Taxing invisible wealth

Download the report

UK household wealth has grown from three times national income in the 1980s to nearly eight times national income today. This has been driven primarily by asset price inflation — eg higher house prices and pension valuations — rather than productive growth. Instead of work being the path to financial security and opportunity, it is now existing asset ownership. But this wealth is highly unequally distributed, much of it inherited, and increasingly detached from effort or achievement.

This is a worrying trend when we consider who holds private wealth in the UK. The top 10% has consistently owned half of households’ total wealth since the mid-1980s, but their wealth has increasingly accumulated at the top 1%. The Sunday Times Rich List reports that the wealth of the 350 richest families now totals £772.8bn. If trends continue, by 2035 the wealth of the top 200 families could be equivalent to the UK government’s entire annual public expenditure. Meanwhile, most households in the country lack significant private assets, making them heavily reliant on public services and infrastructure, which continue to deteriorate because of underfunding and political negligence. 

The UK’s economy has shifted but the tax system has not adapted. An outdated revenue model undermines the government’s ability to fund its commitments to provide reliable public services, while frustrating most of the population who rely on wages. HMRC estimates the overall tax gap to be at least £46.8bn annually, much of it linked to under-declared capital income, complex avoidance, or offshore assets. HMRC’s offshore non-compliance estimate is just £0.3bn,a figure widely seen as a serious underestimate given the narrow methodology and acknowledged data gaps. Taxes on labour and consumption, such as income tax, National Insurance contributions and VAT, account for more than two-thirds of receipts, while taxes on wealth and capital are relatively marginal and much wealth goes untaxed.

Extreme wealth concentration carries direct costs for UK society, undermining prosperity and quality of life for the majority. The OECD has shown that rising inequality between 1985 and 2005 slowed UK growth, cutting nearly five percentage points off cumulative growth between 1990 and 2010. Trickle-down economics, which argues that wealth at the top benefits everyone, has not worked in practice. The benefits of past economic growth have been disproportionately captured by the wealthiest, widening the gap further. Under-taxation of wealth helps to entrench inequality, which depresses wages and domestic demand, reduces incentives for productivity-enhancing investment, and weakens the foundations of long-term growth. Inequality is also among the strongest predictors of democratic erosion, even in long-established democracies.

This briefing recommends that the government launches a High Wealth Compliance Programme to deliver the administrative systems, data, and legal architecture required to make high wealth visible, and strengthen enforcement and compliance. The Programme must be focused on delivery with budget, milestones and clear accountability. Its task is to ensure that, by the end of this Parliament, the state has the capability to tax high wealth fairly and effectively.

Image: iStock