Why taxing wealth more effectively can help to reduce inequality and poverty

Oliver Pearce Inequality, Tax

Since 2014, Oxfam’s Even It Up campaign has been pressing governments to tackle economic inequality because it is hindering efforts to end poverty. Recent World Bank estimates show that according to current economic growth predictions – and if present levels of inequality remain unchanged – in 2030 about 6.5% of the global population will still be living in extreme poverty. Tackling inequality to reduce each country’s Gini index by 1% per year would reduce extreme poverty more than increasing its annual growth rate by one percentage point above forecasts.

Further, International Monetary Fund economists have found that inequality both hampers the power of growth to reduce poverty and diminishes the robustness of growth. Lower inequality tends to be associated with faster and more durable growth. As noted by former World Bank chief economist Francois Bourguignon, redistribution through taxation and spending policies might achieve: “not only greater equality but also faster growth, and for developing economies, faster poverty reduction”.

Wealth inequality is more acute than income inequality.  Last year the wealth of the world’s billionaires grew by $2.5bn a day – or around 12%, whilst the combined wealth of the poorest half of humanity fell by 11%. One of the reasons is that – as economists including Thomas Piketty have pointed out– returns to capital tend to outstrip the rate of economic growth, so those who have capital can become richer more quickly than those whose main income is from labour.

In addition, wealth inequality entrenches privilege at the top and limits equality of opportunity. The richest can benefit from returns on wealth such as profits on investments or property, unlike those at the bottom. The wealthiest may also be able to use their money and power to influence government policies to reflect their interests.

Wealth is often under-taxed

This trend is exacerbated by most governments’ approach to taxing wealth. Globally, just four pence in every pound of tax revenue collected in 2015 came from taxes on wealth such as inheritance or property. For most forms of wealth in most countries, the rate of tax on capital gains or other forms of wealth taxes is much lower than equivalent tax rates on labour. This helps to entrench the high returns to capital, exacerbating wealth inequality. The UK is no exception, with tax rates on capital gains set at 10% (for basic rate taxpayers) or 20% (for higher rate taxpayers), significantly below the equivalent personal income tax rates of 20% or 40% (or 45%).

There is growing support for better use of wealth taxes to tackle inequality. The outgoing head of the IMF, Christine Lagarde, has proposed using wealth taxes to tackle inter-generational inequality. International economists on the right as well as the left have suggested how wealth could be taxed more effectively – with options including a land tax – in order to address acute wealth inequality and raise extra revenue for governments to invest in public services and poverty reduction without harming growth.

Another proposal from the Institute on Fiscal Studies is that governments consider taxing the returns to wealth at the same level as income from labour. Such a change would help to arrest growing wealth inequality as well as raise revenue in a fairer way.

Another option governments can consider is a net wealth tax, which could be less distortionary than other kinds of tax. Although some governments have moved away from this model, current net wealth taxes in Spain, Switzerland and Norway appear to be working well and have reasonably broad support. Whilst the design of specific taxes can be no doubt be improved, such taxes raise important revenue, help to address wealth inequality and send a signal that governments are committed to creating fairer economies.

Bill Gates and Warren Buffet have called for higher taxes on wealth, and US billionaires including George Soros, Chris Hughes (co-founder of Facebook) and heiress Abigail Disney recently urged presidential candidates to back a wealth tax on the richest Americans to create a more equal society. 

Cracking down on tax avoidance

Although most wealth taxes should be progressive because the amount of tax due should be linked to the amount of wealth someone owns, very wealthy individuals may be able to avoid them by employing accountants who can advise them on how to move wealth offshore or into assets that are harder to identify. Properly structured wealth taxes could help to address this, and would have to come alongside concerted action to tackle tax dodging. Oxfam supports the idea put forward by leading economists including Nobel Prize winner Joseph Stiglitz, Thomas Piketty and Gabriel Zucman to see how a global asset registry could be implemented, which would mean tax officials can see who owns what wealth around the world. Already, improved technology and greater exchange of information between governments on tax-related data is making it harder for individuals to hide assets offshore than in recent years.

Oxfam and others have also long been calling for transparency in tax havens, including public registers of beneficial ownership, to help ensure that governments of countries rich and poor can claim the revenue they are due.

Reforming wealth taxes in the UK

In the UK our wealth taxes are relatively regressive, as the Institute for Public Policy Research has shown, mainly because Council Tax, which makes up the largest proportion, is not progressive: poorer people pay a relatively higher proportion of their incomes on Council Tax. The UK raises slightly more of its tax revenue than most other countries from wealth taxes, but as a proportion this remains low – about 4% of GDP compared to 15% from taxes on income and 11% from consumption. Recent changes such as a higher threshold for income tax and cutting capital gains and corporate tax rates have tended to make the UK’s tax system overall less progressive.

There is growing support for reforming UK wealth taxes to make them fairer from across the political spectrum, with various options being proposed. For example, the IPPR Commission on Economic Justice, which includes the Archbishop of Canterbury and senior business figures, has called for  “a transformation of the tax treatment of wealth in the UK” in order to create a more equal society, including an annual property tax, a land value tax, and a lifetime donee-based gift tax.

Former Conservative minister Lord David Willets, now chair of the Resolution Foundation, says a tax on wealth is needed to tackle rising levels of inequality between young and old. The Resolution Foundation has calculated that almost £7 billion a year could be raised by “tightening up” existing wealth taxes and subsidies.

IFS Director Paul Johnson argues that the UK’s current system of wealth taxes could be fairer and raise more money, for example by changing council tax so it’s proportional to the current value of the property, a form of land value tax, and closing obvious loopholes in the capital gains and inheritance tax systems. Bank of England former deputy governors Rachel Lomax and Sir Charles Bean have said governments should consider taxing wealth better, and property in particular, to reduce the need for higher government borrowing.

Further ideas for consideration are aligning the rates on capital gains with income tax; and perhaps a net wealth tax. By way of illustration, Oxfam has calculated that a net wealth tax based on Spain’s model could raise about £10 billion a year, and reduce the UK’s Gini coefficient by around 1 per cent.

Time to tax wealth more effectively

To illustrate the magnitude of revenue that could be harnessed through a small increase in taxing wealth globally, Oxfam estimated it would only take a small increase (0.5% of the value of net wealth on the wealthiest 1% of people in each country) to raise sufficient revenue to ensure that every child goes to school and no one is bankrupted by the cost of medical treatment for their families. Thinking about wealth taxes in this way shows that small taxes on those holding significant wealth could not only help reduce inequality in itself, but also be put to powerful use to further close the rich-poor divide through funding public services.

Oxfam has developed policy recommendations on different wealth taxes that could be used to help reduce inequality and raise funds to fight poverty (for example inheritance, property, capital gains, net wealth taxes) which colleagues around the world adapt to domestic contexts. For example, colleagues in India, where the top 10% of the population own almost three quarters of all wealth, have contributed to a major tax reform process by analysing how the tax system could be more progressive and raise additional revenue to invest in much-needed social services.

Many countries are already managing to raise significant resources in a fair way by taxing wealth, so this comes down to political will. Governments can decide to use wealth taxes more effectively, at the same time raising more revenue for fighting poverty and inequality-busting public services. Rich countries can also use some of the extra revenue raised from wealth taxes to contribute to development aid for tackling climate change, and investment in vital public services which help to reduce gender and economic inequality.


Oliver Pearce