The impact of Covid-19
The pandemic has put poorer households under great financial strain. On average, low and high income households have seen similar proportionate falls in income - but this does not mean that the pain has been equally shared. While richer households can cut back on non-essential spending and fall back on their savings, poorer households are unable to do so. Over half of adults in the poorest 20% of families have had to borrow to fund basic costs such as food or housing.
Unless action is taken, the unequal economic impact of Covid-19 will be felt well into the future. Job losses have been concentrated in the poorest households, threatening a longer-term divergence in employment chances. Many of the richest households have been able to build up their savings over the course of the crisis, further widening the gap between them and the increasingly economically insecure poor. They will use these increased savings to buy assets. Even as the economy has tanked, asset markets have remained reasonably buoyant. This divergence can in part be explained by the wealth gap because the asset-owning class has been least affected by the crisis and in part because of policy decisions that protect financial markets, even at the expense of the real economy.
Poorer households have also seen far worse health outcomes than the well-off. In part, this is because they are less likely to be able to work from home and are therefore more exposed to the virus. It is no small irony that the UK’s “key workers” earn, on average, 8% less than the median wage, reflecting in part the freeze on public sector pay under austerity and persistently low pay in sectors such as social care. At the same time, the UK’s high levels of economic inequality have given rise to wide health inequalities, which the Marmot Review found to have widened since 2010. One consequence of this is that the Covid-19 death rate in the most deprived parts of the country is double that of the most well-off.
Standard Life Foundation have launched a Coronavirus Financial Impact Tracker to monitor the economic effects of the pandemic on people’s finances.
Analysis from NEF has found that inequality in the UK has increased since the start of the pandemic. It finds that the poorest half of households are on average £110 worse off per year, while the top 5% have gained £3,300 on average.
Research by Citizens Advice has found that 6 million UK adults have fallen behind on at least one household bill during the pandemic, with those at the sharpest end of the labour market hit hardest.
The Health Foundation has warned of "rising health inequalities due to pandemic" - their research shows that poorer areas are more likely to have higher Covid-19 death rates.
Wealth taxation
The wide disparities in the distribution of wealth have led to an emerging consensus that the way in which wealth is taxed needs to be reformed. While wealth has soared relative to incomes over recent decades, with these gains concentrated very narrowly among high-income households, the tax take from wealth has remained flat.
Property wealth constitutes an important part of this. House prices in the UK have tripled relative to incomes since the 1970s, a key driver of economic inequality. But soaring property values have been left largely untaxed, with a council tax system still based on 1991 property values. Economists point out that land and property taxation is an efficient mechanism since they are fixed and their rise in value often occurs without any work, effort or skill on the homeowners’ part.
Income from wealth , including dividends and capital gains, is currently taxed at lower rates than income from work, one reason why the very wealthy pay a much lower effective average rate of tax on their remuneration. The system of inheritance tax includes a range of reliefs and exemptions, which can allow the wealthiest estates to avoid it: the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2-3 million. Tax avoidance schemes also allow the very wealthiest to circumvent tax. Among the wealthiest 0.01% of household, who hold 5% of national wealth, approximately 30-40% of wealth is held offshore.
Proposals for tax reform include equalising the rates of tax on income from wealth and income from work; reforming land and property taxation; reforming inheritance tax; and proposals for annual or one-off taxation of household wealth.
IPPR have published proposals to equalise the rates of tax on income from work and wealth and integrate all income into a single progressive tax schedule. It estimates that such reforms could raise around £100bn in annual revenue.
The Resolution Foundation outlines how a series of relatively minor reforms to the taxation of wealth which could raise significant sums without, it argues, significant political opposition.
The broadly-based campaign group Fairer Share outlines the case for a proportional property tax to replace council tax, thereby bringing property taxation into line with the principle that taxes should be progressive (rising with ability to pay). The Institute of Fiscal Studies has argued for the reform of council tax to make it more progressive, while IPPR has proposed the abolition of business rates and the introduction of a land value tax which would capture the increase in land value when planning permission is given.
University of California economists Emmanuel Saez and Gabriel Zucman outline how a progressive wealth tax could work, drawing on a wide range of evidence on wealth inequality, technical feasibility and economic impact.
The UK Wealth Tax Commission established by the LSE has explored the viability and desirability of a wealth tax in the UK. Its final report concludes that a one-off wealth tax set up to respond to the impacts of Covid-19 could raise £250 billion over five years. The IMF has proposed a similar temporary 'solidarity levy' on richer households to pay for measures to combat post-pandemic inequality.
IPPR proposes the abolition of inheritance tax and its replacement by a donee-based gift tax which would tax all gifts over a minimum amount, thereby encouraging the dispersal of estates and reducing avoidance.