Fixing regional wealth inequality

Good morning from New Economy Brief.

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Wealth inequality is growing, and experts increasingly point to higher taxes on wealth as a way to rebalance our economy. Just last month, we covered a proposal for a global wealth tax. But at a more local level, wealth inequality’s role in perpetuating regional economic imbalances is often overlooked.

The Institute for Public Policy Research (IPPR) recently published new research which finds that the current tax system is actively constraining ambitions to regionally rebalance the UK. This week, we take a deep dive into this research and into proposals for a fairer tax system that could be the key to unlocking the economic potential of all areas of the UK.

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The extent of inequality

Wealth is spread very unequally across the UK and is generally concentrated in the south of England. Wealth per person in the South East is £415,200, around £195,400 higher than the North’s £219,750. This gap is growing rapidly. In 2010, the difference between wealth per person in the South East and in the North was £105,000. Based on current trajectories, it could reach £228,800 by the end of the decade. What’s more, the current gap of £195,400 could still be an underestimate, given that the super wealthy, who are more likely to avoid appearing in survey data, are generally concentrated in London and the South East. It’s also worth noting that there is substantial inequality within regions too. Median wealth per head in Surrey, East and West Sussex, for example, is over ten times higher than in Inner East London.

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Why does regional wealth inequality matter? Political agendas such as ‘levelling up’ show that there is widespread acknowledgement of the harm done by regional inequality. The IPPR paper finds that wealth inequality has a negative impact on living standards, financial security, health, housing and political power. Relevantly to the government’s growth mission, the IPPR also argues that regional wealth inequality harms prosperity. Alongside an unfair tax system, it not only locks communities out of entrepreneurship, but also encourages financialisation and rentierism rather than productive investment in local economies.

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‍Overlooked inequalities. The BBC’s impartiality review into its coverage of taxation, public spending, government borrowing and debt found that the media can often overlook how taxation affects different regions of the UK. In both the North East of England and in Wales, more VAT is paid than income tax. However, the review found that while VAT is the biggest tax for “a large proportion of the UK”, it receives far less coverage than income tax.

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A fairer tax system

‍Income from work is taxed much more heavily than income from wealth in the UK. This means the current tax system disproportionately benefits certain regions and entrenches inequality. Below, we explore how different taxes exacerbate regional inequalities:

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‍Capital gains tax. At the basic rate, non-residential capital gains are taxed at only 10% compared to income from work which is taxed at 28% if national insurance is included, meaning that the rate of “under-taxation” is 18%. This rises to 22% for higher rate taxpayers, and to 27% for additional rate taxpayers. Someone earning £50,000 purely from capital gains would therefore be taxed £6,000 less than someone earning £50,000 from work alone. Given that capital gains vary dramatically between regions (gains per head are five times higher in London than in Wales), some parts of the country disproportionately benefit from capital gains’ favourable tax treatment over earnings from work. The IPPR estimates that taxing capital gains at the same rate as income would raise £68 billion by 2029/30. ‍

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‍Council tax. Campaigners like Fairer Share say that council tax is “poorly designed, out of date, unpopular and unfair” and places “the heaviest burden on the young, low-earners and those living in less prosperous parts of the country”. Council tax bands are calculated based on property valuations from almost 34 years ago, which is problematic given the fact that property values have not changed equally across the country. According to the IPPR, owner-occupiers in the North East can expect to pay 0.1% of their property value in council tax annually, compared to less than 0.04% in London.

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‍Inheritance tax. The IPPR estimates that by increasing Inheritance Tax (IHT) from 40% to 50%, 61% of the additional revenue would come from the South of England compared to just 11% from the North of England. On the other hand it finds that abolishing IHT (without a replacement) would represent a significant redistribution of wealth to London and the South East and away from to the rest of the country'.

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Dividend income tax. The difference between tax on income from dividends and from work is 19.25% at the basic rate. At the higher rate it is 8.25%, and 7.65% at the additional rate. According to the ONS, the South East has the highest levels of share ownership (16%), twice as much as in the North East (8%).

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What action can be taken?

As these examples show, our current tax system is accelerating regional inequalities. The IPPR proposes a number of measures that could help “take our foot off the accelerator, or even try the brakes”. They include combining all forms of income into a single tax schedule. As a first step, this could look like equalising the tax rates for capital gains, dividends and savings incomes with those on earnings from work. In the longer term it could also involve replacing council tax with a proportional property tax, perhaps after more immediate reforms such as increasing council tax premiums on empty and second homes and reforming council tax bands. The IPPR also suggests that replacing IHT with a capital acquisitions tax levied on those receiving transfers above a lifetime threshold, in line with the broader income schedule, would help reduce wealth inequality. 

Using revenues raised. The money raised through fairer taxation could be used for targeted regional investment. For example, the IPPR suggests that additional money could be used to build up a citizens’ wealth fund and to offer a universal inheritance that would share the gains of investment more equitably. As the IPPR has shown, the tax system itself can be a source of inequality. However, missed revenue from under-taxation of wealth also makes it harder for the government to proactively tackle regional inequalities. The new government says it wants to see growth in every part of the UK – perhaps fairer taxation of income from wealth would be a helpful first step.

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