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fabian tract 466 
taxing wealth inequalities 

chapter 
1 introduction 1 
2 inequalities in wealth 3 
3 wealth taxes in Britain 12 
4 how should we tax wealth? 25 

the authors : 
Chris Pond is director of the tow 'Pay Unit. Previously he was a lecturer in 
economics at the Civil Service College and research officer at the low Pay 
Unit. He has contributed to " ,Inflation and 'low 'Incomes " (Fabian 1Society1975), "Trade Unions & Taxation" ('WEA 1976), " To Him Who Hath " 

(Penguin 1977), "The Wealth Report" ('Routledge 1979) and" labour and 
Equality " ('Fabian Society 1980). He is a contributor to a forthcoming book 
"Taxation and Social !Policy" to be published by !Heinemann in 1980. 

louie Burghes worked as a research officer in the Urban Deprivation Unit 
of the Home Office before becoming research assistant to ,frank Field at the 
low Pay Unit and at the Child Poverty Action ·Group (tOPAG). !Currently 
she is a research officer of the CP~G. She has contributed to" The Conscript 
Army" (Routledge 1977) and "The Wealth 'Report" (Houtledge 1979) as 
well as a number of journals and newspapers. 

Bill Smith is a lecturer in economics at the University of Kent at Canterbury. 
He has lectured at Southampton University and undertook research at the 
University of Essex. His current research interest is in the effect of inflation 
on the distribution of incomes. 

acknowledgements : 
The authors are grateful to lesley Day and Jill Smith who commented on 
the draft of this pamphlet and Jill Sullivan who typed it under extreme conditions. 
Special thanks are due to Professor A B Atkinson and Professor 
C T Sandford, on whose work the authors drew heavily and who commented 
on an earlier draft. The authors also benefited gre·atly from the comments of 
Fabian readers. 'None of these people can of course, be held responsible for 
any errors or ambiguities that remain. 

this pamphlet, like all publications of the Fabian Society, 
represents not the collective view of the Society but only the 
views of the individuals who prepared it. The responsibility of 
the Society is limited to approving publications it issues 
as worthy of consideration within the Labour movement. 
Fabian Society, 11 Oartmouth Street, London SW1 H 98N. 
January 1980 I'SSN 0307 7535 ISBN 7163 0466 X 


1. introduction 
( ) 

Few of the divisions in British society are 
deeper than that a,ssociated with the 
unequal distribution of wealth ownership. 
The richest one per cent olf the 
population owns a quarter of Britain's 
personall wealth; the top ten per cent 
owns two-thirds. The ownership of 
wealth brings with it more than a comforta:
ble standard of living; in· our society,
property also conifers power, prestige and 
influence-the power not only to control 
one's l'ife, but those of others as well. 
Inequalities in wealth and inequalities in 
power go hand in hand. Despite the 
growth of home ownership in recent 
years the concentration of wealth remains 
extreme: one per cent of the population 
has contrdl over almost three-quartersof all wealth held as land, stocks and 
shares and government securities. 

It is for this reason that the last Labour 
government committed itse~f to achieve 
an " irreversible shift " in the distribution 
of wealth and power in favour of working 
people and their families. One of the 
main instruments for achieving such a 
shift is the tax system, and the Labour 
government, on corning to power, stated 
categorically "We shaN introduce an 
annual wealth tax on the rich". Despitethis early determination to tackle wealth 
inequalities, such a tax was never introduced 
(for reasons which were not wholly 
without merit and which are discussed 
in chapter 4). The inequalities remain. 
Indeed, the distribution of wealth holdings 
became somewhat more unequa~ during 
the period of Labour's stewardship. 

The approach of the .present Conservative 
administration, as we might expect, is 
wholiy different. One of their first acts 
was to abolish the Royal Commission 
established by their predecessors " to help 
secure a fairer distribution ". Si·r Geoffrey 
Howe, the Chancellor, has recentlyreaffirmed his commitment for earlyaction to lighten "the destructive burden 
" of Ca!pital taxes. Lord Cockfield has 
been undertaking an investigation of the 
changes that should be impilemented. 

The aim of this pamphlet is to examine 
the tevel and effects of wealth taxation in 
the light of wea·lth inequalities. In chap


ter 2 we review the evi ence available on 
the extent of those inequalities and consider 
how they have changed over the 
yea·rs. We a~so examine the types of 
wealth held, and their concentration, and 
consider the explanations which have 
been put forward for the extreme inequalities 
that .persist. 

Against thls background we consider, in 
chapter 3, the way in which wealth in 
Britain is taxed. To what extent can the 
current types and level of capital taxes be 
expected to affect the inequality in wealth 
holdings? And 'is 'Sir Geoffrey's assessment 
that they represent a " destructive 
burden" realistic? We .therefore eXamine 
the contribution of capital taxes to total 
tax receipts and see how that contribution 
has changed over the years. We a•lso 
report recent evidence on the burden of 
wealth taxes in Britain, in comparisonwith those of other advanced indust·rial 
nations. 

Finally, in chapter 4, we consider how 
wealth should be taxed to fulfil the objectives 
of economic efficiency and equitywhile helping to tackle the inequalities in 
its distribution. Would the Labour government's 
.proposals for a weaiJth tax have 
been a major s'tep forward in achieving 
these objectives, or are there more effective 
ways of achieving them? We present 
a package of possible reforms which 
would help to achieve a fairer distribution 
of wealth while at the same time 
improving the equity of the tax systemand improving economic efficiency. We 
will argue that what is required is not a 
smaller contri'bution by Britain's wealth 
holders to the total tax burden, as this 
Government proposes, but an increased 
contribution, albeit ievied with greaterequity. 

The purpose of this .pamphlet is therefore 
two~fold. It was first submitted to Lord 
Cockfield to help in his examination of 
the reform of capital taxation in November 
1979. We hope that the Go'Vernment 
will pay particular attention to chapters 
3 and 4 which detail the failure of the 
present system and present proposals for 
rationa'l reform. -But we also hope it 
will read carefully chapter 2 where it 


will find evidence of the urgent need for 
reform if the Conservative Party are serious 
about their declared intention of 
spreading weal·th ownership more widely. 

~he second aim of the pamphlet is longer 
term. If the Labour movement is to 
tackle decisively the inequalities that we 
document in this pamphlet it must be 
properly prepared, next time Labour 
takes office, with a coherent and well 
planned fis'Cal strategy. This will require 
debate within the movement as to what 
should be achieved and how we should 
go about it. We hope that this pamphlet 
will make some contrrbution to stimulating 
that debate. 


2. inequalities in wealth 
The ownership of wealth can confer 
many privileges. It extends a person'sfreedom, independence and security. It 
provides influence, power and prestige.
For the wea;lthy there is more choice and 
more oppotitunity. For some, wealth 
means increased income without forfeited 
leisure. But the assets generally included 
in a definition of wealth do not all bring 
such advantages. Wealth includes not 
on>ly stocks and shares, land and antiques, 
but nationa;l savings and savings in build· 
ing societies, owner occupied housing,
household goods and cash in the bank. 
The importance of wealth, then, is not 
only how much is owned, but what is 
owned. 

Given the benefits of wealth, it is not surprising 
that those who have it wish to 
keep it. Calls for a more equal d'i~tribu.tion 
are often criticised as mere displays of 
envy. But it would also be surprising, 
given the advantages of wealth ownership, 
rif those with little or no wealth 
were not ·interested in seeing it a little 
more equally divided. 

the distribution of wealth: 
the last fifty years 

Those who criticise the unequal distribution 
of wealth are often toid either that 
the data overemphasise the inequality of 
wealth ownership or that it is only a temporary 
problem: the di~ribution is 
rapidly moving towa~rds equa'lity. In this 
section we look at the distribution of 
wealth and how it has changed over time. 
We al'so look at th'Ose factors whkh 
might account for changes in the distri'bu· 
tion as well as its staibi1ity. 

It is generally believed that the distribu· 
tion of wealth ha;s beco.me considerably 
more equa!l during the last fifty years and 
that this trend will continue. But while 
it is true that the very wealthiest-the 
richest one per cent of the population-
do own a smaller proportion of wealth 
now than they did fif.ty years ago, wealth 
remains very unequally distributed. The 
wealthiest fifth of the population-thetop 20 per cent-still own 85 per cent of 
Britain's wealth, almost as much as they 
did half a century ago. It seems unlikely 
that we are witnessing a persistent move 
towards equality in wealth ownership. 

Th'is conclusion does not accord with the 
belief that the post-war period has seen 
a dramatic decline in inequality. Why 
have the changes that have taken place 
in the distribution of wea<lth been overemphasised? 
A ma;jor cause has been 
inadequate informarion. Until recentlychanges in the distribution of wealth over 
time could only be analysed by comlbining 
information on the distribution from 
different sources, often calculated on dif· 
ferent assumptions and covering different 
popula·t'ions. 

Only ·recently have we been provided with 
more consistent statistics 'On the distribution 
of wea'lth over a considera;ble 
peri.od of time. This has been calculated 
by Atkinson and Harrison for the period1923 to 1972 (A B Atkinson and A 
J Harrison, Distribution of Personal 
Wealth in Britain, Cambridge University 
Press, 1978). Their results, summarised 
in the table below, though rome consistent 
than previous estimates, lllre still 
subject to certa·in discontinuibes. The 

DISTRIBUTION OF WEALTH 1923-1972* 
% share ·Of total wealth 

1923 1938 1960 1964 1970 1972 
top 1 per cent 60.9 55 33.9 34.5 29.7 31.7 
top 2-5 per cent 21.1 21.9 25.5 24.1 23.9 24.3 
top 6-10 per cent 7.1 8.1 12.1 12.8 15.1 14.4 
top 11-20 per cent 5.1 6.2 11.6 12.9 15.8 14.5 
top 20 per cent 94.2 91.2 83.1 84.3 84.5 84.9 

*Eoonomica;lly independelllt population, England rand Wales. The estimates for 1923 
and 1938 are not wholly c'Omparable with those for 1960 and later. 
Source: A B Atkinson and A J Harrison, Distribution of Personal Wealth in Britain, 
CUP, 1978. 



precise figures should be treated with 
caution. But the estimates suggest that, 
while the share of wealth owned by the 
top 1 per cent had nearly halved, the 
share of the remaining wealthiest fi·fth 
of the population had increased. The top2-5 per cent had increased their share 
mar~nally, while the next richest five 
per cent more than doubled theirs and 
the next richest 10 per cent almost 
trebled their share. It appea-rs that the 
share of the wealthiest 20 per cent of the 
population as a whole therefore declined 
from 94.2 per cent to 84.9 per cent. This 
is hardly a dramatic decline over a per·iod 
of 50 years. Mmeover, there appears t0 
have been a considerable st·ructur.al shift 
between 1959 and 1960 which accounts 
for much of the decline in the shares 
of the richest groups observed over the 
peniod. By the beginning of the 1970s, 
the poorest four-fifths of the populationowned just 15 per cent of all personal 
wealth. 

As Atkinson had commented in an eadier 
work, " careful examination of these 
figures shows that the redistribution taking 
place ha·s been of a mther special 
sort . . . what redistribution there has 
been is not between the rich and the 
poor, but between the very rich and the 
rich" '(A B Atkinson, Unequal Shares, 
Penguin, 1972). The decline in the share 
of the very ·richest weaiJth-holders, 
which is almost wholly balanced by an 
increase in those only slightly lower 
down, can lbe eX'plained in part lby the 
reordering of the affairs of the 
wealthiest families to avoid capital taxation 
(see chapter 3). 

What is also important about these 
figures, is the suggestion tha:t while the 
share of the top 1 per cent had been 
falling it had been doing so .at a slower 
rate than earlier inconsistent long run 
series had suggested. " Overall, allowing 
for once-for-all jumps ·in the figures, 
the share of the top 1 per cent has, on 
average, been rfalling rut a ra'te df 4 percentage 
points per decade. This compares 
with a deoline of a'bout 7 percentage 
points a decade shown by the 
Royal Commission's figures." (A B 
Atkinson, "The wealthy and the wealth 

tax", New Society, 9 February 1978). If 
the share CYf. the top 1 per cent was still 
declining, it was doing so more slowlythan had previously lbeen supposed. But 
as Atkinson went on to say "a fall of 
4 .percentage points 'is still quite considera!
Jle." Can we predict a continuingdecline in the share of the top wealth 
holders? More .recent data suggests not. 
While the data summarised above suggest 
that the redistribution had virtually 
come to a halt lby 1960, the latest figures 
in fact show that the distribution of 
wealth has become more unequal since 
the early 1970s. 

wealth inequalitiesin the 1970s 

The most recent figures are taken from " 
new set of wealth data produced by the 
Inland Revenue since 19711. This new 
series (like that of Atkinson and Harrison) 
overcomes many of the criticisms 
l·evelled at previous wealth data (especiaUy 
lby the Institute of Economic 
Affairs). Some commenitatons had speculated 
that more adequate data would 
show much less inequality 'in the distribution 
of wealth. The main criticism 
was ·the Inland Revenue's assumption, 
in the absence of adequate da:ta, that 
half the population owned no wealth at 

aH. 

The new data produced by the Inland 
Revenue overcomes these .proi)Jems and 
al•lows us to estimate the distribution 
of wealth among the total adult population 
in the United Kingdom. It was 
assumed that the new series would 
show a much more equal distrilbution 
of wealth than the previous series. It 
did not. Below, we compare one of the 
earlier series, which assumed that persons 
not covered in the Inland Revenue 
Statistics have no wealth (Series B) with 
the new data which indludes both the 
wealth and the individuals m'issing from 
the sta'tistics (Series C). 

Because the Inland Revenue changedthe geographical coverage of their 
wealrh data 'in 1974, no direct comparison 
!between the two sets of figures can 
be made. However, what is striking is 


DISTRIBUTION OF WEALTH 1971 * 
shares in total .personal wealth ( %) 
Old New 

(B) series (c) series 
(GB) {UK) 
top 1 per cent 28.2 30.5 
2 per cent 37.4 38.7 
5 per cent 52.4 51.8 
10 per cent 67.5 65.1 
25 per cent 91.1 86.5 
50 per cent 100.0 97.2 
bottom 50 per cent 0 2.8 

*Adult population '(over 18). 
Source : Inland Revenue Statistics 1979. 


