The Archbishop of Canterbury has called for a reshaping of Britain's tax system to raise more money for public services and reduce 'damaging wealth inequality'.

A report co-written by Justin Welby with the Institute for Public Policy Research proposes the scrapping of inheritance tax and for it to be replaced by a gifts tax. Total gifts received over £125,000 during a person's lifetime would be subject to income tax, replacing the current loophole that allows people to avoid death duties with gifts becoming tax-free after seven years.

The report also calls for a £13-billion a year rise in corporation tax and the creation of a £186-billion 'Citizens Wealth Fund'.

It calls for higher taxes on capital gains and dividends, raising another £27 billion a year.

The increase in tax revenue would fund a higher minimum wage and grants to help young people buy homes.

In an article for the Daily Mail, Welby wrote that there was 'much of which we can be proud' in the UK's economic performance. However, he continued: 'Yet despite these strengths, it is evident that for many people, the economy is not working. It no longer fulfils the promise of rising living standards.'

Pointing out that wages have stagnated for a decade, he says: 'As the Bank of England has shown, for nearly 40 years the share of our national income going into people's pay has been falling while the share going to profits has been on the rise.

'Chronically low pay means that a hard day's work no longer keeps people out of poverty: today, a majority of the poor are working families.'

And he says bluntly: 'I do not believe we can continue with an economy that works so badly for so many.'

Stressing that his view is shaped by biblical values, he says the economy needs to be reformed on a scale similar to that after 1945 under Clement Atlee and in the 1980s under Margaret Thatcher.

Justice, he says, needs to be 'hard-wired' into the economy.

The report from the IPPR's Commission on Economic Justice calls for a boost to manufacturing and exporting sectors, an immediate increase in the minimum wage, and a reform to zero-hours contracts which can leave families relying on foodbanks to survive.

Welby concludes: 'In the Gospel of Matthew, Jesus is recorded as giving one of the greatest challenges possible to his disciples just before his arrest and crucifixion when he describes the judgment of God at the end of time. In that passage he explicitly says that judgment is linked to justice, namely, in the way in which we treat those who are most vulnerable and weakest. Out of that extraordinary passage comes the Christian call to work for the common good and for the welfare of everyone in our society.'

A government spokesman said: 'Since 2010, we've supported more people into work, introduced the National Living Wage worth £7.83 per hour, doubled free childcare and helped workers keep more of the money they earn at the end of every month by cutting taxes for 31 million people by an average of £1,000.'