Wealth inequality is even greater than income inequality and is on the rise, says new report

Governments should consider deploying the taxation system to reduce wealth inequality, with inheritance tax the favoured route, according to the west’s leading economic thinktank.

Wealth inequality is greater than income inequality and evidence suggests disparities have increased in recent decades, the Organisation for Economic Cooperation and Development said in a report. Wealth – such as property, savings, share portfolios and pensions – grows and becomes self-reinforcing because the rich have more to invest in higher-yielding assets, greater financial knowhow and better access to investment advice, the OECD said.

Rich people also have more power, influence and opportunities and are able to generate income without having to work. Someone working for €20,000 (£17,300) a year and another person making the same money from an investment are in different positions, the report, The Role and Design of Net Wealth Taxes in the OECD, said.

“A key aspect of wealth accumulation is that it operates in a self-reinforcing way; wealth begets wealth,” the report said. “It may be argued that wealth begets more power, which may ultimately beget more wealth. Overall, this means that, in the absence of taxation, wealth inequality will tend to increase.”

The OECD’s report is in part a response to the arguments of the economist Thomas Piketty, who has highlighted the importance of wealth in entrenching inequality and has called for a global wealth tax to reduce inequality and increase social mobility.

The number of developed countries that tax wealth each year has shrunk from 12 in 1994 to four – France, Spain, Norway and Switzerland - but the OECD said arguments for a wealth tax were weak because it was hard to implement and did not take into account what was earned from an individual’s wealth.

Taxing capital income would not do enough to reduce wealth inequality and the answer may lie in higher taxes on inherited wealth, the OECD said.

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Increased home ownership and rising house prices mean the wealth of younger generations now depends more on how much they inherit, increasing inequality. Inherited wealth is also unearned and therefore unfair, the report said.

By accepting the argument for tougher wealth taxes and proposing inheritance tax as a key measure, the OECD is likely to stir debate in the UK, where the tax is highly unpopular. Inequality between the generations has surged, but most married couples can leave up to £850,000 to their direct descendants without paying inheritance tax. That figure will rise to £1m by 2020.

Laura Gardiner, principal researcher at the Resolution Foundation, a UK thinktank, said: “It’s very useful that the OECD has published this analysis. The broad thrust of the argument is very sensible. Wealth is much more unequal than income but we talk about it much less.”

She said politicians on the left and right recognised that taxing wealth would be necessary as more baby boomers, which typically refers to the generation born between 1946 and 1964, retire and need social care. The 40% rate for UK inheritance tax scares people even though only 4% of estates pay any inheritance tax, she said.

People also believe, with some justification, that the very rich can avoid the tax, Gardiner said. She said the government should require that agricultural land, which is exempt, is owned by farmers and tighten rules on trusts and the passing on of businesses.