1

the laok of improvement in the share 

holding of the bottom half of the population. 
Because of the inadequacy of the 
data, the older Series has had to assume 
that half of the population owned no 
wealth at all. The new Series still suggests 
that the share of the least wealthy 
half of the population is negligible.
Whatever changes there have been in 
the distribution of wealth over the past 
fif.ty years or more, it remains remark-
a!bly unequai. 

The latest figures in the table 'be],ow show 
that the inequality has increased in recent 
years. We now ·turn to look at the reas·ons 
for the persistent inequal-ity in the dis-
tr.jbution of wealth and the causes of its 
increasing inequality in recent years. 

causes and explanations of the 
distribution of wealth 

While some have argued that Britain's 
unequal distribution of wealth was merely 
a reflection of our inadequacy in measuring 
it, others have argued that an unequal 

distr'i'bution of weaHh is inevitable. It is, 
they argue, the result of our being born 
without assets and acquiring wealth with 
age, for example, through savings. "Quite 
obviously in the most ·egalitarian df 
societies one would not expect the new 
born babe and the man on the point of 
retirement ·to have identical savings, or 
even the 50 year ·oid and the 60 year old, 
and there must therefore be a concentrat'ion 
·of wealth in a minority of hands in 
any society one can conceive of. Where 
inheritance is not allowed, only the old 
can be rich" (The Times, September 1968 
quoted in Atkinson, Unequal Shares, 
op cit). This " life cycle theory" of 
wealth ownership cannot be tested 
merely by analysing the distribution of 
weaHh holdings by age, a1though this has 
often been done. Estimates of the distdbution 
of wealth by age use data which, 
the Roya'l Commission have .pointed out, 
distort the value of the wealth holdings 
of some age groups, particularly the 
young. 

An .alternative way of testing the life 
cycle theory is to estimate how much 
wealth people might be able to save out 
of their earnings during their lifetime. In 
their fifth report, the Royal Commission 
on the Distribution of Income and 
Wealth 1(Rcorw) compared estimates 
of that sort with the Inland Revenue's 
estimates of the actual distribution of 
wealth. These .results, and those of two 
independent exper-ts, are given in the 
table on page 6. 

The results vary according to the assumptions 
made but they suggest that in 1974 
accumulated savings out of earn'ingswould lead us to expect the -top one per 

DISTRIBUTION OF PERSONAL WEALTH NEW SERIES (C)* 
% of adult population shares in p-ersonai wealth (%)
1971 1974 1975 1976 1977 

most wealthy 
2 
30.5 
38.7 
'22.5 
29.6 
23.5 
30.5 
23.7 
31.5 
24.0 
32.2 
5 51.8 43.1 43.8 46:1 46.4 
10 65.1 57.5 58.0 61.4 61.1 
25 86.5 83.6 83.3 84.2 83.9 
50 97.2 92.9 93.3 95.4 95.0 
*Adult population (over '18) UK 
Source: ·Inland Revenue Statis-tics 1979. 


DISTRIBUTION OF ACCUMULATED SAVINGS OUT OF EARNINGS FROM 
EMPLOYMENT AND Tiffi DISTRIBUTION OF TOTAL WEALTH 

Actua•l 

Distribution 

Distribution of Accumulated Savings of Wealth 

(1) 
(2) (3) (4)
Inland 
Atkins·on Flemming RCDIW Revenue 
Top 1 .per cent 3.0 5.5 6.9 22.5 
Top 2-5 per cent 11.2 11.0 16.6 20.6 
Top 6-10 per cent 12.9 na 14.7 14.4 
Top 11-20 per cent na na 21.3 18.8 
Bottom 80 per cent na na 40.5 23.7 

Notes : 

(1) Atkinson-assumes realistic lifetime earn'ings with 4-!-%. interest. 
(2) Flemming-allows for different earnings streams. 
(3) RCDIW-by age, sex and two social class groups, assumes compound interest of 4%. 
(4) Inland Revenue (C) Series 1974. 
na not ava:ilalble. 
Source: Roya'l Comm'ission on the Distrilbution of Income and Weal~h (Rcmw) Report
No 5, 1977, and Report No 7, 1979. 
cent to own between 3 per cent and 7 per 
cent of personal wealth. This compares 
with their actual share of 22.5 per cent. 
The majority of the wea'lth awned by the 
top wealth owners cannot, therefore, be 
explained from savings out of earnings. 
The same is true for the top 2-5 per cent 
of wealth owners. The sav.ings models 
m'ight explain holdings of between 11 percent and 17 per cent for this group, compared 
to an estimated actual wealth holding 
of 21 per cent. 'I'he wealthiest 6-10 
per cent are the one group who, according 
to the assumptions of the models, could 
have accumulated their wealth from 
earnings. But if the savings models were 
correct, then the wealthiest 11-20 per 
cent of wealth owners and the bottom 
80 per cent, would both own more wealth 
tJhan they do. The Royal Commission 
models suggest that the holding of the 
bottom 80 per cent would be almost 
doulble their estimated aotual wealth holding 
of just under 24 per cent. Clearly, 
extreme inequali6es of wealth cannot be 
explained 'by savings out of earnings. 

inherited wealth 

If the distribution of wea•Jth cannot be 
totally explained from savings out of 
earnings, at 'least a part of wealth owner


ship must be accounted .for by transmitted 
or inherited wealth. The RoyalCommission calculated tJhe proportion of 
total wealth owned by differ·ent wealth 
g·roups that could be attributed to transmitted 
wealth-indluding entrepreneurialfortunes, financial windfalls and wealth 
fr01111 accumul:a~ed investment income 
derived from inheritances. The results, 
shown in the ta'ble below, suggest that 
while the majority Of the wealth holding 
of the wealthiest can be accounted for bytransmitted wealth, transmitted or inherited 
weal'tlh is of no relevance to the least 
wealthy. 

Other evidence has .pointed to similar 
conclusions. Work by Professor Harbury 

TRANSMITTED WEALTH AS A 
PROPORTION OF TOTAL 
PERSONAL WEALTH 

% 
top 1 per cent 75 
2-5 per cent 52 
6-1 0 per cent 37 
11-20 per cent 25 
bottom 80 per cent nil 
overall 40 

Source: Royal Commission on the Distribution 
of Income and Wealth, RCDIW, 
Report No. 5, 1977. 


% ASSET COMPOSITION OF PERSONAL WEALTH BY RANGE OF NET 
WE.NLTH; 1976* 
range of net well'lth (lower •timit) 
Asset/Liability 
nil £5,000 £10,000 £20,000 £50,000 £100,000 £200,000 total 

physical assets: 

dwellings 28.7 50.2 56.7 41.5 30.4 21.2 13.1 41.0 
land 0.2 0.5 1.0 3.1 5.2 7.1 20.0 3.8 

other 
buildings 0.2 0.4 0.8 1.3 2.2 2.6 1.3 1.1 
household 
goods 7.3 4.5 3.5 3.3 3.3 3.7 4.5 4.0 
trade assets 0.7 1.3 1.3 3.9 5.1 4.9 2.8 2.6 

financial assets: 

l.isted ordina-ry 
shares ~including 
unit trust) 1.1 0.9 1.5 5.8 15.3 21.7 21.8 6.9 
other 
companysecur-ities 0.4 0.2 0.6 2.4 8.1 11.8 14.3 3.6 
life policies 26.9 20.4 17.6 15.7 7.2 4.3 2.7 15.1 
buildingsocietydeposits 11.7 9.2 9.0 11.5 8.2 4.8 1.2 8.9 
listed UK 
governmentsecurities 1.2 0.5 0.4 1.5 2.7 4.4 6.4 1.8 
cash and 
bank 
depooits 12.0 6.1 4.9 5.9 7.9 10.0 8.5 6.9 
national 
savings 10.3 5.0 3.7 2.7 1.5 0.8 0.3 3.5 
other 
financial 
assets 21.3 14.4 9.1 9.8 8.4 8.2 8.6 10.9 

liabilities: 

personaldebts -8.7 -3.2 -2.5 -3.6 -3.8 -4.7 -4.9 -3.9 
propertydebts -13.3 -10.4 -7.6 -4.8 -1.7 -0.8 -0.6 -6.2 

net wealth 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 

*This tabl•e relates only to the .population and types of wealth covered by the unadjusted 
esta'te mu!:tiplier estima~es, that is all those ·individuals· whose estates would require 
probate, or be liable to Capital Transfer Tax (forme11ly estate duty) in the event of 
their death. 
Source: Royal Commission on the D1stribution of Income and Wealth, Report No 7. 

matching the esta:tes of the wealthiest in work led him to the conclusion that " on 
1956-57 and .in 1965 with the estates of the evidence available, the role of inherithe 
previous generalion showed a strong tance in influencing the distribution of 
correla:t'ion between the wealth of sons wealth at the top end of the scale is sub-
and the size of the estates of their stantia:! and there has been no marked 
fathers. His resu1lts proved similar to change in ·the pattern of inheritance, at 
those of Wedgwood some th:irty years least up to the mid-1960s" (Rcmw,
earlier (1924-26). ·Professor Harbury's Report No 7, op cit.) 


DISTRIBUTION OF THE TOTAL VALUE OF HOLDINGS OF INDIVIDUAL 
ASSETS BY RANGE OF NET WEALTH 1976. 
proportioned total value of each assets owned by those of net wealth of 
£50,000 £100,000 £200,000 

physical assets: 

dwellings 13.7 
other buildings 46.1 
bod 69.8 
household goods 23.9 
trade assets 41.4 

financial assets: 

listed ordinary shares 70.2 
other company securities 76.9 
life policies 8.5 
building society 14.7 
UK govt securities 62.0 
cash and bank deposits 32.0 
national savings 7.0 
other financial assets 19.4 
total net wealth 25.4 

Note: 2.5% of wealth holders own £50,000; 0.7% 
Source: RCDIW, Report No 7, op cit. 

5.9 

24.3 

54.5 

15.0 

20.4 

45.8 

52.4 

3.3 

4.6 

44.9 

19.4 

2.3 

11.0 

14.5 

own £100,000; 0.2% 

2.5 

9.0 

42.1 

8.9 

8.3 

25.0 

31.0 

1.4 

1.1 

28.7 

9.8 

0.7 

6.2 

7.9 

own £200,000. 

Further work by the RCDIW supportedthis conclusion for later years. A study of 
estates in England and Wales in 1973 
showed that in gener~l the largest pro· 
portion of estates were left to rel•atives 
and that this share increas·ed the smaller 
the estates. The Commission's conclusion 
from this study supports the earher con· 
elusion by Atkinson about changes in the 
distribution of wealth. "The fragmenta·
tion of large wealth holdings at death 
reduces the share of the top 1 per cent, 
but to the benefit of the groups immediately 
below as a numlber of beneficiaries 
each receives a sizeable bequest ..." 
(RCDIW, Report No 7). At the same time, 
the concentration at the top is reinforced 
through marriage. From a study of 
women, wealth and inheritance (1973)
Harbury concluded that marriage had 
the effect of increasing rather than 
diminishing concentration at the top of 
the wealth distribution and suggested that 
inheritance will continue to play an 
important role in sha[Jing file distribution 
of wealth (ibid). 

the importance of assets 

Inheritance is one, if not the majorcause, of the inequality in the distr.ibution 

of wealth. Another influence on the dis· 
tribution is the way in which wealth is 
held. In recent years it has become clear 
that the assets Wlhich people hoild, the proportions 
in which they are held, who they 
are held by and how their relative values 
change are crucial determinants of the 

distribution of wealth. There have been 
changes in the proportion of total wealth 
accounted for by different types of 
assets. The greatest changes have been 
in shares and home ownership. Shares 
were a much smaHer proportion of total 
weal'th by 1976 than they had been in 
1960, although they showed some recovery 
towards the end of the period.
The most dramatic change was in the 
increase in the proportion of personalwealth accounted for by dwellings (while 
mortgage liability remained fa'irly slteady). 
How these changes in the asset composition 
of weallth affect the distri'bu~ion 
depends not only on the quantity of each 
asset owned but on their relative prices 
and their distribution among weaHh 
owners. 

who owns what ? 

The taoble on page 7 shows how the 
assets people own vary depending on the 


amount of wealth accrued. For those 
w'ith the smallest wealth holdings, dwel'lings 
were by far the most important rform 
of physical assets, whi<le the main forms 
of financial assets were life policies, cash 
and bank deposits and building society 
deposi'ts as well as national savings. The 
holdings of stocks, shares and land by the 
groups are minimal. At the other end of 
the weahh scale, for those w'ith over 
£100,000, stocks and shares are the most 
important component of their wealth 
accounting for over a third. Land and 
dwelJ.ings together account for another 
third. Cash and bank depos1its, building 
society deposits, household goods, life 
policies and national savings are o.f little 
interest to the very wealthy. 

Wnile dweHings formed a considerable 
proportion of the wealth of both ·Vhe least 
wealthy and the wealthiest, they are of 
greatest importance to those in the middle 
of the wearlth range. For those with 
between £5,000 and £20,000 housingaccoun'ts for at least a half of their 
total wealth With the proportion declining 
for both the more weaHhy and the 
less wealthy. 

Different groups hold their wealth in very 
different forms, and we should be aware 
thal, when we talk of " wealth " we are 
referring to a wide range of assets. The 
houses, bank deposits and national savings 
which form the bu1lk of the wealth 
of the less prosperous are matched by the 
land, stocks and shares and government 
securities held by the most weatrhy. In 
the table below we show the distribution 
of these different forms of assets between 
different .groups. The data 'is only available, 
as in the table above, for wealth-
holders (excluding half the adu1lt population 
who, according to the Inland 
Revenue statistics, have no wealth at all). 

