The UK’s tax system a significant barrier to ending regional wealth inequality, new IPPR North research argues

The UK's tax system is holding back efforts to level up the country, with the under-taxing of income from wealth exacerbating harmful inequalities for poorer areas of the country. 

Analysis by IPPR and IPPR North finds that regional wealth gaps are growing and that those in London and the South East are more likely to benefit from the preferential tax treatment of income from wealth. 

Our analysis finds:  

• The UK is in a wealth inequality spiral: in which inequalities in wealth generate inequalities in income and make wealth inequality worse. Our findings imply that such a spiral may well be present in the UK. Around 40 per cent of investment income in the UK is generated in London and the South East despite being home to a quarter of the population, and an increasing share of total unearned income is accumulating there.  

• The tax system is accelerating regional inequalities: income from work is generally more highly taxed than income from wealth. Having explored the regional distribution of where taxes are paid and compared this to the advantages of the tax system for incomes from wealth as compared to earnings from work, we conclude that the tax system is accelerating regional inequalities. 

• Spatial inequality is a systemic feature in the UK because of the lighter tax treatment afforded to wealth compared to work: There is a high concentration of wealth stocks and incomes from wealth in some parts of the country. For instance, chargeable capital gains per head amount to over £2,400 in London but only £500 in Wales. 

• London and the South East benefit most: We find the tax advantage on incomes from wealth accrue overwhelmingly to London and the South East, across capital gains tax, dividend tax and inheritance tax. 

Wealth inequality means a poorer quality of life, poorer health and shorter lives for many. It also places barriers in the way of those seeking better opportunities for themselves and their families. Successive governments have failed to reverse the entrenched wealth inequalities that now scar the UK. 

Our report illustrates how the tax system is designed in such a way that some of the wealthiest people, concentrated in London and the South East, can end up paying lowertax rates on their total income than those whose income comes from work, such as nurses and teachers. The report argues that the lighter tax treatment given to wealth is a significant barrier to rebalancing the UK. 

The report Supporting the status quo: How the taxation of wealth in the UK grows regional divides, urges the government to use the Autumn Budget to begin a process of rebalancing the tax system. 

As IPPR has called for previously, we recommend a series of reforms to rebalance the tax system, including: 

• Taxing different types of income equally: In the long-term we propose a unified tax schedule for all income types, including capital gains and dividends, to align with income from work by the end of this parliament. In the short-term, we propose the equalisation of capital gains tax with income tax implemented at the upcoming budget. 

• Reforming property tax: In the long-term we support replacing the outdated and regressive council tax with a proportional property tax to reduce regional inequalities over this parliamentary term. In the short-term, we propose immediate reforms, such as higher levies on empty homes and two new additional higher council tax bands at the next fiscal event. 

• Reforming the transfer of wealth: In the long-term we propose replacing inheritance tax (IHT) with a lifetime capital acquisitions tax to reduce intergenerational wealth inequality in this Parliament. At the budget we propose capping IHT reliefs on business and agricultural transfers to minimise tax avoidance now. 
   

To redouble the impact of reforms in slowing regional divergence, additional spending funded by these tax changes should target closing regional divides. 

Marcus Johns, IPPR North Senior Research Fellow, said:  

“The tax system's bias towards wealth is one of the most significant barriers to levelling up that we face.  

“Our research shows that we under tax income from wealth compared to income from work and this special treatment benefits people living in the richest parts of the country like London and the South East. This is not just unfair, it's a handicap on our efforts to rebalance wealth and opportunity between the regions. 

“The evidence shows that 60 per cent of all private wealth in the UK is inherited rather than accumulated through work. That means people who inherit very little, or nothing, face an uphill task to build the wealth needed for a comfortable lifestyle. 

“We need to level the playing field on tax, to reflect the value we place as a society on work and productive wealth creation as opposed to wealth extraction.” 

Dr George Dibb, associate director for economic policy at IPPR, said: 

“Taxes don't just raise revenue, they also shape our economy. But right now, the UK's tax system is skewed, holding back attempts to reduce regional economic inequalities and benefiting a lucky few who largely get their income from wealth, not work.” 

“At the moment our tax system is driving regional inequalities – it's time to take our foot off the accelerator. We propose a number of reforms, including equalising capital gains tax with income tax.” 

“By taxing wealth in a fairer way, government can help regionally rebalance our economy, correcting widening inequalities in wealth, and consequently in health, opportunity and living standards.” 

ENDS 

NOTES TO EDITORS 

1. The IPPR paper, Supporting the status quo: how the taxation of wealth in the UK grows regional divides, by Henry Parkes and Marcus Johns, will be published at 00:01 hrs Thursday, 29 August 2024. It will be available for download at http://www.ippr.org/research/publications/ 

2. Lower tax rates are found on income profiles more likely to be found in London and the South East. See chart below: archetypes of different ways to earn £40,000 (in 2024/25)