The most damaging thing about wealth

Of course it is. Pensioners may look poor, and get upset when people try to take away their free TV licences, but they have houses. Millennials just have avocados; if they’re lucky they have a fork to mash them with, and a sourdough starter in a jar they carry around from rented house share to rented house share.

Wealth of any kind is an amazing enabler. Even a few thousand pounds in the bank can enable you to wait it out for a better job, instead of taking the first one that comes along. It can enable you to be safe from financial harm if you get ill. And, of course, wealth can enable you to start a business and get even wealthier.

When I worked in Number 10, the Conservative policy advisers were endlessly writing speeches and memos about helping the ‘risk-takers’, usually with tax cuts. No-one ever seemed to notice that these risk-takers were only able to stake a few million on the next big start-up because they had a few million in the first place.

But probably the most damaging thing about wealth is that it can be passed on. It can enable you to give your kids a leg up in life, perpetuating your privilege. We like to believe we live in a meritocratic society, where all have an equal chance, but wealth is like a weight on the die every time it is cast. If your parents have money, you’ve got luck on your side.

I must confess: I went to private school for many years, funded by some sort of family trust left over from the time when my mum’s family was seriously rich. And my dad lent me money to help me buy my first flat. I am well aware that many of the privileges of my life today were bought by someone else’s wealth, not my hard work.

And this is a growing source of division in our society. By the age of 40 there’s now nearly a 20 percentage point gap in home ownership rates between the children of rich parents, and the children of poor parents. Since the financial crisis, home ownership among the least wealthy half of the population has fallen by around 12%, while it’s gone up 1% among the richest.

But as I say, this is all rather banal. David Willetts wrote a whole book about this a decade ago. The question that plagues me is why we’re so dreadful at doing anything about it. Taxing high incomes is surprisingly popular across the political spectrum, but the moment you start talking about taxing wealth, you lose middle England completely. The Lib Dems’ proposals for a mansion tax lost them countless votes and seats, even though it was only to be levied on property values over £1 million.

And inheritance tax? This ought to be a popular tax. You don’t need to pay a penny until you are literally dead. I’d be delighted to pay all of my tax bills post mortem. And yet somehow, people consider it to be an egregious assault on their financial freedom.

It’s economically irrational. The best way to encourage growth is to have low taxes on the things that generate growth, like work. Instead, we have low taxes on money that is sitting dormant in bricks and mortar. It would be much better to tax this stagnant wealth and get it moving again.

The funny thing is that when you ask people in principle about this, they agree. Ask if tax should be low on money you’ve earned, and high on unearned wealth, and people will say yes. But the moment you tell them that ‘unearned wealth’ means Granny’s two-bed terrace, people immediately feel they are entitled to the money.

Behavioural economists call this ‘loss aversion’. We fear losing things we have far more than we value getting new things. Once you’ve acquired some money – even if it’s by dint of waiting for a relative to pop their clogs – you’ll cling on to it for dear life. But if the money hasn’t arrived yet, well, losing a bit of tax doesn’t make much difference. How many of us actually check our payslip every month to work out how much cash is being sent to Uncle Phil at the Treasury?

But don’t despair. We can slow the excessive accumulation of wealth, and we can do it through our tax system. First, instead of having an annual allowance of how much you can earn tax free, why not a lifetime allowance? We now have a lifetime allowance for how much you can put into a pension tax-free: I think it’s time to experiment with the same principle for taxes, too. Instead of removing people’s tax-free allowance when they earn £100,000 a year, remove it once they’ve earned £1 million in total.

And we do need a proper land or property tax, based on a small percentage of the value of the property assets you own. But the best way to help people accept this is to deduct it from people’s salaries through the pay-as-you-earn scheme. You tell the tax man your assets, he puts it into the tax code your employer uses to calculate your take home pay, and you probably stop noticing the bill.

The Conservative party is currently embroiled in a war on tax, with promises of lower tax bills being handed out like sweeties. But what they seem to have forgotten is that an effective redistributive tax system can actually reduce the burdens on state services. When money and opportunity are concentrated in the hands of those who have, the state will come under pressure to level the playing field. The Bank of Mum and Dad helps out thousands of young people; but it also creates political pressure for the state to help out those whose parental bank is out of cash.

Taxing wealth properly will enable us to tax income – and hard work – less. There must be a political win in there, if only someone will have the courage to take it.

To read the rest of the Riven Britain series, click here.

---

Polly Mackenzie is Director of Demos, a leading cross-party think tank. She served as Director of Policy to the Deputy Prime Minister from 2010-2015.

pollymackenzie