The concentration of weai'th hO'ldingswhich we have already documented is 
greater sti'll when we consider particular 
assets. Only 2.5 .per cent of wealth holders 
(just over one per cent of the adult popul,
ation) owned wealth with a net vaJlue of 
£50,000 or more. This group owned over 
a quarter of aJl personal wealth (25.4 per 
cent). But this average disguises wide 

variations :between different types of 
assets. This same group owned a1most 
half the buildings (other than dwellings).
They owned almost 70 per cent of the 
land, and approach'ing three quarters of 
the listed ordinary shares {inoludingunit trusts) and other company securities. 
They also owned almost 'two thirds of the 
listed UK government securities and a 
third of all cash and bank deposits. The 
concentration is more remarkable stiU if 
we consider ownershrp by those whose 
assets (·minus liablilities) are worth more 
than £200,000. Only a fifth of one per 
cent of weai'th holders (perhaps one in a 
thousand of the adu1lt popul<l'tion) found 
themselves amongst this tiny elite. But 
tnis small number of people held no less 
than 42 per cent of all personal wealth 
holdings in the form of land, a quarterof the ordinary shares, and a third of 
other company securities and fisted UK 
government securities. This group even 
held a tenth of the cal'ih and 'bank 
deposits. 

Some forms of wealth are heavily concentrated 
in the hands of the few. But 
others are more even1y distributed than 
the overall distribution figures would 
suggest. The .important faotor is that the 
concentration is greatest in those forms 
of wealth Which confer social and political, 
aJS well as economic, power. The 
greatest dispersion of weahh appears to 
have been in those forms which aNow 
for greater consumption and improvedliving standards without the additional 
attributes of power and influence. The 
differentia'] ownership of different types 
of assets also hal'~ an effeot on changes in 
the distr%ution of wealth in addition to 
the effects of quantity and pr.ice changes, 
which we consider as the final part of this 
section. 

changes in asset pricesand quantity 

H ousmg. While housmg 1s the largest 
part of the wealth holdings of those in 
the middle wealth ranges, the largestwea'ithholders are of course most likely 
to own their own houses whi1e those at 
the bottom are least likely to do so. Only 
6 per cent of those ownling wealth with 


a total value of less than £1 ,000 own their 
own house compared with nearly 90 per 
cent of those with more than £50,000. 
Moreover, the va,lue of houses increases 
as total wealth increases. 

But it is in the middle wealth ranges that 
home ownership has had the greatestimpact in the last fifteen years and it is 
th:is change that has had some equa~lising 
effect on the distribution of weal·th. Since 
1961, the number <Jf owner occupiedhomes has increased by nearly ha,lf hom 

6.9 million to 10.9 million, increasing as a 
proportion of all dwelling·s from just over 
42 per cent to just under 54 per cent. And 
as the a,mount of owner occupied hous· 
ing has increased so has its price. Between 
1960 and 1976 there was an almost six 
fold increase in the price of housing, with 
a large part of the rise occurring between 
1971 and 1973. No other asset has 
increased by such a sUibstantiaJ. amount. 
Not surprisingly, the proportion of 
wealth owners owning ·their own homes 
has risen from just under 26 per cent in 
1960 to 48 per cent in 1977 and the value 
of dwellings as a proportion of all per· 
sonal wealth has doubled from 17.7 per 
cent in 1960 to 35.5 per cent in 1976. 
These changes combined are thought to 
have reduced the share of wea1<th of the 
top one per cent by about 6 percentage 
points between 1960 and 1972, (RCDIW, 
Report No 7, op cit). 
Stocks and Shares. Although stocks and 
shares only form a small proportion of all 
personal wealth (about 10.5 per cent in 
1976) changes in their relative price and 
quantity effects the overaH distribution of 
wealth because of their concentration 
among the very wealthiest. The top 1 per 
cent of wealth owners own 17 per cent of 
a11 personal wealth but more than 54 per 
cent of aU company securi~ies. The top5 per cent, more than 80 per cent. 

Since 1960, changes in share prices have 
had a considerable effect on the distribution 
of wealth. While for the greater part 
of the period, share prices generaHy rose 
in line with the Retail Price Index reaching 
a peak in 1972, they fell sharply up to 
1974. Since that time they have been 
increasing once more. The distr.ibution of 

wealth has reflected these changes. The 
changes are most clearly seen in the table 
on page 5. For example, between 1971 
and 1974, the share of the top 1 per cent 
of the popul·ation fell from 30.5 per cent 
to 22.5 per cent, but it has since recovered 
to 24 per cent in 1977. 

Land. Like stocks and sha·res, 1land forms 
only a small proportion of total personal 
wealth but its ownership is highly concentrated. 
In 1976, land accounted for on'ly 
about 5 per cent of aH personal wealth 
although its va'lue is known to be considerably 
understated becaus·e of technical 
problems of valuation. The top 5 per 
cent of wealth owners own a'lmost three 

quarters of al1 personally held Jand, just 
less than the proportion of aU personallyowned stocks and shares at 80 per cent. 
But, unlike stocks and shares, land has 
held its value since 1960 increasing faster 
than the RPI between 1960 and 1972 and 
r.ising steeply between 1972 and 1977. 

changes in the distribution 
of wealth 1960 to 1977 

As we have seen from the table on page 
3, here has been very httle redistribution 
since the early nineteen ~ixties. The 
main factors account!ing for the change 
that did occur in the distribution since 
1960 have been the fall and then the 
increase in the value of s~ocks and shares 
and the increase in both the value and 
ownership of owner occupied hous-ing. 
The chang'ing fortunes of the stock market 
were reflected in a declining, and now 
increasing, share of wealth of the topwealth holders. The increased amoun't of 
owner occupied housing and its risingvalue has increased the wealth holdingof the midd'le range of wealthier holders. 
An additional factor, particularly at the 
beginning of t'he period, was the 
increased hdlding of cash assets-mostlysavings including national savings, Building 
Society deposits and life assurance 
policies. Since these assets are of most 
importance to those at the bottom of the 
wealth distribution, an increase in the 

holdings of these assets may have had 
some equalising effect. 

But the equalis·ing effects of changes in 


the distribution of wea1:t'h during this 
period are neither irrevocable nor dramatic. 
Share prices have increased since 
1974 and the share of the top 50 per cent 
has climbed steadily. The continuinging upward trend in home ownership and 
the value of dwellings has continued to 
increase the share of middle wealth 
owners. The share of the boHom 50 per 
cent has been declining since 1974 and, 
as important, we do not know how badly 
those at the very bottom have fared compared 
to those nearer the middle. While 
savingS'---the cash assets-have been 
increa&ing over the last few years in an 
assumed response to inflation and the 
fear of unemployment, the return on such 
savings is considemb1y less than on other 
assets. 

Although there have been exceptionalperiods, it is general'ly true that the most 
wealthy are well placed to put their savings 
and inheritance in'to those assets 
which provide the best hedge against 
inflation. They tend to be the ass·ets that 
come .in large, expensive and indivisible 
lots, require specialised knowledge and 
for which purchase may require hefty 
fees. They are shares, antiques, housing 
and land. Housing is the only one of 
these assets which is important to the 
" middling rich " as well as the very rich. 
UnfQrtunately even tha,t requires the 
sort of secure and settled future which 
many manual and lower grade clerical 
workers do not enjoy. For those who 
have neither large lump sums nor sufficient 
credit standing, savings and investment 
are in the form of bank and building 
society deposits, and hfe assurance 
policies. In general they have provedless lucrative forms of savings. Nor do 
such forms of wea~th confer the economic 
and political power associated with 
land, stocks or shares. 

The conclus'ion must be •that wealth 
shares are highly sensitive to short term 
changes in asset prices. Since 1960 there 
have been periods in which the price of 
assets most important either to the richest 
or poorest wealth holders has changedrapidly. A fall in share prices that brings 
about a decline in the value of the top 
wea'lth holdings cannot, however, be 

treated as a redis.tTibution in any real 
sense. The poor certainly gain nothing 
even if the rich lose. Moreover, these 
short term changes, together with the 
longer term increase in home ownership 
have done little to a:lter the concentration 
of wealth as a whole. Power conferring 
assets remain highly concentrated in the 
hands of the few, while even increased 
owner occupation has been of benefit 
only to those in the top haH of the distribution. 



3. wealth taxes in Britain 
We have seen that extreme inequalities in 
the distribution of wealth persisted in the 
Britain of the late 1970s. This means 
more than wide disparities in the living 
standards or consumption possibilities of 
different social groups. The ownership of 
wealth confers prestige, status and influence 
over and above the income it provides-
the ability to influence not only 
one's own life, but that of others. Indeed, 
the greatest concentrations persist in those 
forms of wealth-land, government securities 
and company shareholdings-whoseownership carries with it social and political, 
as well as economic, power. 

why tax wealth at all? 

One of the most important instruments 
available to a government committed to a 
reduction of such inequalit·ies is the tax 
system. Before considering how wealth is 
taxed ·in Britain, we need to ask whywealth should be taxed at aU. For those 
concerned with the extreme inequalities 
in wealth holding described in the first 
section this question may seem redundant. 
But a clear understanding of the 
reasons for capital (or wealth) taxation is 
essential if we are to make an assessment 
of the current tax system in this respect. 
It ·is even more essential if we are to 
make a judgement about the type of 
wealth taxation we would like to see. 

tackling inequalities 

First ·let us examine capital taxes as a 
means of reducing inequalities in the distribution 
of wealth. This objective has 
clearly played an important part in the 
Labour Party's approach to capital taxation, 
as wi,tness·ed in Denis Healey's foreword 
to the Wealth Tax Green Paperpublished ~n August 1974: "The Governmen,
t is committed to use the taxation 
system to promote greater social and economic 
equality. This requires a ·redistribution 
of wealth as well as income. 
Thoroughgoing reforms a•re needed in the 
taxation of capita'! " (Cmnd 5704, HMSO). 

The tax system can be used ~n ·a number 
of ways to bring about a fairer di·str·ibution 
of wealth. First ther is the income 

tax system itself. Income and wealth inequalities 
tend to go hand in hand (a,lthough 
the connection is far from perfect). 
Those with large holdings of capital 
are usually able to der·ive an, at least 
comfortable, income from it in the form 
of ·rents, dividends, interest or capitalgains. At the same time, high income 
earners have the opportunity to accumulate 
property through their savings. The 
·income tax system might reduce inequalities 
in wealth by slowi'llg down this process 
of accumulation and by reducing the 
net income derived from wealth. 

But if governments are really serious 
about breaking down the concentration 
of wealth and power in the hands of the 
few, the income tax system will not take 
them very far. As noted in the previoussection, the heaviest concentration of 
wealth can be attributed not to accumulations 
out of savings, but to inheritance. 
Moreover, many of the top wealth-holdings 
are in forms that yield relatively 
little income 1n a taxable form (largely, 
no doubt, in order to avoid the ravagesof the income tax system). 

If wealth inequalities spring primarily 
from inheritance, it follows that a tax on 
gifts or bequests is likely to be more successful 
than a tax ·on the income derived 
from such wealth. But such an approach 
demands a patience which many mayfeel unjustified given existing wealth inequalities. 
The achievement of equalitymay take several generations even with 
an effective inheritance tax. 

Such inadequacies have led many within 
the Labour movement to advocate the 
use of an annual wealth tax as a means 
of redistributing wealth from rich to poor 
as an immediate objective. We will return 
to consider whether such a tax could 
be expected to achieve its redistributive 
objective in the following section. 

fairness in taxation 

The Conservative Party has expressedthe belief that: "The main pressure for 
heavy cap·ital taxes has always been poliaccompanied 
by a disproportionate increase 
lin the contribution of wage and 


ticai-in part mere egalitar,ian envy, in 
part a mistaken belief that some significant 
redistr-ibution of wealth could thus 
be achieved to the advantage of the poor " 
(A Maude (Ed), The Right Approach to 
the Economy, Conservative Central 
Office, 1976). 

But the arguments for taxing wealth gobeyond those of equality. Indeed, the 
capital taxes that exist both here and in 
other advanced industrial countries, have 
little to do with equality. Most <life more 
concerned with " equity" within the tax 
system. A basic principle of the British 
tincome tax system is that ~nvestment income 
should be taxed more heavily than 
earned income. Many conservatives regard 
this as yet another example of egalitarianism. 
Yet as the influential (andhardly leftist) Meade Committee on tax 
reform explained " Capital produces an 
income which, uniike earning capacity, 
does not decline with age and is not 
gained at the expense of leisure " (J. E. 
Meade (chairman), The Structure and 
Reform of Direct Taxation, Institute for 
Fiscal Studies/George Allen and Unwin, 
1977). As a result, many countries (including 
the UK) apply a surcharge to ~avestment 
income or allow special relief to 
earned incomes ; others discriminate 
against investment income through the 

use of an annual wealth tax. 

The logic does not end at taxing unearned 
income more heavi1y. As we have noted, 
much wealth yields no income at aU in a 
readily taxable form. It by no means follows 
that the " taxable capacity " of such 
wealth holders is zero. An employee with 
earnings of £10,000 whose great aunt has 
left him a Rembrandt (or even a Lowry) 
is clearly better off than his colleague 
who earn~ the same but only has wallpaper 
on his walls. Yet under an income 
tax system they both pay the same amount 
of tax. 

This argument for taxing wealth is often 
dismissed by those on the left as an intricacy 
of the tax system which is of interest 
only to tax · economists and 
accountants. For instance, Jeremy Bray, 
in his draft report on the wealth tax for 
the Select Committee, considered this 

aspect of the problem under the heetding 
"Equity among the rich ". But this is to 
overlook the important linkages between 
the workings of the tax system and inequaLity. 
The Green Paper on the Wealth 
Tax made this clear: " The ownership 
of wealth, whether it produces income or 
not, adds to the economic resources of a 
taxpayer so that a person who has wealth 
as well as income of a given size necessar
·ily has a greater taxable capacity than 
one who only has income of that size. 
Because our tax system takes no account 
of this fact, a,Ithough we have a highlyprogressive system of income tax (sic),
the bulk of privately owned wealth is 
still concentrated in relatively few 
hands" (Wealth Tax, Foreword by the 
Chancellor of the Exchequer, ibid).
Hence, if wealth is not subject to taxation 
.jt <becomes a vehicle for circumventingthe income tax system. Moreover, since 
wealth confers benefits over and above 
the income yielded, it should be subjected 
not only to tax tin the same way as 
income, but to a heavier burden of taxation. 


economic efficiency 

Many of the arguments against taxing 
wealth are couched in terms of the " economic 
costs " of doing so. While there 
are important ·economic effects of certain 
types of wealth taxation (though not always 
clear cut) yet it is difficult to see 
how such arguments can be used to justify 
taxting wealth, or the income derived 
from it, less heavily than income from 
employment. Indeed, since wealth taxes 
are related to past rather than presenteffort, the disincentive effect may be .less 
than with an income of the same yield. 

