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The Progressive Policy Think Tank

Wealth inequality isn’t inevitable – it’s a political choice

Inequality is often treated as a law of nature - but really, it's the result of conscious political choices. It's time to choose equality.

The recently published ‘Paradise Papers’ have refocussed attention on just how much wealth the richest in UK society own, and how even in a democratic society the rules you play by depend on who you are. The Papers echo the findings of a new discussion paper for the IPPR’s Commission on Economic Justice, which shows the UK is a wealthy nation; but that wealth is very unevenly divided. The wealthiest ten percent of households have in aggregate five times the wealth of the bottom half of households. The wealthiest 1,000 individuals and families in Britain have a combined wealth of £658 billion. By contrast, the net wealth of the lowest 30 per cent of households is £200 billion. Meanwhile, the British Medical Journal has just released a study claiming that over 152,000 people have died from the effects of austerity. 

The official statistics are very likely to be an underestimate of the wealth held by the top, precisely because wealthier people obscure their wealth and are difficult to survey. Excluding offshore wealth, the top 0.01% are estimated to hold 3.3% of the UK’s wealth. But when we include offshore wealth, researchers estimate that 5.1% of the UK’s wealth is held by this group. The proportion of the wealthy’s wealth held offshore has been rising for the past half-century.

As well as vertical inequality between individuals, there are large horizontal inequalities in the UK, between different groups. At the forefront of political debate is inequality between generations. Every generation since the post-war ‘baby boomers’ has accumulated less wealth than the generation before them had at the same age. The other major divider is where in the country you live. The total value of housing stock in London is now greater than the housing stock of all of Wales, Scotland, Northern Ireland and the North combined. Median household wealth in London increased by 14 per cent between 2010 and 2014, but in Yorkshire and the Humber it fell by 8 per cent. Wealth inequality also persists as seen through gender, ethnicity and class lenses.

Moreover, things are getting worse. While wealth inequality actually fell for much of the twentieth century, since the 1980s both wealth inequality and wealth concentration have been rising. The share of total wealth held by the top 10 per cent rose from 46.7 per cent in 1984 to 51.9 per cent in 2013. More recently, between 2010-2012 and 2012-2014, over half of the increase in personal wealth went to the top 10 per cent of households.

There are multiple causes for wealth inequality, starting at birth. In Britain today, how much wealth you start off with in life still depends on who your family are. Those with the highest incomes also inherit the most across their lifetimes. In fact, inheritance is becoming more important in determining lifetime wealth, because the housing boom has meant that older generations have more to pass on, while also making it harder for younger generations to independently get on the ladder.

Compounding the unequal distribution of wealth that people start off with in life, our economic system also has inbuilt drivers that cause levels of wealth to diverge.

Firstly, wealth generates income in the form of rents, such as rent from property, dividend payments, and interest. If capital were equally shared in the economy, or if wages rose at the same speed as returns to capital, this would not in itself generate inequality. However, as Thomas Piketty has meticulously detailed, returns to capital now exceed returns to labour. When this is the case, the total share of national income flowing to capital increases, and if capital is unevenly distributed, those with capital become wealthier. This is the case in the UK, where ownership of productive capital is highly unequal. The wealthiest 10 per cent of households own an estimated 77 per cent of all stocks and 64 per cent of bonds, while the least wealthy tend not to have any stocks or shares.

Two technological trends, automation and the rise of digital platforms, are likely to increase the share of national income going to capital. The IMF estimates that half of the fall in the wage share since the 1980s has been driven by technological change. In a world in which more work is done by robots, it’s increasingly important who owns the robots. The rise of digital platforms also risks concentrating wealth, particularly as powerful network effects mean they trend towards becoming monopolies, generating ever-greater rewards for a small number of ‘super star’ firms and their founders.

Secondly, assets appreciate and depreciate in value. This creates winners and losers; but when unevenly distributed assets consistently appreciate, overall wealth inequality increases. Housing, and the land housing is on, are the most visible example of this effect. As land is inherently limited, increased demand driven for example by demographic change, credit availability, family formation and increasing wages drives up the value of land. If ownership of land is broadly shared, this can decrease wealth inequality, and indeed while home ownership grew among all regions and income groups during the 1990s and early 2000s, this exerted downward pressure on wealth inequality. However, home ownership has been falling since the mid-2000s and is now at its lowest rate for almost three decades. With house prices too high for many to access ownership, rising property prices are driving wealth inequality.

Faced with huge differences in wealth and inbuilt drivers of divergence, wealth inequality can feel inevitable. But a final driver of wealth inequality gives at once cause for anger, and for optimism. This is that policy choices have in fact been exacerbating wealth inequality.

Unbalanced public investment has helped to drive apart house prices in different regions, with prospective infrastructure projects in London costing £36 billion to deliver and likely to raise land values by an estimated £87 billion. Demand side housing policies such as Help to Buy have increased prices and helped those who already had access to housing, while the collapse of state housebuilding has limited supply and pushed up prices. Dividend incomes and capital gains are taxed more lightly than income from work, and capital gains are not taxed upon death or on first homes. Perhaps biggest of all, our inheritance tax system allows the wealthy to pass on fortunes while avoiding inheritance tax, through trusts and passing on wealth more than seven years before death.

But if political choices and policy design can drive rising wealth inequality, they can also help decrease it. This does not have to mean a Thatcherite effort to create a “share-owning democracy,” not least because this actually led to a concentration of capital when individuals gradually resold their shares, recreating existing patterns of share ownership.  Solutions lie in both creating broadly shared wealth and redistributing the existing pot.

Key is spreading ownership of the productive economy more broadly. New models of employee ownership including trusts for workers in individual firms or within whole sectors would spread returns to capital and recognise workers’ contributions to economic production. To give everyone a stake in the economy, including people not in work, the government could also set up a Citizens’ Wealth Fund. A well-designed fund with social objectives could invest in businesses across the UK and in line with the government’s industrial strategy, sharing the returns through a universal dividend.  It could also invest in new housing for Britain, building enough houses to stabilise or reduce prices, and supporting new forms of ownership such as Community Land Trusts.

But tackling wealth inequality in the UK, entrenched through many generations, also requires reform of the tax system. We tax income from capital more lightly than income from labour; bringing these taxes in line with one another and ending exemptions on housing, agricultural land and upon death could raise billions. The Paradise Papers have highlighted again the need to go beyond vague promises of closing tax loopholes; the UK should end its complicity in global money laundering and tax evasion by fixing its tax haven problem and making sure it’s not possible to avoid inheritance tax by using a trust.

Wealth inequality is not a law of nature; it has been created and grown through an archaic class system, permissive tax systems that allow the avoidance of tax in their design, private capture of the returns from public investment, and a broken housing market. That policy choices have exacerbated the problem shows that the level of wealth inequality we have in society is a political choice, and getting it right is a political problem. The Chancellor is unlikely to take the necessary steps in his upcoming budget, but progressives should be looking now at big ideas to create broadly shared wealth in the UK, and how to create the political will to implement them.

Carys Roberts is a Research Fellow at IPPR. She tweets @carysroberts.

This blog originally appeared on Red Pepper.