billion. And that's just because those people who are going to be dying in future years were born at a later point where they when they got on the housing ladder, the house price rises were larger for them. It’s just they were born at a time that meant the wealth was rising really fast. That story Ian told us of that huge rise in wealth from the eighties, they were there in that point, that was when they were invested. And so they've got the benefits of a lot of that. And that means that there's actually going to a lot more wealth being passed on at death in the coming years and that means there's a lot more revenues that will come from that.
Second reason why we should care about inheritance tax is social mobility. We should care about it because it's about the passing of assets between generations and it's kind of a lottery. So, just a quick stat: if you compare, you know, kids who are born to the poorest fifth of parents - the lowest wealth fifth of parents - and kids who born to the highest wealth fifth of parents. So, if you think about people who are now in their fifties those who were from the poorest fifth, by the time they've reached their fifties, have an average wealth of about £180,000. Those from the highest fifth have more than four times as much, they have £830,000. That’s before they’ve received the inheritances they're going to get when their parents die. In those early fifties, when their parents are not quite dead yet that's the gap – it’s 180 to 830. That poorest fifth are on average going to inherit about £2,000. So basically nothing in terms of changing that picture. That top fifth who've got 830 already are expecting to receive £380,000. Inheritance tax is going to take away almost £40,000 of that £380,000. But substantially, they going to end up with, you know, basically 1.2 million at the end of this. And there's people at the bottom end were still at £180,000 so now the gap is sort of getting on for kind of eight times and making that picture worse. And so inheritance tax has a kind of role to play to try to do something about it.
Mubin: That's a pretty stark picture that you're painting there. And I think what you're suggesting is, is actually we need even more reforms in inheritance tax, but not in terms of abolishing, but actually making it even tighter than it currently is.
Arun: Yeah. The big thing that it misses at the moment is that, when kids are in their twenties and thirties and are thinking about getting on the housing ladder part of it is, can I go to the bank of Mum and Dad? And some people will go to bank of Mum and Dad and bank of Mum and Dad says, sorry, no cash here, you're going to have to keep saving. And you'll be in your late forties by the time you start getting on the housing ladder. Other people, bank of Mum and Dad says, oh yeah sure, here's a couple hundred thousand pounds, I can remortgage or something. and that gets you on the housing ladder. And so a lot of the wealth transfer happens at that point. And that's the point at which you start building up a big part of those wealth inequalities. There's also the impact of just the ability your parents had when you were young to be able to help you with your schooling, to help you with all of those things that affect your lifetime earnings as well. So, there’s a lot in this picture. But even just from a tax perspective, you sort of need inheritance tax to go further back and to account for those transfers that are made in your twenties and thirties that are covering big gifts to help you get on the housing ladder, because otherwise it's just too little too late. That's the problem.
Mubin: Can I touch on non-doms and what might happen there? Because Labour said some interesting things. So, Arun, you’re quite expert on this.
Arun: Yeah, non-doms are kind of my scene. So, just to remind people what non-doms are: being non domiciled, means you can spend the entire year, 365 days in the UK. The reason you're not domiciled here is that you haven't chosen to make your permanent home in the UK, or at least you declare that your permanent home is not the UK. So you say, in your heart of hearts, that even though you live here - you might have lived here for ten years, you might have kids here and a partner here - you still kind of feel like home is somewhere else. And so because of that we've decided to give you a different tax status. And there's two things you have access to. One is what's called the Remittance Basis. That means that if you invest, as long as you promise not to invest in the UK but to invest abroad, we won't tax you. If you invest here, we’ll of course tax you. But, you know, make that decision to invest elsewhere and we won't tax the money you get from that investment, unless you bring it onshore. And second thing is that when you die, we won't charge inheritance tax on your assets. And that's a pretty anomalous system. It's not something that other countries really do. Most countries tax you based on where you are, both because that's just verifiable. Like I can see whether you've lived here and how many years you've lived there. The third thing is that we've designed the system in a way that means that you are encouraged to keep that money offshore. That's obviously sort of stupid of us in terms of, you know, UK plc is not getting that investment. But also, other countries, because their system is designed to be based around residency, they only care about taxing you if you are based there. They'll say, well, you're not resident here, so it's not our problem to tax you. So, most other countries won't tax you on that income. The only obvious exception is the US, which taxes its citizens wherever in the world they are.
Mubin: So, just to wrap up then, how would you rate the parties in terms of the policies on looking at wealth and the potential to make things fairer? So Arun, I'll start with you.
Arun: So, I don’t think the Conservative Party party has actually said - I mean the only thing it has said is that it has an ambition to reduce the overall share of tax as a share of GDP.
Labour have said lots of things about taxes, but mostly about kind of minor, around the edges type of things so they talk to non-doms; they talk about putting VAT on private schools; they've talked about ending the carried interest loophole. And so those are all, sort of, sensible reforms, but they’re not touching the sides in terms of trying to raise substantial amounts of money for any grand ambitions and they're still not, doing anything fundamental in terms of rebalance between wealth and work.
The smaller parties actually have. So, the Lib-Dems and the Green Party both have stated policies in this area that are about trying to equalize the taxation across those two forms of return – across wealth and work. Obviously, it's unlikely that next year we see such an earthquake in politics that either of them are going to become the government. But they might have some role depending on what the electoral map looks and they may end up being able to put some pressure to have those kinds of reforms come in. But that's, that's kind of the best hope for people who want wealth and work to be taxed more equally and more fairly.
Mubin: And, Ian, I'm guessing that's probably your assessment, too, but do say if you disagree. Do you think we might see something different in government from what's in the manifestos?
Ian: Well, I think it's definitely the case at the moment that we have a bit of a phony war on tax and the public finances. And I'm hoping that we'll get a bit more honesty from both parties about what needs to happen in the years ahead. But I think that that's possibly unlikely. And I think both parties will probably be going into the election, kind of crossing their fingers and hoping that things turn out better than they currently look. But if it does, in fact, turn out that, you know, significant amounts of taxes do have to be raised in the next parliament to pay for public services, etc., then I think, , there is clearly a role for wealth taxes, as we've discussed, you know – CGT, non-doms, IHT - you know, there’s potentially, something in the ballpark of £20 billion here which could be used to, both, take some of the pressure off income tax, but also to make the system better and fairer. And so I think any government in the next parliament will have to start looking at these things, whether they'll do the whole array of options we've kind of been through, it remains to be seen. But I think we have to hope they'll do some of them.
Mubin: And what's the one reform you'd really like to see?
Ian: Well, for me, I think it would be equalizing capital gains tax and and introducing inflation relief. I think that would raise probably something in the ballpark of the equivalent of 2p on the basic rate of income tax, which is a significant amount of money. And it's also, would make things a lot more efficient.
Mubin: And, Arun, what would you…you'd be the same?
Arun: Yeah, the same. If I only get one, that’s the one I’d do.
Mubin: Great. I mean, we've got consensus there and brilliant, we've had a real run through in terms of what is possible and what's feasible. I'm feeling a little bit more hopeful as a result after that. So thanks very much for your time.
Arun: Thanks very much.
Ian: Thanks, Mubin.
Mubin: Thanks again for listening to the Financial Fairness podcast.
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Join us for our next episode to discuss issues relating to work, as we continue looking at the key issues the political parties will be addressing in the run up to the general election.