For some the desire to accumulate savings-
for ·a spending spree, retirement or 
to pass on to thei.r heirs-may be a driving 
force ·to work harder. On .the other 
hand, the knowledge that these en.ds can 
be achieved with more ease (m the 
absence of wealth taxation) may cause 
widespread laurel-resting. Two things are 
clear. Fi'fst that the postwar period has 
seen a decline in the contribution of 
wealth holders to the total tax burden 


sala·ry earnings. If we are worried about 
incentives, we had better shift the burden 
back again--quickly. Second, we know 
that some of the largest property holdings 
are not accumulated because of the 
monetary ·return they yield, but because 
of ·the other advantages conferred bywealth. To that extent the taxation of 
wealth ·is unlikely to discourage accumulation. 
We may add that it is even less 
li.ikely to discourage inheritance! 

how is wealth taxed? 

The present Conservative administration 
has committed itself to reductions .in capitail 
taxation. In this section we consider 
the way in which capital or wealth is now 
taxed in Britain. We also consider what 
has happened to the burden of capitaltaxes as a whole in recent years. 

Wealth can be taxed in a number of 
ways: on its income, its capital value 
(annually or on transfer) -or on any increase 
in ~ts value. The British capital 
tax system is an amalgam of these three 
approaches : the investment .jncome surcharge, 
the cll!pital transfer tax and the 
capital ga,ins tax are usually considered 
to be the three principal wealth taxes, and 
it is these three on which we concentrate 
here. Loc·al authority rates a,nd stampduties might also be included within the 
definition. But the first is usuaUy treated 
in official accounting exercises more as a 
form of (highly regressive) local income 
tax or an expenditure .tax on housing consumption, 
while the second are apphed to 
a variety of property transactions and-
although important in revenue terms-
cannot be treated as " part of the fabric 
of the system of capita,} taxation.'' 
(C T Sandford, Taxing Personal Wealth, 
George Allen and Unw.in, 1971). 

We note that the Conservative Party include 
Stamp Duties in their list of capital 
taxes (although they include no propos·als 
for their reform) (The Right Approach to 
the Economy, op cit). As we show, their 
inclusion makes Ettie difference to our 
conclusions about the burden -of capitaltaxa,tion. The Party also consider the 
Development Land Tax as a form of tax 
on capital and propose to reduce its 

impact. Since it raised only £13 million 
in 1978/79 out of a total direct tax 
revenue of £24,000 million, there seems 
little that the Government can do to make 
it less effective. Again its inclusion would 
not change our conclusions. 

taxing wealth transfers-
voluntary taxation 

The main form of weaclth tax in Britain, 
death duties, are related to the actual 
vaiue of wealth. In rhat sense they are 
more akin to an annual wealth tax, but 
instead of •being assessed each year they 
are levied only when wealth changeshands. Estate Duty, replaced in 1974 by 
the Capital Transfer Tax, was payableon the value of property changing hands 
at death. 

Such taxes have a long history. The 
Estate Duty was introduced by Harcourt 
in 1894 and rema,ined substantially unchanged 
until it was converted into Capital 
Transfer Tax 80 years later. Ha·rcourt's 
budget was framed against a background 
of " the entirely novel idea that 
taxation might not only supply the wants 
of the State but actually become a means 
to redress social inequalities". In his view, 
the guiding principle of taxation is that 
liability should be imposed where it shall 
be the least heavily felt", a principlewhich led him to introduce the tax subject 
to a progressive scale of rates (B E 
V Sabine " Influences on the Development 
of Direct Taxation in Br~tain ", in 
T D Lynch (ed), Direct Taxation in the 
United Kingdom, Institute of Chartered 
Accountants of Scotland, 1968). The Government 
were warned that the new tax 
would lead to ·large scale evasion (a prediction 
which proved correct) and that it 
would bring about the demise of English 
landlords and the virtual extinction of 
English farming (on which the critics 
were wrong) (C T Sandford, TaxingPersonal Wealth, op cit). 

Harcourt's progressive tax was set at 1 
per cent on estates between £100 and £500 
rising to 8 per cent on those valued at 
over £1 million, ·rates which one MP described 
as sufficient ·to " throw into shade 
everything that had ever been done in 
the way of highway robbery " (quoted in 


A B AHanson, Unequal Shares, op cit). 
Nevertheless, the top rate was raised to 
20 per cent by Lloyd George in 1912, to 
40 per cent by Chamberlain and to 50 per 
cent by Snowden in 1930. The post-warperiod saw an even greater degree of progression 
in the rates. Both Dalton (1946) 
and Stafford Cripps (in 1949) saw death 
duties as a means of ·reducing wealth inequalities, 
and they raised the top rates 
to 75 per cent and 80 per cent respectively 
(Sandford, ibid, A B Atkins·on, UnequalShares, op cit). 

Over its 80 year Jife, the top marginal 
rate of Estate Duty was therefore subject 
to a ten fold 'increase. Wibh such 
dramatic increases in the rates we mayhave expected a powerful redistributive 
effect of the tax. But if we return again 
to chapter 2 we are reminded that over 
recent years the decline in shares of 
wealth at the highest •leve1s was modest, 
and was to some extent offset by an increas-
ing share of those Who were onlySlightly less rioh. As Atkinson has argued, 
this may reflect not so much a redistribution 
of wealth in any true sense, but 
rather a reordering of the affairs of the 
wealthiest families, passing on the·ir 
wealth earlier to avoid Estate Duty


" the redistribution has been very much 
a " family affair " (ibid.) 

The failure of Estate Duty to redistributive 
wealth, despite the dramatic increase 
in its nominal rates, is reflected in a somewhat 
surprising decline in the revenue 
raised by the tax. The table below shows 
the contribution of Estate Duty (plusCapital Transfer Tax af.ter 1975 /76) as 
it has changed over the past 70 years. 

In the year following their introduction 
(in 1895 I 96), death duties raised an impressive 
£14 million, equivalent to over a 
third (35 per cent) of all Inland Revenue 
t:axes. By 1908, they raised £18 million, 
although this now represented only 20 
per cent of Inland Revenue receipts. With 
the very substantial rise in income tax 
during the First World War, the relative 
contribution of death duties again fell. 
Nevertheless, they remained a powerfulsource of revenue: " In their hey-day as 
a revenue-yielder, just before the First 
World War, the death duties were contributing 
over 16 per cent of centnd government 
revenue from taxation. In those 
years, they played an important part in 
financing the beginnings of the welfa·re 
state" (C. T. Sandford, J. R. M. Willis 
and D. J. Ironside, An Accessions Tax, 

REVENUE FROM ESTATE DUTY/CAPITAL TRANSFER TAX, 1908-1978 

Total Inland Estate DutyIncome Tax Estate Revenue revenue as 
and Surtax Duty/err Rece·irpts % of total 
'(£m) (£m) (£m) (%) 
1908/09 34 18 96 18.8 
1918/19 294 31 624 5.0 
1928/29 293 81 407 19.9 
1938/39 399 77 521 14.8 
1948/49 1460 178 2055 8.7 
1958/59 2484 187 3012 6.2 
1968/69 4574 382 6546 5.8 
1969/70 5162 365 7492 4.9 
1970/71 5978 357 8180 4.4 
1971/72 6780 451 9110 5.0 
1972/73 6818 459 9248 5.0 
1973/74 7444 412 10634 3.9 
1974/75 10457 339 14236 2.4 
1975/76 15150 330 18143 1.8 
1976/77 17076 383 20711 1.8 
1977/78 17450 398 21914 1.8 
1978/79 18784 369 24075 1.5 

Source: Inland Revenue Statistics 1974, HMSO, 1979. 


Institute for Fiscal Studies, September 
1973). Estate Duty maintained its contr-
ibutions at around this level until the 
eve of the Second World War, at which 
time it still yielded £1 for every £5 raised 
in income tax. The real decline came in 
the post-war period. Despite the substantial 
·increases in the rates of duty imposed 
by Dalton and Cripps, Esta:Jte Duty ra,ised 
only 9 per cent of Inland Revenue receipts 
in 1948/49 and only 6 per cent ten 
years ~ater. By the time of its repl·acement 
with C<i!pita.J Transfer Tax in 1974, Estate 
Duty contributed only 2.4 per cent of all 
receipts. 

Given that the nominal rates of tax were 
subjected to very substantial increases 
over this period, which might have been 
exacerbated by the effects of inf!.ation and 
rising property prices, this steady decline 
in revenue requires some explanation.
One such explanation might be that the 
top wealth holdings had declined substantially 
in value. But ·in 1927, when the 
top nominal rate stood at about 30 per 
cent, death duties represented just 0.42 
per cent of all personal weailth holdings 
(Atkinson, op cit). By 1976 our own calculations 
suggest that Estate Duty and 
Capital Transfer Tax together contributed 
only 0.2 per cent of total personal wealth. 
The impact of the duty ~n either period 
on the distribution of wealth can hardly 
have been dramat·ic. 

a voluntary tax 

A more plausible explanation is that 
Estate Duty over the yea-rs had increasingly 
become a "voluntary tax " paidonly by eccentrics and " by those who 
dislike the Revenue less than they dislike 
their heirs" (quoted in Sandford, TaxingPersonal Wealth, op cit). The tax gained 
itself this reputation through the ease 
with which it could rbe avoided, principally 
through life-time gifts, the setting up of 
trusts or investment in assets which were 
wholly or partially exempt from the tax. 
The principal way of avoiding the duty 
was to pass on the wealth before "passing 
on " oneself, since the tax was a:pplied 
only to property changing hands on the 
death of the owner. In an attempt to 

tighten this loophole the length of time 
allowed before death in which gifts could 
be made tax-free was increased from 3 
months to 7 years over the life-time of 
the tax. But as Kay and King have remarked, 
" the healthy, wealthy and welladv
·ised " were well able to order their 
affairs in such a way as to avoid the dutycompletely (J. A. Kay and M. A. King,
The British Tax System, Oxford University 
Press, 1977). 

An alternative, for those finding the prospect 
of prematurely giving away their 
wealth altogether too harsh, was to set up 
a trust rwhich was wholly or partiallyexempt from tax. By the late 1960s, it 
was estimated, 95 per cent of all discretionary 
and accumulation trusts had 
been crreated solely as tax-sav~ng devices. 
Finally, there was the option of converting 
wealth into exempt or partially 
exempt forms such as agriculture or 
forestry, private businesses or works of 
art. As Kay and King have warned, the 
·result of such concessions to agricultureand woodlands have had the somewhat 
perverse effect of making life more difficult 
for the working farmer. The concessions 
turned farms rinto highly desirable 
forms of wealth-holding, forcing upthe price of agricultural land and making 
it still more difficult for small farmers to 
set up or stay in business (Kay and King, 

op cit). 

These va·r·ious loopholes in the Estate 
Duty legislation ensured that the tax was 
easily avoided. Atkinson estimated that 
by 1966, life-time gifts and discretionary 
trusts alone accounted for £160 milHon i!l 
J.ost revenue from estate duty. This represented 
more than half the total amount 
of revenue raised by the duty in that year.
An ·indication of the wider spectrum of 
avoi·dance ·is given by the relationshipbetween the yield of estate duties and the 
rates in force. Given the very substantial 
increase in rates over this century, and 
in the absence of any substantial decline 
in the wealth holding of the top groups, 
we would have expected a very much 
la:rger revenue than actually exists. A 
large part of the shortfall may be attributed 
to avoidance. Atkinson has used 
this reasoning to estimate the overall level 


of avoidance: "We can estimate that had 
the 1966 rates of duty been in force in 
1911 (with the exemption level and the 
tax brackets the same percentage of average 
wealth) the revenue payable would 
have been 1.5 per cent of total personal 
wealth. This is nearly four ·times the 
actual percentage collected in 1966, and 
would have implied a revenue in 1966 
of some £1 ,200 minion rather than the 
actual revenue of £300 million " (Atkinson, 
Unequal Shares, op cit). Using the 
same approach (and assuming that the 
revenue payable maintained the same relationship 
to total personal wealth) we 
can estimate that in 1977/78 the expected 
revenue would have been over £3,000 
million. The actual revenue from est·ate 
duty in 1974/75 was £398 million-one 
eighth as much as these calculations 

would predict. 

We should note at this point that revenue 
and the ability of a tax to reduce wealth 
inequalities need not exacly coincide. 
There is one type of avoidance about 
which socialists should not be undulyconcernec\. Suppose, for instance, that a 
tax actually encouraged wealth holders to 
give their property away to a number of 
individuals in order to minimise the tax 
paid on the transfer. Revenue would be 
reduced but redistribution would never-
the less take place. The process would bypass 
the government sector, and maytherefore be more haphazard, but inequality 
would nonetheless be ·reduced. 

Unfortunately the Estate Duty, and its 
success·or, the Capital Transfer Tax, contain 
no such incentiv<e for the dispersionof wealth holdings. The tax is assessed on 
the person who gives it away (or on his 
estate) regardless of the way in which the 
estate is subsequently distributed. Whether 
the estate is split into a hundred parts, or 
whether it is passed on .in one lump, the 
tax payable is the same. This point was 
not lost on Parliamenta•rians when Harcourt's 
new Estate Duty was introduced : 
" I understand the advantage of taxing a 
man at an increased ratio in proportion 
to his wealth: I do not understand the 
advantage of tax·ing a man exceptionally, 
not according to his own wealth, but 
according to his father's wealth", puzzled 

Balfour. He advised the Government to 
" graduate property in propo·rtion to the 
amount enjoyed, and not in proportion 
to the amount left by those who can no 
longer enjoy it" (quoted in C. T. Sand-
ford, Taxing Personal Wealth, op cit, see 
also A. B. Atkinson, Unequal Shares, op 
cit). 

The use of an estate duty of this type, as 
opposed to an inheritance tax assessed 
on the wealth of the recipient, is particularly 
inequitable. In many c•ases the tax 
is in effect paid 'by the recipient, even 
thoug'h it is assessed on the donor's circumstances 
(unless the donor is so determined 
to pass on a given amount that he 
" grosses up " the amount left to take 
account of the tax). So the owner of a 
supermarket chain who inherits a minion 
will be subject to the same tax, in effect, 
as would be paid by one of his shop-
workers ·inheriting the same amount. 

