WEALTHY people who make money from buying and selling assets should have their income taxed in the same way as people who work hard for a living, according to a leading think tank.

And the Institute for Public Policy Research (IPPR) said such a move could raise at least £90 billion over five years, with the ending of special treatment for capital gains being the first step in a radical overhaul of Britain’s “unfair and outdated” tax system.

The IPPR said cash for schools, education and the police announced in the Chancellor’s spending review is only a fraction of what the country’s public services will need to end austerity and meet future demand.

Even the £13.8bn promised was unlikely to be possible without breaching the government’s current fiscal rule, as it would be funded from fiscal “headroom” likely to have dwindled since the spring forecast.

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The report said meeting this long-term spending challenge will only be possible by overhauling the tax system and the way income from wealth is treated.

Under the current tax system, it said two people earning the same amount can end up paying vastly different amounts of tax depending on the source of their earnings.

Someone on a £50,000 a year salary would pay 42% of a £20,000 pay rise in tax – 43% in Scotland – but just 8% of their additional income if they received £20,000 profit from selling non-residential assets. The think tank said the disparity makes inequality worse, as the wealthiest people are more likely to get income from wealth and can end up paying less tax than they would if their income was from work.

The wealthiest were also more able to avoid their tax obligations by shifting their income source from wages so they are paid in the form of lower-taxed capital gains and dividends, and the IPPR said this dynamic meant the rich can continually get richer, whilst everyone else struggles to catch up.

According to its report, people’s life chances will be increasingly determined by the wealth of the family they are born into. Raising taxes on income from wealth to the same level as those on income tax is, in the IPPR’s view, a necessary step to restore a sense of justice to our economic system.

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The capital gains tax proposal is based on the principle that income, regardless of its source, should be taxed equally and to achieve this, the IPPR recommends abolishing separate tax rates on capital gains by incorporating them into the income tax schedule and removing most exemptions, allowances and reliefs that currently exist – bringing capital gains in line with taxation of earnings from work. These changes it said, could raise up to £120bn of extra revenue over five years, adjusted to £90bn following potential behavioural changes modelled in the report.

IPPR director, Tom Kibasi, said it was a matter of basic fairness: “It is fundamentally wrong that people who get their income from betting on the stock and shares or playing the property market pay less tax than those who go out to work each day to provide for their families.

“The current tax system works for the rich, designed to help them avoid paying their fair share.”

Carys Roberts, IPPR’s chief economist and head of the Centre for Economic Justice, added: “Our proposals to meet this challenge are based on a simple idea: that all income should be taxed the same, whether from wealth or from work. It’s not justifiable that the wealthy, who are more likely to receive income in capital gains, should contribute less tax than ordinary people who work for their income.”