Former health secretary Wes Streeting has set out plans for a “wealth tax that works”, by equalising tax on assets and income.

Streeting said the current system – in which capital gains tax is generally much lower than income tax – was not fair and penalised work, arguing the taxes should be equalised.

“The wealth gap in this country has widened, the opportunity gap in the country is widening and the gap between earned income and unearned income has also widened,” he told the BBC’s Political Thinking podcast.

Laying out part of his pitch for the leadership of the Labour party, Streeting told Nick Robinson that the plan could raise up to £12bn a year. He used the example of a woman in Lancashire who paid a higher rate of tax on her salary than her landlord paid for the growing value of the house she rented.

“She slogs her guts out, he puts in far less effort, yet the state rewards him more than her. And we wonder why people are angry,” he said. “The system is penalising work. It’s not fair and it’s bad for our economy. We need a wealth tax that works. A pound made from simply owning assets should not be taxed less than a pound made from a hard day’s work.”

Under the current system higher or additional rate taxpayers pay 24% on gains they make in the current financial year. Streeting’s proposals would mean capital gains tax rates mirror the three bands of income tax of 20%, 40%, 45%, with a person’s capital gains tax band calculated by adding up their income and profits from assets. A 2024 report by Centre for the Analysis of Taxation estimated changing capital gains tax could raise £14bn.

Critics of raising capital gains tax argue that it could result in capital flight, discourage investment, or – because the tax is paid on sale – encourage investors to hold on to assets. But Streeting said there was “a good pro-business, pro-growth, pro-productivity argument” in his proposals because the current system encouraged investment in less productive businesses. Streeting said tax reform could include measures to protect real entrepreneurs, with lower capital gains tax rates for those taking risks building companies.

“The kite that I am flying in this leadership contest will be to equalise those rates with allowances for genuine entrepreneurialism, investment, reinvestment, so that we can be both pro-worker, pro-entrepreneurialism, pro-fairness, and in the course of that generate up to £12bn worth of revenues.”

The Ilford North MP also said the government should close loopholes that allow people to disguise income from work as capital gains, such as setting up personal service companies or taking pay in shares.

Streeting, who quit the Cabinet last week and called on Keir Starmer to stand down, warned in his resignation speech on Wednesday that Labour must change course or risk handing Reform UK power.

He said that while he had the support of 81 MPs, needed to launch a leadership challenge, he had decided not to because he “got wind” that the Greater Manchester mayor Andy Burnham had found a seat to stand in.

“It was clear that if we had been plunged straight into a leadership contest by me or for that matter, anyone else, I think it would have been seen as a deliberate attempt to get ahead of Andy Burnham’s potential return,” he said.

“And if there’s one thing that we need to do coming out of a change in leadership, it is to bring the tribes of the Labour party together, to unite around one leader as one team, drawing on Labour’s different political traditions to unite progressives and beat Reform.”