Despite these drawbacks, measured 
against the yardsticks of both equity and 
equal.ity, it was not an 'inheritance tax 
with which the Labour Government replaced 
Estate Duty in 1974 but another 
donor-based tax-the Capital Transfer 
Tax (err). Nevertheless, a major improvement 
of err over the old Estate 
Duty was that it attempted to close the 
loophole of life-time gifts. As the White 
Paper announcing the tax explained " the 
new tax on capital transfer would apply, 
subject to certain exemptions for small 
amounts, to all transmissions of wealth, 
whether made by gift during a person'slife-time or by way of property passing 
on his death ... the charge would be at 
progressive rates charged on the cumulaJtive 
total of gifts made during a per-
son's life-time with the further final cumulation 
of property passing on his death " 
(Capital Transfer Tax, Cmnd 5705, 
HMSO August 1974). 

The new tax should have been a powerful 
revenue raiser and might have been 
expected to have more effect than estate 
duty on wealth inequalities. But what the 
Government taketh away, the Government 
(in this case) giveth. Loopholes 
were replaced with generous exemptions 
and lower rates than Estate Duty. One of 
the most important effects of the change 


must have been to reduce the costs of 
accountants' fees to the wealthy. Takingfirst the change in the rates, an estate 
valued at under £15,000 was still exempt. 
But that valued at between £15,000 and 
£20,000 was subject to a rate of 10 percent instead of 25 per cent under Estate 
Duty ; an estate worth £40,000 to £50,000 
was subject to a rate of 30 per cent instead 
of 40 per cent ; and :the top rate of 
75 per cent which was payable under 
Estate Duty on estates worth over £t 
million was now only payable on those 
over £2 million. These were the rates 
when the tax was introduced. The current 
·rates of err, on life-time transfers made 
at death, a·re set out below. 

Although gifts were now included in the 
tax base the rate of tax chargeable on 
gifts of 1es.s than £100,000 are only half 
the rates payable on death (provided the 
property passed hands at least three years 
before death). Transfers (whether by gift 
or inheritance) between husband and wife 
are exempt from tax a~bogether. This was 
a major concession in comparison to 
Estate Duty, to which the Royal Commission 
on the Distribution of Income 
and Wealth attributed "the recent decline 
in the annual yield of cap'ital transfer 
tax" (RCDIW, Report No 8, CMND 7679, 
HMSO, 1979). The exemption level at 

RATES OF CAPITAL TRANSFER 
TAX FROM OCTOBER 1977 
va1ue of 
transfer transfers 1lifetime 
(£) at death transfer 

0-25 0 0 
25-30 10 5 
30-35 15 7.5 
35-40 20 10 
40-50 25 12.5 
50-60 30 15 
60-70 35 17.5 
70-90 40 20 
90-110 45 22.5 
110-130 50 27.5 
130-160 55 35 
160-510 60 42.5-60 
510-1010 65 65 
1010-2010 70 70 
over 2010 75 75 

Source : Inland Revenue Statistics 1979. 

£25,000 is considerably higher in real 
terms than in 1894 and in effect is higherstil1 when viewed over the life-time. An 
individual can give away £2,000 tax free, 
a married couple £4,000 each year. "Over 
a 10 year period a couple could pass on 
more than £100,000 without paying a 
penny in tax." In addition gifts of up to 
£5,000 "in consideration of marriage" 
are exempt (Kay and King, The British 
Tax System, op cit). 

The effects of these various concess'ions, 
but svill excluding the impact of the 
favourabl·e treatment of life-time gifts, 
are shown in the table bel•ow. The table 
shows the nominal rates of tax payable 
on estates of differing size passing a:t 
death. It is these rates to which most 
people refer when considering the harshness 
of cap'ital transfer tax. But the table 
also shows the effective rates actuallypaid •on estates of this size, and that is a 
rather different story. 

The effective rates of tax are hardly"confiscatory". No tax is payable on 
estates of less than £25,000. An estate of 
~his value is subject to tax at a nominal 
rate of 10 per cent (20 per cent before 
October, 1977) but the actual tax paid on 
estates of this size is less than half that 
amount. Even estates of £100,000 with a 
nominal tax rate of 45 per cent (and 50 
per cent !before Oct·ober 1977) only paid 
tax equivalent to one quarter their va1ue. 
Only estates worth over £2 million paid 
tax equal to haJ.f their value, even 
though the top nominal orate on such 
estates was 75 per cent. 

Special additional concessions are pl'ovided 
for certain business assets. These 
concessions can be formidable. The 
Royal Commission on the Distr.ibution of 
Income and Wealth has calculated that 
business relief reduce the effective rate of 
tax on an estaJte by a.Jmost three quarters. 
(Rcmw Report No 8, Cmnd 7679, HMSO, 
October, 1979). 

We have seen that, as a result of these 
substantial concessions, Capital Transfer 
Tax raised even less revenue than Estate 
Duty-the voluntary tax. In the table 
below we show the amounts of revenue 
raised in Estate Duty in 1974/75 and in 


NOMINAL AND EFFECriVE RATES OF CAPITAL 

TRANSIFER TAX ON 

ESTATES PASSING AT DEATH, 1977/78.

value of 
estate (£) nominal ~ate af tax paid (%) effective rate of tax 
lower limit before Oct 1977 after Oct 1977 paid(%) 1977-78 
25,000 20 10 

4.5

50,000 35 30 14.8 
100,000 50 45 25.7 
150,000 60 55 29.9 
200,000 60 60 34.4 
500,000 65 60 41.8 
1,000,000 70 65 46.1 
2,000,000 75 70-75 53.4 

Source: Inland Revenue Statistics 1979, HMSO, 1979. 

Estate Duty plus CIT in each of the three 
fo1lowing years. These are expressed as 
a proportion of all Inland Revenue Taxes 
and as a proportion of estimated total 
personal net wealth. 

The rell!l value of estate duty I CIT revenue 
fell substantially over the period. The 
contribution of cap·ital transfer taxes to 
total revenue was less than 2 per cent in 
1977/78 (compared with 35 per cent in 
, 1895/96!) At the same time the revenue 
accounted for less than a fiHh of one per 
cent of estimated total personal wealth. 
The a!Jility of the tax to redistribute 
wealth can hardly have been ~ignificant. 

taxing the income 
from wealth 

Many ·Of our European neighbours have 
annual wealth taxes dafing back to the 
first World War. •Britain, meanwhile, 

attempted to achieve the same effect by 
introducing a heavier tax on property incomes. 
(C T Sandf•ord, J R M Willis and 
D J Irons'ide, An Annual Wealth Tax, 
Heinemann Educational Books, Institute 
for Fiscal Studies, 1975). Until 1973 this 
differentiation between earned and investment 
income was achieved by providing 
an earned income rel•ief, superceded by 
a special surcharge ·on investment incomes 
thereafter. The current level of 
the investment 'income surcharge is an 
additi•on of 15 per cent ~o the tax 
rates appl·ied to earned 'incomes. While 
the max.imum rate of tax on earned incomes 
·is therefore 60p in the £, that on 
unearned income is 75p. As we noted 
above, the rationale for such discrimination 
against investment incomes is that 
they are subject less to the uncertainties 
of age and health than are earned incomes, 
and they received without the 
sacrifice of leisure. Moreover, there are 

REVENUE RAISED BY ESTATE DUTY AND CIT AS A PROPORTION OF 
ALL INLAND REVENUE RECEIPTS AND TOTAL NET PERSONAL WEALTH 
UK, 1974/75 to 1977/78 

revenue 
revenue from as proportionEstate Duty total net of a!ll Inland rota'! personal 
and CIT personal wealth* Revenue taxes wealth 
£miNion % 

1974/75 339 159,911 2.4 0.21 
1975/76 330 190,290 1.8 0.17 
1976/77 383 203,821 1.8 0.19 
1977/78 398 209,772 1.8 0.19 


*Estimates !based ·on personal sector balance sheets. These figures apply to calendar 
years and may overstate the revenue as a· proportion of wealth. 
Source: Inland Revenue Statistics 1979. 



certain costs associated with employment 
incomes, such as travel to work. 

Unfortunately, the investment ·income 
surdharge is not very effective as a means 
of differentiating ·in favour of earned 
incomes. While the rate of surcharge is 
15 per cenrt:, this a;pplies only to investment 
incomes in exces·s of £5,000 a year. 
These rates apply only to taxable ·income, 
after deduction ·of tax-free personala:llowances and a motley collection of 
other re1iefs. Al•though the numbers subject 
to the surcharge increased substantially 
in the first four years a;fter its introduction, 
1Jhe high-water mark was 
·reached in 1976 /77---'t.he year that will 
perhaps go down in history as the turning 
point in the Labour government'sattack on inequality. Subsequently the 
numbers fell until they reached an estimated 
300,000 people in 1979 I80-al'most 
a third the number subject to the surcharge 
four years earlier (Board of 
Inland Revenue, Inland R e v e n u e 
Statistics, HMSO, 1979). 

The partial elimination of tlhe &urchargein effect is not the on1y prdbJ.em with this 
"proxy" for a wealth tax. That unearned 
income should be taxed more heavilythan 'that .from employment remains 
sacrosanct only in principle; in practice 
the reverse is often true. As the Meade 
Committee have argued " ·role of the 
earned income relief and investment sur-
Charge as p·rovidling such discrimination 
has been undermined progressively over 
the last half century or so as a result of 
the deve1opment of a national insurance 
system financed by compulsory contributions 
imposed on earnings " (Meade, op 
cit). The Committee argued that national 
insurance contribu'Vions, payable only on 
employment •incomes, represented in 
effect an "earned income surcharge." At 
current rates, earnings are subject to 
nati·onal 'insurance contributions of 6t per 
cent payable by the empl'oyee and 13.5 
per cent payable by the employee on all 
earnings up to £135 a week. (Both are 
soon to rise by t per cent). Together 
these account for a tax on lalbour income 
of 20 per cent, in add'Hion to the income 
tax. This more than cancels out the 
investment income surcharge except in 

the case of higher earned incomes which 
are above the £135 contribution ceil~ng. 
Moreover, since the surcharg·e is not payable 
on small investment incomes at all, 
low earned ·incomes are ·cons•iderably 
more heavily taxed than low investment 
incomes. In the case of lower incomes 
(below ~he ceil1ing on national insurance 
contributions) the differentiation is com 
p1etely reversed in favour of income fwm 
wealth. This is important when considering 
firms' decisions on whether to use 
more labour or more capital. And since 
the employers' contribution may be paid 
out of .J.ower wages as well as higherprices, the surcharge on wage-earners is 
clear. 

The investment income surcharge is not 
only on inequitable means of taxing"wealth", it is also highly .inefficient. By 
definition, only wea'lth that yields money 
income is taxed at all by the surcharge, 
while V/ealth that yields 'i•ess income is 
more favourably treated than that which 
yields more. This has two ratlher detri 
mental effects. First we have a situation 
in which two people with ·wealth of equal 
value are taxed differently. One may hold 
his wealth in the form of investments on 
which he wiH be sulbject to tax. Meanwhile 
vhe other may dedide to hold his 
wealth in a form that produces no money 
income, such as yachts, cars or houses. 
Since he has no money income from his 
wealth, he pays no tax on it. But his command 
over economic resources is clearly 
the same, since he could at any time seH 
this playboy paraphenalia and invest the 
proceeds to o'btain an 'income. Indeed 
economists would say that he must derive 
an income " in kind " from the possession 
of these items or he would make good 
his losses by switching his wealth into 
more " productive" forms. Again this 
may seem to be an argument about the 
unfair treatment of one wealthy person 
in comparison to another. But once more 
it has a great deal to do with wealth 
inequalities. For as we have seen, the 
existence of the investment income sur-
Charge encourages the very wealthy to 
divert their resources into non income 
yielding forms. Th~s wealth is untouched 
by taxation, but it continues to provide 
status, power and security to its QWners. 


This state of affairs not only insulates the 
wealthy from the rigours of taxation 
which might reduce inequa!ivies. It aloo 
has a disturbing economic effect which 
might reduce the overall level. of wealth 
avail·ab!e to share. By exemptmg unproductive 
wealth (defined as that which 
yields no income) the investment income 
surcharge distorts 'investment, consumption 
and savings amongst the verywealthy. Investment in " productive " 
capital is actively discou.rage~i. Tlhe 
absurdity created by th1s s1tuatwn was 
i'llustrated graphically lby the L!rbera! 
Party in a discussion document on taxation. 
By tlhei.r calcula.tions, a Rolls R·oyceof a value of £30,000 would have co!>t 

just £48 per annum to buy. The basis ~or 
this calculation was that the altemat1ve 
m'ight be to invest the £30,000 in productive 
capital yielding an interest of 8 
per cent, which would. t?en have been 
subject to tax at fhat Nm~) at a rate of 
up to 98 per cent (Liberal Party, Incentive 
Taxation; interim report to the 1977 
Liberal Assembly, 1977). 

The Conservative party have criticised the 11 Investment Income Surcharge for the 
same reasons arguing that jt " distorts 
capital markets by diverting privateinvestment towards capita:! profit and 
away from income yielding securities·". 
As a result they declare that "we are 
increasingly doubtful about the wisdom 
of retaining any kind of Investment Income 
Surcharge". (The Right Approachto the Economy op cit). While we agree 
with this assessment with regard to the 
distorting effects of t'he current arrangements, 
we should stress that the greater 
problem at present is the e~i~tence of an 
" earned income surcharge m the f.orm 
of national insurance contributions. To 
dispense with the surcharge on proi_Jertyincomes altogetlher would lbe h~igh1y 
inequitable, .given the . a d ":an t age s 
associated with income m th1s form. 

capital gains tax 

The third form of tax cons•idered here-
the Capital Gains Tax-is nat really .a tax 
on capital at all. It is more a:ppropnate!ythought of as a tax on a form of income, 

the income which derives from the 
increased value of wealth. 

Caplital gains have long 'been considered 
a form of income. Almost a quarter of a 
century ago the Minority Report of the 
Royal Commission on the Taxation of 
Profits and Income asserted that " capital 
gains increase a person's taxable capacity 
by increasing his power to spend or save " 
(Final Report, Cmnd 9474, HMSO, 1955)
A short term ga:ins tax (on gains realised 
within 6 months) had been introduced in 
1962, and attempts to tax gains on 
specific types of assets stretch back to 
1909. In 1965 gains reahsed within 12 
months of purchase were treated as income 
and subject to income tax and surtax. 
Long term gains were taxed under a 
special Long Term Capital Gains Tax. In 
the 1971 Budget, however, aH capitalgains were subject to the same long term 
vate wh:ich was considerab1y lower for 
most ~axpayers. 

