ChainWhat it assumes · how to break it
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The government raises taxes on wealth, for example taxing capital gains at the same rates as income, tightening inheritance tax reliefs, or revaluing homes so that higher-value properties pay more council tax.
1
As a result, households with large holdings of property, shares and inherited assets pay more tax, and these assets are concentrated among the wealthiest households.
distribution of wealth
distribution of wealth
Assumes: Wealth is held mainly by people who also have high incomes.
But: Many older households are asset-rich but cash-poor, owning a valuable home on a modest pension, so some of the burden falls on people with low incomes.
2
This means large fortunes grow more slowly, because returns on assets and transfers between generations are taxed more heavily.
inheritance tax · capital gains tax
inheritance tax · capital gains tax
Best link to attack
Assumes: The wealthiest pay the tax rather than avoid it.
Assumes: The wealthiest pay the tax rather than avoid it.
But: Wealth can be given away early, held in trusts, moved abroad or placed in assets that qualify for reliefs, such as business property and farmland.
3
Consequently, wealth inequality narrows over time and less advantage passes from one generation to the next.
wealth inequality · social mobility
wealth inequality · social mobility
Assumes: The tax takes enough to change the distribution.
But: The stock of wealth is very large relative to the tax raised each year, so wealth inequality changes only slowly.
4
In addition, the revenue can fund services or benefits for poorer households, narrowing income inequality as well.
redistribution
redistribution
Assumes: The revenue is spent on poorer households.
But: The revenue may be used to reduce borrowing instead, leaving incomes at the bottom unchanged.
End
Wealth inequality narrows over time, and income inequality may narrow if the revenue is spent on poorer households.
Evaluation chain
- E1However, the effect depends on how much of the targeted wealth is actually taxed.
- E2Because the wealthiest households can afford advice on trusts, lifetime gifts, business and agricultural reliefs and offshore holdings, they often pay a lower effective rate than the moderately wealthy.
- E3As a result, the burden falls mainly on the upper middle, such as owners of a single valuable home, while the largest fortunes are partly untouched.
- E4So wealth inequality at the very top narrows by less than expected, unless reliefs and avoidance routes are tightened at the same time.
Another way to attack it: A council tax revaluation affects property wealth, but bills are set by band with a top band, so the most valuable homes may still pay a small share of their value.
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Questions this answers
- Assess the effectiveness of inheritance tax in reducing wealth inequality.
- Discuss whether the government should tax wealth more heavily than income.
- Explain the difference between income inequality and wealth inequality.
Diagram
Lorenz curve for wealth: the curve moves towards the line of equality, though slowly. Note that wealth is far more unequally distributed than income.
Reverse and related
Cut in inheritance or capital gains tax → more wealth passes intact between generations → wealth inequality widens.