Measuring Wealth
Amid all the talk of ‘no tax increases for working people,’ it is pertinent to look at the different types of wealth that people have.
The one most people know about is earnings, the salary or wages they are paid for doing a job. This is what they spend to live on and, if they are fortunate enough, to save from, often in housing via mortgages.
The second most obvious one is income earned not from wages but from assets. If people have managed to save enough, they can invest in housing and draw rental income from that. Or they might invest in stocks and shares and draw on the income they yield. In both housing and shares they have the possibility of gains if the value of their assets rises.
A third form of wealth is in the form of entitlements. People in the UK are entitled to a free education for their children, to free healthcare for themselves and their families, and to a free pension from the state when they reach retirement age. These constitute wealth, and it is wealth that can be measured by calculating what it would cost to provide it if the state did not do so.
Surprisingly, many commentators on inequality fail to include this third form of wealth, and therefore come up with a much greater figure for inequality than there actually is when it is taken into account. This form of wealth is particularly valuable for those at the lower end of income distribution because it gives them access to essential services. When benefits are added in, the entitlements raise the standard of living much higher than it would otherwise be, and help redress some of the inequalities.
Much of the current government’s talk centres around imposing a heavier tax burden on those who draw income from assets, and not doing so for those who draw it from wages. The thought seems to be that asset income is less meritorious than wage income. This is simply not true. Those who buy houses to let are increasing the stock of rental properties at a time of a widely acknowledged housing shortage
Those who buy shares are investing in business and in the growth that makes the population richer. Furthermore, they are taking risks that the wage earner does not take. Their gains are not assured, which makes a case for taxing them at a lower rate rather than a higher one.
Capital Gains Tax is particularly iniquitous when it fails to take inflation into account. Inflationary gains do not make people richer, they simply put a higher monetary figure on asset values without any real gains.
Tax policy should be to encourage what is good for everyone, not to penalize it. We want people becoming wealthier, to invest and to save into pension funds. Taxing them more is not the way to achieve this.