The maximum rate of Caplita:l Gains Tax 
(<XJT) is 30 per cent, the same as the 
standard rate of income tax on earned 
income. Until recently the max•imum rate 
of tax was substantially lower than that 
paid on earned income ; it is well below 
the rate paya'ble on other unearned 
income, and very muoh lower than the 
higher rates· of income tax. 

Against this already very low rate of 
tax, there are substantial concessions. 
Ind1viduals' gains of up to £1,000 a year 
are exempt, as is the entire value o~ the 
principal private resi_d~nce and pn-:ate 
cars. Gilt edged secur1·t!es are not subJeCt 
to CGT on an increase in their v•alue as 
long as they are held for al 1e~st a ye~r. 
In addition to these exemptiOns ·relief 
against tax is .given for gains of less than 
£9,500 a year. A gain of 'be1JWeen £1,000 
and £5,000 is taxable at only 15 per cent. 
Hence a person earning £5,000 a year(about the average male wage) wou'l~ pay£1,113 income tax plus £325 natwnal 

•insurance ·contribu6ons, equ1valent to 
28.8 per cent of the gmss wa,ge. But .if he 
received the same amount, not in earnings, 
but in the form of capital gains, the 
most he would expect to pay would be 
£600-Iess than half •as much. His tax 
biU would represent only 12 per cent of 

his income. As w'ith the investment in 
come surcharge, the principle that earned 
income shou1d be more favoura.bly taxed 
commands httle respect in reality. 

11he cost of these exemptions and reliefs 
is ·considerable. The loss in revenue on 
the_ exemprion of gains on the principal 
residence alone was estimated at £1 500 
million for 1978/79 (sufficient to reduce 
the standard rate ,of tax by 3p in the £). 
Other reliefs for which the cost could 
be estimated increased ~he cost to £1 700 
millions, but there were another 36 a'liowances 
or reliefs against CGT for which 
the cost could not be est·irnated. (Inland 
Revenue Statistics 1979, op cit). Since 
total revenue from CGT in t'hat year was 
only £353 miUion, the reliefs involve at 
least five rimes as much revenue as the 
tax raised (and pro'bably much more). 

It can be argued, as it often is, that the 
Capital Gains Tax has been converted 
by inflation into a harsh weatth tax. This 
is because an increase in the value of an 
asset which does no more than maintain 
its value against rising prices may nevertheless 
oome to be subject to tax. So 
instead of just taxing the increase in the 
v·alue of the asset, the tax effectivelybites into the value of the capital 'itself. 
It is this aspect of capital taxation which 
the Conservat'ives are most l'ikely to 
change. There are two courses of action. 
Either the tax can be properly indexed 
to a:void the effect, or it can be albolished. 
We suspect the Government wil1 adoptthe latter course ·Of action. Since the tax 
only raised 1t<p in every £ of Inl•and 
Revenue taxes in 1979 I 80-and the s•ame 
amount in cash terms as in 1974/75this 
move would shift the burden of taxat!
ion further towards 'income tax payers. 
In the following chapter we propose the 
adoption .of a means of taxing capital 
gains more equitably but at a more 
realistic level. We agree that the current 
situation is haphazard and unsatisfactory. 
But since the tax raises less than £400 
minions, the harshness of the 'inequityshould not be overstated. 

More impO'rtant, in our view, is the fact 
that CGT has become less a tax than a 
tax-·avoidance device. Thos·e subject to 
the h'ig'her rates of income tax or invest


ment income surcharge can reduce their 
tax biH substant'ially by converting their 
income into capital gains. This can be 
done by seHing off income yielding assets 
and buying shares or other .property likely 
to increase in value. LiaJbi'lity can thereby 
be reduced from a max:imum 75 per cent 
(.on inves•tment income) to 30 per cent 
or even to zero .if certain favoured assets 
are chosen. As the Meade Committee 
noted: "There is thus a marked incentive 
for the higiher rate taxpayer to distort 
his affairs by seeking investment 
chan_nels which_may _not be the most productive 
but wl11ch w'Ill produce their product 
in the form of a capital gain rather 
than ·Of investment income" (Structureand Reform of Direct Taxation, op cit). 

As weH as being highly efficient, byencouraging taxpayers to devote time and 
resources to converting their income from 
one fiorm to another, this is highlyinequitable: a taxpayer can pay up to 
75 per cent if his investment income is in 
one form, but a maximum of 30 per cent 
if it is in another. It also reduces the 
progressiveness of the income tax sySJtemby a'llowing higher rate taxpayers to side 
step the higher rates of tax. Less than 
two taxpayers in every hundred are now 
subject to the higher rates, partly because 
of the effect of CGT. It follows that 
Capital Gains Tax has more effeot in 
widening inequal'ities in income than in 
narrowing inequaEties in wealth. 

A remarkable feature of ~!he present 
system is that the Government itself connives 
in such tax avoidance by providing 
special low-y.ielding Government Stocks. 
Such stocks provide little interest, which 
would be subject to tax of up to 75 percent, but promise substantial capital ga~ins 
which are taxed at no more than 30 per 
cent and will be totally exempt if d'isposed 
of after one year or more. 

Kay and King have estimated that "At 
present, .at least £3,000 miHion is invested 
in Government stocks which are clearlyunattractive to anyone who is not a 
higher rate taxpayer". (op cit.) They also 
warn that such a state ·of affairs has 
implicati•ons stretching beyond the effects 
on the progressiveness of the income tax: 
" The tax system has, in effect pushed 


pr.ivate investors out of traditional 
'middle-of-the-road' ·investments like 
good-quality equities, properties, and 
bank deposits and into fringe activities 
like 'performance shares', geared investments 
in property, and portfolio investment 
abroad, as well as higher rate t·axpayers' 
s~ocks, whidh promise--but do 
not necessarily deliver-above averagecapital gains. This is part oif the generalmanghng of the patterns of savings and 
investment in this country by the tax 
system". 

the myth of capital taxation 

It is genemlly believed that capita1 taxes 
in Britain are severe. This is a belief 
shared, apparently, by the Chancellor of 
the Exchequer and his advisers. In his 
budget statement, for !instance, Sir 
Geoffrey Howe expressed his determination 
" to make the taxation of capital 
s i m p 1 e r and less oppressive " He 
described Capital Gains Tax as " a 
capricious and sometimes savage levy".
Capital Transfer Tax (err), in the Chan' 
cellar's view, "is oppressive, harmful to 
business and a rea'! deterrent to initiative 
and enterprise" (Hansard, 12 June, 1979). 

Our examination of the three main forms 
of capital taxation has led us to rather 
different conclusions. We have seen thM 
Capital Transfer Tax-far from preventing 
the maintenance of estates intact-

provides little incentive for the dispersion 
of wealth. The revenue it raises, as a 
proportion of all Inl•and Revenue taxes, 
represents less than ·a tenth the amount 
raised when this type of tax was introduced 
80 years ago. err paymentsamounted to less than one fifth of one 
per cent of total net personal wealth-
hardly sufficient to make a major 'impact 
on wealth inequalities. The investment 
income surdharge affects only 300,000 
people and raises revenue of little more 
than £250 millions (1.2 per cerut of all 
taxes). Moreover, when national insurance 
contributions are taken into account, 
we find that the 'intended differentiation 
in favour of earned income is converted 
into a bias in favour of inves~ents. Most 
earned income is subject to a higiher rate 
of tax than that paid on income from 
capital. This is certa'inly true of one form 
of investment income-that wh'ich comes 
in the form of capital gains. Because the 
rates of CGT ·are lower than those on 
unearned income, and lower in manycircumstances than on earned income, it 
has become a useful devide for tax avoidance. 
Its impact is greater in w'ideninginequalities in income than in reducinginequalities in wealth. 

It only remains for us to draw together 
the strands of the argument by showing 
the amount of revenue raised by these 
three main forms of capita'l tax compared 
with all orher taxes. 

CONTRIBUTION OF CAPITAL TAXES TO TOTAL INLAND REVENUE 
RECEIPTS 1973/74-1978/79. 
All Capital Taxes** 

Investment excludingEstate Duty Capital! Inoome Sramp Duties 
( CIT Gains Tax Surcharge and DLT 
£ % £ % £ % £ % 

1973/74 412 3.9 324 3.0 136 1.3 872 8.2 
1974/75 339 2.4 382 2.7 202 1.4 923 6.5 
1975/76 330 1.8 387 2.1 232 1.3 949 5.2 
1976/77 383 1.8 323 1.6 265 1.3 971 4.2 
1977/78 398 1.8 340 1.6 253 1.2 991 4.5 
1978/79 369 1.5 353 1.6 •(313) {1.3)t 1035 4.3t 


**Excluding Stamp Duties aJnd Development Land Tax (DLT). 
tEsbimated on the assumption that Investment Income Slllfcharge continues to raJise 


I 

1.3 % of aH Inland Revenue receipts. 
Source: Inland Revenue Statistics 1979. 

Over the past six years total receipts have 
increased substantially. But the contri'bu· 
tion of wealth holders to the total has 
fallen dramatically from a meagre 8 per 
cent to 4 per cent. In just six years,
wealth taxation as a proportion of total 
direct taxation, has ha'~ved. Even if we 
include Devel-opment Land Tax (DLT)
and Stamp Dubies (which, for reasons ex-
p~ained earlier are not central elements 
of the capital tax system) the revenue 
from capital taxes has increased by only 
£163 million. Their contribu~ions to total 
revenue has fallen from 9.9 per cent even 
on this wider definition. 1lhis is in a 
period in wh!ich prices doubled and income 
tax revenue increased 2t times. 
Capital .taxes have also declilined quitesharply as a proportion of net persona:] 
wealth over the period {RCDIW, ReportNo. 7, op cit). 

Considering the taxes separately, CTT I 
Estate Duty raised less revenue in cash 
terms in 1978/79, rthan in 1973/74 and 
its contribufion to tota'l revenue halved, 
to ·a mere 1 t per cent. Cap'ital Gains Tax 
contr.i!buted the same small proportion to 
1!otal taxes in 1978 I 79 as err. Far from 
being converted 'into a harsh "wea~th 
tax " by inflation CGT barely managed to 
maintain its cash revenue ·at its 1973/74 
level. If inflation is taken into account, 
the real value of CGT receipts halved over 
the period, as d'id the proportion contributed 
to total revenue. 

Investment Income Surcharge increased 
its revenue yield mug'hly in 1•ine with 
inflation over the period (assuming tha•t 
our estimate for 1978/79 is broadly correct). 
But it was ~he one element of 
income tax for which the revenue 
rema,ined constant as a proportion of 
~otal receipts: in a peri•od when income 
tax receipts increas·ed from 70 per cent 
of total revenue to 80 per cent that 
from the Investment Income Surcharge 
remained at approximaJtely 1.3 per cent. 
It is perhaps paradoxical that these considerable 
reductions in the relative tax 
burden of wealth holders came during the 
period of office of a La!bour government 
-a government, moreover, who began its 
period in office with a comm:itment to 
reduce wealth inequahties. Yet that same 

government presided over an effective 
ha1ving of the contribuvion of capital 
taxes. The prospect of achieving real 
reductions in wealth inequa:l·ities under a 
Conserv.ahve government committed to 
further cuts in capital taxation cannot be 
viewed wirt:h optimism. 

A favourite past-nime of Conservative 
administrations is to make international 
comparisons. A recent study carried out 
for the Organisation for Economic Cooper
·ation and Development (ooco) by C 
T Sandf·ord, J R M Willis and V Flegmann 
allows us to make tentative conclusions 
albout Britain's treatment of 
wealth taxati·on in comparison to other 
advanced industrial nations. The reportshowed that in 1976, UK taxes on capital 
transfers represented 0.87 per cent of 
total tax revenue, compared with 2.60 per 
cent in 1965. Only twelve of the 21 
countries raised a smaller proportion of 
their revenue through wealth taxes (including 
annual wealth taxes) in 1976, 
whereas the UK came third from the top 
·of the league in 1965. H wealth taxes are 
expressed in relation to gross domestic 
product then the UK, at 0.32 per cent, 
again came midway in the league in 1976 
(ten countries rai·sed less as a pwportionof GDP). This compared with Britain's 
pos·irt:ion near the vop of the league (three 
raised less) in 1965, when capital taxes 
in the United Kingdom represented 0.81 
per cent of GDP (C T Sandford, J R M 
willis and V Flegmann, The Taxation of 
Net Wealth: Capital Transfer and 
Capital Gains of Individuals, OECD 1979, 
In summa,ry, we may reca!l.l that BritaJin'~ 
weabth holders have been called upon to 
contribute a steadily dedining proportion 

of revenue for the Government's 
requirements ·over the past decade. The 
UK is now midway in the league of 

advanced ·industrial nat•ions in this 
respect. Not only are Brita'in's wealth 
tax·es poor revenue-,pa,isers, they are also 
economically inefficient and inequitable. 
Moreover, they offer littJ.e prospect of 
breaking down the extreme inequalitiesin property ownership that divide the 
nation. In the final chapter we outline a 
framework of capital taxes which could 
meet these objectives both more efficiently 
and more equitably. 


4. how should we tax 
wealth? 

Extreme inequalities in the ownership of 
wealth, ·and therefore in the political and 
economic power that ·it represents, persist. 
The system of wealth taxation has 
failed lamentably to break down these 
concentrations, beyond a rea11rangementof the pattern of wealth ownership within 
the richest families. Moreover the systemhas not served us well either in terms of 
economic efficiency or fairness between 
taxpayers. Sam Brittan, an economist who 
can hardly be accused of holding rampant 
egalitarian views, once asked : " Is 
it conceivable that if a new system were 
being designed for Britain that income 
woud be taxed heavily and effectively,
and capital hardly at all?" (S. Brittan,
The Treasury under the Tories, 19511964, 
Penguin, 1964). Those words were 
spoken 15 yea:rs ago, when the relative 
burden of capital taxes was somewhat 
grea•ter than it now is. 

