Alec Haglund, IF Researcher, introduces IF’s latest report which makes the intergenerational fairness case for a wealth tax and calls on politicians to offer the young a fairer tax deal.
Fiscal pressures require bold action
The nation needs to boost tax revenue in order to deal with the polycrisis the nation faces – sky-high government debt, public sector underfunding, COVID-19 spending, inflation and recession, as well as the inevitable future twin costs of climate change and an ageing society.
How that tax is raised is increasingly an intergenerational fairness issue. As our new report Tax wealth for the young: The intergenerational fairness case for a wealth tax explains, income from work is taxed far more heavily than income from wealth or overall wealth, which is hardly taxed at all. At the same time, total household wealth has grown in relation to national income. Who owns that wealth is increasingly both an intergenerational and intra-generational fairness issue. Wealth inequality within generations has increased rapidly since the 1980s. Wealth inequality across generations has also increased with the median wealth of older individuals continuing to grow substantially while the wealth of the young has stagnated.
As Labour is looking increasingly likely to win the upcoming general election, those of us who are interested in securing a fairer policy deal for young people and future generations would like to see some meaningful commitments to younger voters in the form of a fairer tax system. Unfortunately, just a few days ago the Shadow Chancellor ruled out any wealth taxes or increases to tax on income from wealth, instead relying on hope that growth itself could fund spending ambitions.
Tax policy must be fairer on the young
IF’s report analyses the growth in both overall wealth and wealth inequality in the UK, and concludes that that a moderate annual tax on personal wealth above £2 million would improve intergenerational fairness within the tax system and put the public finances on a sustainable footing for future generations.
Taxing wealth is extremely popular among the electorate, with survey results showing that three-quarters of Britons support annual wealth taxes on millionaires. The call for wealth taxes has been echoed by various charities, think-tanks, and campaigning organisations such as Tax Justice UK and a coalition of wealthy millionaires who say taxing their wealth is the right thing to do. IF’s new report aims to put further pressure on political parties to adopt a wealth tax by adding an intergenerational fairness perspective to the many benefits of wealth taxes.
Diverging fortunes
Although income inequality has remained relatively stable for the past two decades, wealth inequality has continued to increase. Naturally, this means that inequalities between rich and poor have grown, but the division of wealth is now becoming more and more apparent when viewed through a generational lens.
As IF’s new report shows, the median wealth for those aged 65 and over has increased three times as much as the median wealth of 25–44 year-olds between 2010 and 2020. As a result of unequal levels of wealth accumulation and an aging society, the share of total wealth held by 18–44 year olds fell from 28% in 2007 to only 15.5% in 2016. Older people have, on average, benefitted massively from the growth in asset prices over recent years while the young have fallen behind. Therefore, any political party cannot look away from wealth when considering options for how to fund spending ambitions, as taxes on the young and on work are already much higher than taxes on wealth.
Why tax wealth?
Total household wealth in the UK now stands at approximately seven times national income, or £15 trillion. Wealth and income from wealth form an increasingly important part of the economy. While wealth currently exists as a source of inequality, it is also a potential source for raising tax revenue in an intergenerationally fair way.
For a progressive tax system to function as intended – raising sufficient revenue while reducing inequality – it must be reformed when changes in the economy require the tax system to adapt. The current tax system is intergenerationally unjust as it places a huge tax burden on young people and on those receiving their income from work while affording privileges to older and wealthier generations who have been fortunate enough to amass large amounts of wealth.
Even a moderate wealth tax that only affects approximately 1% of the population would significantly contribute to making the tax system more intergenerationally fair as it would mean that taxes on work could be reduced. As the report makes clear, an annual progressive wealth tax that taxes wealth over £2 million at 0.8%, over £5 million at 1% and over £10 million at 1.2% would raise £18–£23 billion per year and allow the government to raise the tax-free personal income allowance to £13,800 with billions to spare for the Treasury.
The many benefits of a single policy
There are multiple benefits of a well-designed wealth tax to young people and to society as a whole.
Both present and future governments are likely to recognise the need for increased public investment to battle climate change and to deal with the health, care and pension costs associated with an ageing society. A wealth tax would be an intergenerationally fair way to raise tax revenue for increased public investment, instead of continuing to place an unfair and disproportionate tax burden on the young and on income from work.
Furthermore, a wealth tax would have positive impacts on the health of the economy as it would contribute to slowing down increasing levels of inequality between the rich and poor and old and young. High levels of wealth inequality lead to an economy characterised by low growth, low productivity, low wages, and inefficient use of assets, all of which disproportionally affect the young. However, even a moderate wealth tax would contribute to tackling these interlinked and self-reinforcing trends.
A wealth tax could be used to reduce the tax burden on the young and on income from work, with billions of tax revenue to spare, and simultaneously contribute to building a healthier, more productive, and intergenerationally fair economy where growth is shared between the generations.
A wealth tax is intergenerationally fair
Older generations have benefitted from an unprecedented temporal period of rising asset prices, free university tuition, generous pensions, and sky-rocketing property values. Young people have not been so lucky to be born in such a time period, and many are unable to save even small sums at the end of the month. Young people must spend a large part of their incomes on essential spending, and as real wages have remained stagnant for two decades it has become all but impossible for young people to build up wealth.
It is a matter of intergenerational fairness how the necessary tax revenue to deal with an ageing society, funding public services and tackling climate change will be raised. IF calls for an annual progressive wealth tax to be implemented to relieve some of the fiscal burden placed on the young and future generations, with parts of the revenue used to lower the taxation burden on income from work. Despite the lack of bold action from the main political parties on intergenerationally fair tax policy, we must continue to argue for wealth to be taxed fairly. A wealth tax would be a win-win for all generations and contribute to making the economy and the tax system work for everyone – the young, the old, and those to come.
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