The coronavirus pandemic has impacted every one of us. We are all fearful of getting sick, and many have lost loved ones or suffered through weeks of illness. Still more have been unable to leave their homes in over two months. Some have lost their jobs or seen dramatic falls in their incomes.
But like so many things in this country, the crisis has had a disproportionate impact on the most vulnerable. Those living in the poorer areas of the UK are twice as likely to die from coronavirus as those living in well off regions. Black men and women face a significantly higher risk from the virus. Young people, who were already getting a raw economic deal before the pandemic, are the most likely to lose work during the lockdown.
And what about the massive economic intervention from the government? Who is benefiting from that?
Millions are still being paid through the furlough scheme and the government has made some parts of the social security system a little bit more generous. But research from the Institute of Public Policy Research (IPPR) suggests that the government’s pandemic intervention will entrench the power and wealth of those who already own assets, while the working poor face higher levels of debt. Flows of income to rentiers – those who profit from ownership of scarce assets like housing – are almost entirely protected. IPPR estimate that up to 45% of the cost of the furlough scheme will go on rent and debt payments.
Before the crisis there was already a huge gap between those with money and assets, and those without. The pandemic is only going to make this gaping inequality worse.
Some on the right have long argued that inequality is not as severe as we might think. The editor of the right-wing Spectator magazine, Fraser Nelson, points to official statistics showing that income inequality has been flat, or even falling, over the last few decades. But new research from academics at LSE and Warwick, in collaboration with the Resolution Foundation, has exposed that we’ve been underestimating inequality for 20 years at least.
After 2008, considerable effort was put into arguing that the nation was “all in it together” and that among the losers in the age of austerity were the ultra-rich. As it turns out, this argument was wrong. When the researchers factored in the regular income rich people receive from their wealth a different picture emerged. They found that the increase in income of the top 1% since the late 1990s is twice as large as we previously thought.
The researchers were able to correct our underestimation of income inequality by including figures on capital gains in their calculations. These are the profits people make from selling assets, such as shares or second homes. Capital gains are taxed at a much lower rate than income from work. About half of capital gains relate to people’s jobs, rather than income from arms’ length investments. Out of the £52 billion in gains realised in 2017-18, 62% went to the 9,000 people who made more than £1 million in capital gains.
In other words, the ability of rich people to transform their income into wealth (to pay lower levels of tax) has skewed our understanding of the gap between rich and poor.
Taking a step back, it’s clear that the UK’s approach to tax is dysfunctional: we don’t raise enough money, avoidance is rife and wealth is under-taxed. Despite some recent progress, estimates suggest that £35 billion to £90 billion of tax goes uncollected per year. The government also spends over £164bn a year on tax reliefs – many of which are badly targeted and largely benefit the well-off and big companies. The corporate tax rate has been slashed from 28% in 2010 to the current rate of just 19%.
The coronavirus crisis has shown us that the government has huge financial power, including flexibility over money creation, borrowing, and options like higher taxes on wealth and big business. As the immediate crisis fades, we will rightly have a national debate about how to build back better. We should look to the period after the Second World War, which saw the founding of the NHS, when tax rates were much higher than they are now. Income tax reached up to 90% in the 1950s and ‘60s.
We simply cannot afford a return to austerity. To build a fair society, we need to be spending more money on health, care and other public services to protect our national resilience. In the long run, there will have to be tax rises. Given what we now know about the real state of inequality in this country, it would be inexcusable not to raise taxes on wealth.