In this final chapter we consider the options 
for reform of capital taxation,
especially an annual wealth tax. We share 
the concern of the Conservative govern


1 
ment that the system of wealth taxation 
should be more conducive to economic 
efficiency than is the case with the current 
arrangements. But we are also concerned 
that capital taxes should be ~evied 
with considerably greater equity than is 
now the case. And, in particular, we feel 
that the prime objective of a system of 
wealth taxation should be to help break 
down the extreme inequaJ,ities which now 
exist. Once more, it seems, we are not 
alone in this objective. The Conservative 
party have stated that "it is no part. of 
our •aims to encourage the concentratiOn 
of the country's assets in fewer and fewer 
hands" '(The Right Approach to the Economy, 
op cit). Unfortunately, the policies 
they propose would have. precisely .t~at 
effect. Moreover, at the t1me of wntmg(November 1979) the Conservative govemment 
looks set to embark on these 
policies with vigour. 

Before considering the options for reform, 
we should set out precisely what it 
is we plan to achieve. Our aim is greaterequality, while at the sa!lle rim.e .improving 
equity and economic effimency. We 
can state the basic pr·inciples which should 

guide us quite briefly. First there is the 
principle that the income from wealth 
should be taxed more heavily than that 
from employment. The former does not 
involve the loss of leisure or the insecurity 
which attaches to many (especially 
manual) sources of income. Moreover 
there are often additional costs associated 
with employment incomes, including 
those of travel. A second main pr.inciple 
is that wealth should •be subject to 
tax, whether it yields income or not. Even 
where no money income derives from the 
ownership of wealth, the additional taxable 
capacity is evident, and such wealth 
continues to confer prestige, status and 
power on its owner. Thirdly, inherited 
wealth should be taxed more heavily than 
thaJt: accumulated out of savings. In partthis can be justified on either equity or 
efficiency grounds, since inherited wealth 

•requires no effort or ability on the part of 
the recipient. More important, in our 
V•iew, is the fact that inherited wealth is 
the prime source of inequality. If we are 
reaHy concerned about the ability of the 
tax system to reduce the concentrations 
of property in a few hands, we must deV
·ise a means of tackling •inequality at its 
tap root, and that is the system of inheritance. 
a wealth tax 

The Labour government which came into 
power tin 1974 was committed to ~he redistribution 
of wealth and power m favour 
of working people and their families. 
As a major part of the programme to 
achieve that objective, the Chancellor announced 
his intention in the March 1974 
budget to " introduce an annual wealth 
tax on the rich". A few months later, a 
Green Paper was issued proposing ~he 
implementation ·of a wealth tax, applied 
to wealth holdings in excess of £100,000. 

I'C.,V,t-Jt... ~~·~J ,'. 

The Green Pa,per also mnounced the 
setting up of a Select Committee of the 
House of Commons to consider " the 
exact shape of the tax, and the II'ate at 
whioh it should be introduced " (Wealth 
Tax, cmnd 5704, HMSO, 1974). It also 
expressed the. intentton ;of introducing 
the tax m the 1976 Fmance Act. 


The Select Committee could not, however, 
agree on its final report, so widely divided 
were its members as to what the tax 
should achieve-or whether it should be 
introduced at all. Five draft reports were 
proposed (one by Dr. Jeremy Bray, one 
by John Pardoe, one by the Conservative 
members of the Committee, and two bythe Chai·rman) but in the end the Committee 
could only agree to disagree and to 
publ.ish all five drafts. The failure to agreea Teport was appa•rently pa:rtly attributable 
to the lack of commitment of the 
Labour members (two of whom were 
abwad at a Conference at a vital stage 
of vobing) and to the woolliness of the 
Government's original proposals (C T 
Sandford, "The Wealth Tax Debate" in 
F Field (ed) The Wealth Report, Rout-
ledge & Kegan Paul, 1979). The deHberations 
of the Select Committee ~ook longerthan had been expected and its failure to 
agTee on basic obiectives iJeft the Government 
without solid ·recommendations on 
which to act. By 1976 the Chancellor 
announced that the proposal to jntroduce 
a wealth tax in the present Padiament 
had been dropped. 

This was in any case the time at which 
the Labour Government's approach to 
inequality was beginning to change, witnessed 
not only in its approach to wealth 
taxes, but towards pay policies and income 
tax as well. If the roc had not 
stepped in to mainta:in pressure on the 
Government, the proposals for a wealth 
tax would no doubt have been quietlv but 
gratefully shelved. A roc/Labour Pa·rtyWorking Party was established at the beginning 
of 1977 w.ith the aim of looking" at ways in which we can find a practical 
wav of g-etting a wea1th tax in, hopefully 
within the Hfetime of this present government" 
(Len Murrav. quoted in Sandford, 
ibid). They failed. The approach 'Of their 
successors. the post 1979 Conservative 
government, is unambiguous: "We will 
have no oart in introducing an annual 
wealth tax in the United K!ingdom." The 
fa•ilure of a British government to introduce 
an annual wealth tax is, in one sense, 
surpr·ising. Such a tax has much to comnomic 
·efficiency. For those reasons. half 
mend .it, both in terms of equity and ecothe 
OECD countries have a wealth tax and 

in many cases these have existed for half 
a century or more (see Sandford, Willis 
and Flegmarm, "The Taxation of Net 
Wealth, Capital Transfers and CapitalGains of Individuals, op cit and Sandford, 
Willis and Ironside, An Annual Wealth 
Tax, op cit). In most of these countries 
" horizontal equity " between taxpayers is 
the main reason for s111ch a tax. But, in 
Britain, the determination of the left to 
introduce a wealth tax, and the determination 
of the right to avoid it, springsfrom the belief that such a tax would 
substantially reduce inequalities. How 
realistic are these beliefs? 

The answer to this question will depend 
very much on the type of tax proposed, 
which in turn will depend on the objectives 
of the tax. Most ex·isting wealth 
taxes are not primarily intended to reduce 
inequalities, and are designed in such a 
way as to ensure that they do not actually 
erode the capital itself. The intention 
is that the taxpayer should be able to 
meet his tax liabil·ity out of his disposable 
income. Such " substitutive " wealth 
taxes (to introduce the technical terminology) 
can be expected to make little 
contribution to reducing inequality. Because 
of the objective that the tax should 
be paid out of income, such wealth taxes 
are often proposed as alternatives to the 
higher rate.-; of income tax or the Investment 
Income Surcha:rge. They would 
have a low starting point and low rates. 

A tax intended pr.imarily to tackle inequalities, 
by contrast, would be designed 
to reduce the capital value itself. In other 
words, the income tax a:nd wealth tax 
payments together might approach or exceed 
100 per cent of the value of the 
disposable income der.ived from the 
wealth. To return to " jargonese ", it 
would be an " additive" wealth tax. The 
rates of tax would be high and progressive, 
but the level of the threshold 
would depend on whether the higherrates of income tax and Investment Income 
Surcharge were reta•ined. If such 
taxes were retained, a higher wealth tax 
threshold might be appropr.iate. 

It is not at all clea:r whaJt sort of wealth 
tax would have emerged from the Labour 


Party's initiative. The Green Paper specified 
very li<ttle about the shape of tax 
which the Government then had in mind, 
except t!hat it should anly be payable on 
net wealth (excluding liabilities such as 
mortgages) exceeding £100,000. Above 
this level it only provided two 
illustrative schedules of rates, one rising 
to 2t per cent on net wealth exceeding 
£5 million, the other reaching 5 per cent 
at that level. 

The Conservative members of the Select 
Committee claimed that the Green Paperproposals were "unequivocally an additive 
tax" (Select Committee on a Wealth 
"Pax, Report and Proceedings of the Committee, 
He 696-1, Nov. 1975, vol. 1). A 
closer inspection of the " illustrative " 
structure of rates suggests ·that this statement 
was itself a little too" unequivocal ". 
The starting point for liabil.jty at £100,000 
would in 1974 have affected just 80,000 
people-about one fifth of one per cent of 
the adult population. On either schedule 
proposed, very few wealth holders (probably 
less than one in a thousand) would 

• have been subject to a rate in excess of 1 
per cent. (A one per cent annual wealth 
tax equa·ls a 20 per cent tax rate on income 
if the wealth )'lields a 5 per cent 
return, 10 per cent on that yielding 10 
per cent, and so on.) 
Moreover, the Green Paper .jndicated that 
the Investment Income Surcharge and the 
wealth tax would probably be offset, one 
against the other. But as John Pa!'doe 
(who was not concerned primarily with 
the equality objective) pointed out in his 
draft report, 620,000 people paid the Investment 
Income Suroha>rge in 1974/75while only 100,000 would be affected by 
a wealth tax with the proposed threshold. 
"We are bound to say that we are 
not attracted to proposals for a wealth 
tax .intended to promote horizontal equity 
which leave out of account more than 
five-sixths of eligible persons " (SelectCommittee on Wealth Tax, ibid). 

The proposal to offset investment income 
surcharge meant, according to the calculations 
of one witness, that even on the 
higher and more progressive schedule of 
rates proposed in the paper, a typical tax


payer would be better off under the 
wealth tax unless his net wealth exceeded 
£300,000. (Ev.idence of Dr. Barr, quoted 
in Select Committee on a Wealth Tax,
ibid). As Dr. Bray commented in his 
draft report " At any lower rate the re-
distributive effects would be very slow 
and small ... Any lower rate or higherthreshold will scarcely be seen as a wealth 
tax at all" (ibid). 

The Green Paper indicated that ·even this 
offsetting of the wealth tax aga,inst income 
tax did not go far enough, in the 
Government's view, and ·raised the possibil-
ity of setting a ceHing to the taxpayers 
total tax l>iability. As Jeremy Bray, 
once more, pointed out: " The purposeof a ceiJ,ing to the combined liability to 
income tax and wealth tax is to l.imit or 
even prevent any redistributJion of wealth 
by the wealth tax ... The rurgument that 
people cannot pay tax lin excess (sic) of 
100 per cent of their incomes reflects 
tJhe long standing, deeply engrruined, but 
old fashioned aJtt•itude that capital is 
sacrosmct and must not be touched." 

The proposed threshold of £100,000 was 
to be applied to net wealth, after liabilities 
and exemptions. Owner-occupiedhouses were to be included in the tax 
base, ltlthough few would have attracted 
liability. Somewhat surprisingly, the 
Green Paper explicitly excluded the value 
of occupational pensions from the scopeof the tax. By contrast, the Conservat>ive 
draft •report of the Select Committee 
stressed at •length the value of occupational 
pensions to Civil Servants (noting 
the evidence of the Inland Revenue arguing 
for their exclusion) and insisted that 
a wealth tax, if introduced, must include 
such elements. Cynics might be led to 
suggest tha>t the Labour Government 
sl-ipped this one specific commitment into 
the Green Paper to avoid tlhe clammy,

dead hand of civil service resistance falling 
on the proposals, whil-e the Opposition 
had an interest in such resistance, 
and were at pains to encoumge it. 

Overall, it appears that a wealth tax, if 
introduced, would have done little to redistribute 
wealth. The only draft reportof the Select Committee to advocate an 


additive wealth tax was that of JeremyBray who received little support from 
other Committee Members. The primary 
a·im of the other reports was to increase 
faarness between taxpayers. M1 objectivewhich led them to propose substitutive 
taxes. 

If we look carefully at the Chancellor's 
Foreword to the Green Paper it becomes 
clear that, although the wealth tax was to 
make some contribution to greaterequality, this was to be achieved rather 
indirectly. Instead of •reducing the topwealth holdings by allowing the tax to 
bite into capital, the pr.imary aim was to 
close some loopholes in the income tax 
system: "Once the additional taxable 
capacity represented by ownership of 
wealth is adequately brouht into charge, 
excessive inequalities of wealth will in 
time be eroded, and ·it will be possible 

to reduce the high rates of tax on earned 
income" (Wealth Tax, op cit, our emphasis). 
By making the income tax system 
more effective, the accumulation of 
wealth would be hindered (somewhat). 
But progress <towards greater equalitywould be a very slow one indeed. 

This is not to imply, of course, that a 
wealth tax could not be devised which 
would begin to break down such inequalities 
with more speed. J. S. Flemm·
ing and I. M. D. Little have, for instance, 
proposed a tax with marginal rates of 3 
per cent on wealth of £100,000 rising to 
13 per cent on £1 million and to 20 per 
cent on two million. Even though they 
proposed the abolition of the investment 
·income surcharge, estate duty (now CIT)
capital ga·ins tax and stamp duties, the 
authors estimate that such a scheme 
would make it very difficult to accumu·
late wealth above £250,000. Their motivation 
is not primarily egalitarian: "In a 
progressive mixed society some clever, 
lucky, efficient individuals have to be allowed 
to become rMher rich. But they do 
not have to be extremely rich-say, with 
over £250,000. Less than one person in a 
thousand falls within the latter class .. . 
Great inequality cannot be justified on the 
grounds that it makes it easier to collect 
taxes" (J. S. Flemming and I. M. D. 
Little, Why We Need a Wealth Tax, 

Methuen, 1974). At the same time, the 
authors were concerned to ensure that 
the accumulation of wealth is made easier 
for the poorer 95 per cent of the population. 


It would therefore be possible to devise 
a wealth tax which had a significant ~mpact, 
albeit a slow one, on the current 
distribution of wealth. But if we are concerned 
primarily with inequality, we 
should remember that the root source of 
that inequality is ~nheritJa.nce. For this 
reason improvements •in wealth taxation 
should include a reform of wealth transfer 
taxes and of those on investment income 
and oa~pi~al gains. 

inheritance taxes 

We noted in chapter 3 that the CapitalTransfer Tax (like its successor the 
Estate Duty) was a tax levied on the 
donor of the <gift •or inheritance. The 
revenue from such taxes has fallen 
dramatically over the post-war per.iod. If 
transfer taxes were now called upon to 
contribute the same proportion of total 
revenue as they did thirty years ago,
their yield would be six times its current 
level, and equivalent to a tenth of current 
income tax receipts. The rate of income 
tax could :be reduced :by up to 4p in the £ 
without an increase ·in the governmentborrowing requirement. Even ten yearsago, transfer taxes raised proportionately 
four times their current revenue yield,
sufficient now to reduce the standard rate 
of income tax by 3p in the £. A principal 
objective of .reforms should be to 
raise through transfer taxation at least 
the same proportion of total Inland 
Revenue receipts as was the case a decade 
ago. 

Since CIT revenue now accounts for less 
than a fifth ·of one per cent of total estimated 
personal wealth-holdings, 1t can 
hardly be expected to make a significant 
impact on wealth inequalities. Moreover, 
as we have noted, being assessed on the 
estate of the donor, it provides no incentive 
for the wider dispersion of wealth. 
The move from an estate tax to an 
" accessions tax " covering all gifts and 


·inheritances but payable by the recipientwould be more equitable while encouraging 
·redistribution. Such a tax could be 
levied at a progressive rate on the cumulative 
total of gifts or inheritances received 
by an individual (for a fuller discussion 
see Sandford, Willis and Ironside,
An Accession Tax, op cit, and Atkinson 
Unequal Shares, op oit). 

The Meade Committee on tax reform 
were ·in favour of an accessions tax of 
this type, but acknowledged that an !important 
drawback remained: "it levies 
the same tax whether the wealth is held 
for a long or for a short period. Inherited 
wealth which changes hands frequently is 
taxed more heavily than inherited wealth 
which stays in the same ownership for 
long periods" (J. E. Meade (Chairman), 

The Structure and Reform of Direct 
Taxation, op cit). As a result, the incentive 
to pass on wealth quickly is reduced 
even though there is encouragement to 
disperse it more widely when it is passed 
on. To overcome this problem, the Meade 
Committee proposed an accessions tax 
~mbined with a wealth tax, and Iev.ied 
at progressive ·rates (PAWAT). On receiving 
a gift or inheritance, a progressiveaccessions tax would be levied. At the 
same time an additional tax would be 
payable on the wealth received levied at 
an annual progressive rate over the per.iod 
for which the reoipient was expected to 
hold the wealth, perhaps his or her life-
expectancy. This would in effect levy a 
tax .on the annual value of wealth to be 
paid in advance. If the 'recipient passed 
the wealth on sooner, part of the wealth 
tax element of the tax would be refunded. 

Two problems arise with such a tax. 
First, an accessions tax is J.ikely to reduce 
inequality more slowly than an annual 
wealth tax levied at comparable rates, 
since the former only applies when wealth 
changes hands. Secondly, an accessions 
tax does not, by definition, apply to 
wealth accumulated out of sav·ings. While 
it may encourage the faster dispersion of 
inher.ited wealth, it actively discourages 
that of accumulated wealth. The Committee 
also therefore proposed the consideraTion 
of a separate progressive annual 
wealth tax in a,ddition to a non-

progressive linear combined annual 
we~lth and accession tax (LAWAT) (ibid).
This, they argued, would provide a 
general discrimination against ·inherited 
wealth, leaving the annual wealth tax to 
tap the largest fortunes, whether inherited 
or saved. Although a non progressive 
LAWAT would be easier to administer tit 
would be feasible to apply such a tax 
progress!vely, together with a sepa·rate 
progressive annual wealth tax. If the rates 
o~ the annual wea_lth tax were sufficiently 
high, however, little would be gainedfrom applying a PAWAT. 

taxation of 
investment incomes 

\Ye have argued that, if the main objective 
is to tackle wealth inequalities, a 
wealth tax should be "additive". It 
should be levied at such a level that the 
largest wealth holdings were actually reduced. 
This would lead us to •retain the 
separate taxation of investment incomes. 

We noted in chapter 3 that the current 
method of taxing investment incomes was 
highly inefficient. The Conservative Party 
has argued that the tax distorts capital 
markets by encouraging people to convert 
their investment income into capitalgains which are far more favourablytaxed. Indeed, for many the investment 
income surcharge, like the Estate Duty, 
has become a largely voluntary tax. The 
approach of the Conservative PC!lrty has 
been to consider abandoning the Investment 
Income Surcharge altogether. 

This is a prime example of throwing out 
the baby (an apt description given the 
revenue of the surcharge) with the bath 
water. Given the advantages associated 
with unearned incomes, it would be 
highly inequitable to remove the historic 
discrimination in favour of earnings. A 
more appropriate course of action would 
be to remove the incentive to convert income 
into capital gains, by taxing gains 
as income. There is 'little justificationfor treating capital gains as a separateform of receipt subject to a lower and 
proportional rate of tax. All gains should 
therefore be subject to the progres&ive 
schedule of tincome tax, as was the case 


with shortterm gains between 1965 and 
1971. Moreover, since capital galins a:re 
by definition " unearned income " theyshould be taxed as such, subject to the 
1nvestment Income Surcharge. 

The difficulty that arises from this treatment 
is that capital gains are at presentlevied only when the asset is sold, on 
" realisation " of the gain. If an asset is 
sold, this would add substantially to the 
liability of its owner in that tax year,
whereas the increase in value may have 
occurred over several years. With a progressive 
tax, this would mean higher tax 
payments than if liability were assessed 
year by year on the increasing value. Yet 
to do this would require annual valuation 
and the high admillistrative costs 
which would result. To overcome this 
problem. Atkinson has proposed that 
gains be taxed on reahlsaJt.ion but with 
al-lowance for averaging the gain over a 
period of (say) five years (UnequalShares, op cit). A similar a:pproach was 
proposed by the Canadian Carter Commissi-
on on Tax Reform who also suggested 
that capital gains be taxed as income. 
Only real gains (rather than inflation-
created paper gains) would of course 
be included. The Meade Committee has 
proposed a method whereby this could 
be achieved. 

We have also shown that, in effect, the 
real surcha:rge appLies to earned income, 
through the effect of national insurance 
contributlions. More "tax " is payable on 
earnings than on investment income, ·a 
situation which runs contrary to basic 
principles of fairness ,in taxation. One 
obv,ious means of overcoming this problem 
would be to integrate the national 
insurance contributions with the income 
tax, rather than ·retaining them as ,a 
sepaz;ate, regressive levy. But this would 
have severe implications for the new Pensions 
Scheme. A more straightforwardapproach would be to increase the level 
of the Investment Income Surcharge, by 
remov,ing the exemption for small investment 
incomes (which already receive 
<the same personal allowances as earned 
income) and increasing the rate. If this 
seems harsh, we should remember earned 
incomes are treated m ore harshly. 

In these last two pages we set out some 
of the options rfor reform of wealth 
taxation. 

conclusion 

These reforms we believe would improvethe <tbility of the system to tackle severe 
inequalities, increase the fairness of taxat1on, 
and ~mprove economic efficiency.
The programme of reform should include 
the following: 

1. A combined annual weaHh and accessions 
tax, as proposed by the Meade 
Committee, levied at either progressive 
or proportional rates. Such a transfer tax 
should be expected to raise 'revenue at the 
effective level of Estate Duty ten years 
ago. The removal and reduction of manyof the (currently distortionary) exemptions 
and rel-iefs, would allow transfer 
taxes to make a real contribution to tax 
revenue. 
2. The introduction of a progressive annu-
al wealth tax with rates high enough 
to make ,it impossible to maintain the 
largest concentrations of wealth by drawing 
on income (taking account of the tax 
also payable on that income). If we are 
senious about reducing inequalities, we 
cannot continue treatJing capital as 
" sacrosanct ". 
3. The retention of an investment ~ncome 
surcha-rge and an increase in its effective 
rate to ensure the differentiation in favour 
of earnings. 
4. The abolition of the separate CapitalGains Tax and the treatment of capi,tal 
gains as income, again subject to the progressive 
schedule of rates. This would 
remove the current loophole provided for 
those who can convert their income into 
capital garins. Such conversions reduce the 
progressiveness of the income tax systemand are highly wasteful in economic 
terms. 
We do not pretend that this package of 
proposals is the only way .in which the 
tax system can be used to tackle wealth 
inequalities. An author with whom we 
share common objectives and priorities, 


Michael Meacher, MP, has recently proposed 
an alternative framework consisting 
of, first, a progressive accessions tax 
with rates ·reaching 100 per cent on transfers 
of £20,000 or more ; second, an annual 
wealth tax at (say) 5 per cent on 
holdings exceeding £t million and, third, 
a tax on imputed incomes from wealth 
holdings above a threshold of (say)
£20,000 (having made generous allowance 
for owner -occupied housing) (M.
Meacher, "Wealth ", in N. Bosanquetand P. Townsend '(eds) Labour and 
Equality, Heinemann, 1980). 

Nor, in the space allowed, have we been 
able to explore the ·administrative or economic 
implications of such proposals (the 
reader .is referred to the report of the 
Select Committee on a Wealth Tax, to 
that of the Meade Committee and A. B. 
Atkinson's Unequal Shares, on whioh we 
have drawn heavily throughout). We 
would not wish to minimise the constraints 
which face a government trying 
to implement policies which tax more 
heavily those who have not been used to 

, 
pay.ing tax. Act:Uon might be necessa·ry to 
avoid the flight of capital, a problemwhich the recent abolition of exchangecontrols has exacerbated. At the same 
time, high marginal rates of capital taxes 
would ·tend to lead the wealthy to " spend 
themselves out of the depression" of being 
taxed. Inequality in consumptionmight well >increase while the process of 
reducing inequality in wealth holdings 
progressed. But it would have to be a 
special kind of consumption (excluding 
those goods which would be subject to 
tax) and might actually increase the dispersion 
of wealth holdings ~n the tonger 
term. The economic, administrative and 
political difficulties ·of a reform of wealth 
taxation should not be ignored. But if the 
Labour Movement is really committed to 
a ·reduction in the extreme tinequaJ.ities of 
wealth and power that persist, a decisive 
programme of change is now needed with 
some urgency. 


recent fabian pamphlets 


research series 


327 Howard Glennerster (ed) 
331 Chris Ralph 
332 Roy Manley, Helen Hastings 
333 Nicholas Bosanquet 
334 Oarl Wilms Wright 
335 Vincent Cable 
336 Christopher Parsons 
337 Robin Cook, Dan Smith 
338 Alan Fox 
339 Peter Archer 
340 Deepak La'! 
341 Tom Sheriff 
342 David Scott Bell 

tracts 

438 Anthony Crosland 
448 Lisanne Radice 
449 Rod Northawl, Richard Corbett 
451 Dianne Hayter453 Nicholas Falk 
454 Society of Labour Lawyers 
455 David Watkins 
457 Tom Crowe, John H. Jones 
458 Robert Taylor 
' 459 A Fabian group 
460 Walter Jaehni•g 
461 A Fabian Group462 Bryan Gould and others 
463 Austin MitcheU 
464 Giles Radice 
465 Peter Scott 

Labour's social priorities 55pThe picket and the Iaw 60pInfluencing Europe 55pEconomic strategy: a new social contract 75pTransnational corporations 75pImport controls: the case against 70pF•inance for development or survival ? 75pWha.t future in NATO ? 75pSocialism and shop floor power 60pThe role of the law officers 75pPoverty, power and prejudi•ce 75pA deindustrialised Britain? 60pEurocommunism 80p 

Social democracy in Europe 55p
Reforming the House of Commons SOp
Electing Europe's first parliament 60p
The labour party: crisis and prospects 60p
Think small: enterprise and the economy 7Sp
Legal services for all 70p
Industrial common ownership 6Sp
The computer and society 50p
Labour and the social contract 65p
Deserting the midill·e ground SOp
Family service for mentally handicapped 60p
Creating a caring ·community 6Sp
The po'litics of monetarism 60p
Can Labour win a:gain? 75p
Community socialism 65p
What .future for higher education? 70p 


young fabian pamphlets 


37 David R. Allan Socialising the company 50p42 Martin Smith Gypsies: where now ? 40p 
44 Melvyn Westlake World poverty: the growing conflict 70p45 Geoff Harris A wider Europe 50p46 David Elliott The Lucas Aerospace workers' campaign 60p47 Tom SchuHer Education through life 65p48 Mark Swift A regional policy for Europe 70p49 Mark Goyder Socialism tomorrow 65.p 

books 

R. H. S. Crossman and others New Fabian Essays cased £1.75 
Brian Abel-Smith and others Socialism and affluence paper £0.60 
Peter Townsend and others The fi'Hh socia:l service paper £2.50 
George Cunningham (ed) Britain and the world in the 1970s cased £3.00 

taxing wealth inequalities 
This pamphlet places capital taxes in their economic and social context. 
One per cent of the population owns one quarter of !Britain's personal 
wealth, including ralmost threequarters of all land, stocks and shares and 
two thirds of all government securities. rlt 1iS against this background that 
the Chancellor has asserted that capital taxes are " oppressive, harmful to 

business and a real deterrent to initiative and enterprise " . The evidence 
as set out in this pamphlet suggests that the Chancellor is wrong. It is 
pointed out that the various capital taxes contribute little, more than 4 pence 
in every E of direct taxes raised-less than half their relative contribution 
when 'Labour last took office. 

The authors put the issue of wealth taxes firmly on the legislative agenda 
of a future 1Labour government. How should the inequalities in wealth be 
tackled? Do we need the sort of we·alth tax to which the last 'Labour 
government was committed but which it abandoned? Should we have a 
more effective system of inheritance taxes? The authors argue that 
socialists must now begin to ask these questions and they provide an 
excellent basis for discussion within the Labour movement with this 
pamphlet. 

fabian society 

The Fabian Society exists to further socialist education and research. It is 
affiliated to the 'Labour Party, both nationally and locally, and embraces all 
shades of socialist opinion within its ranks -left. right and centre. 
Since 1884 the Fabian Society has enrolled thoughtful socialists who are 
prepared to discuss the essential questions of democratic socialism and 
relate them to practical plans for building socialism in a changing world. 
Beyond this the Society has no collective policy. It puts forward no resolutions 
of a political character. The Society's members are active in their 
Labour parties, trade unions and co-operatives. They are representative 
of the labour movement. practical people concerned to study and discuss 
problems that matter. 

The Society is organised nationally and locally. The national Society, 
directed by an elected Executive Committee, publishes pamphlets, and 
holds schools and conferences of many kinds. Local Societies-there are 
one hundred of them-are self governing and are lively centres of discussion 
and also undertake research. 

Cover design by Dick Leadbetter Printed by Civic Press Limited {TU). 
Civic Street, Glasgow G5 9RH ISBN 7163 0466 X ISSN: 0307 7535