Report: Opinion
March 2005
A taxing role
Steve Van Riel thinks inheritance tax is more Robin Hood than
Sheriff of Nottingham
‘Dead wrong: Why we’re campaigning to stop inheritance tax
robbing ordinary homeowners’ was the headline in The Observer.
The story has returned every Sunday since then. House price
inflation has increased the personal wealth of lots of middle class
people. The outrage is that, when they die, this new wealth
will be taxed on its way to their children.
When you think about the rest of the left’s agenda you
realise just how strange this sounds. The government has begun to
tackle asset inequality with a radical new type of welfare. Think of
examples like the Child Trust Fund or the recent moves to help
people in social housing buy a part of it.
“Inheritance tax should be an easy tax to defend. It doesnt
distort the market, it doesn't hurt the poor and, best of all if you
are going to tax anyone, tax dead people.”
Who are The Observer’s ‘ordinary people'? Here’s a better
definition - from Labour’s own Shaun Woodward MP, ‘I am not talking
about well-off middle class people. I am talking about people in the
80s who bought their (council) house which today is worth around the
limit.’
The threshold is £263,000. You may wonder how many
£263,000 ex-council houses there are in St Helens South, his
constituency. But let’s take Shaun Woodward at his word, let’s say
this imaginary house, and the rest of the estate, is worth
£300,000.
The child of the imaginary individual walks away with
£285,200. That’s because the tax only affects the money after
the threshold (on 40 percent or £14, 800 of tax). £285,200
might not buy you an imaginary council house in St Helens but it’s
about thirteen times the average annual pre-tax salary.
What you
own, more than what you earn, determines your position in British
society today. Assets make you independent. Around
one in ten people in Britain have no assets; around one in three
have no savings. If you are in that one in ten you don’t
have any economic defences. Your position is precarious.
You have no choice but to take the short term, no future, route
through life.
These are not the £300, 000 poor. Large inheritances will not
go to those who don’t own already. In normal circumstance, we
imagine children inheriting when they are in their 40s. By
that point, they’ve probably done quite well for themselves, as
middle class children do.
Think about it this way – whose life is that £14,000 of tax going
to improve more? The kids who get a £500 slice of it to start
off their Child Trust Fund? Or someone who’s already comfortably off
and is about to receive an £285,200 unearned bonus?
The Institute for Public Policy Research has published a
detailed paper on inheritance tax. Their proposals are
interesting but they have given ground to the anti-tax lobby. The
paper argues that the tax should be banded, starting at 22 percent,
then 40 percent, then 50 percent.
Fifty percent top rates of tax always receive scepticism because
it’s believed such rates can encourage cleverer accountancy rather
than greater payment. But that isn’t my point here. The 22
percent band, effectively a tax cut for Mr Woodward’s £300, 000
poor, can’t be justified on any other grounds than that we really
ought to be a bit nicer to the middle aged children of the upper
middle classes.
Inheritance tax should be an easy tax to defend. It doesn’t
distort the market, it doesn’t hurt the poor and, best of all, if
you are going to tax anyone, tax dead people. The £2.5 billion
it currently raises would have to be raised elsewhere, by taxing
spending or earned income.
Either that or there would have to be cuts to public
services. Just for reference, the ippr puts current
inheritance tax revenue at about the same size as the entire capital
budget for the NHS in England. If the surveys which prompted
all this outrage are right, then the public sector is going to
become increasingly reliant on inheritance tax in years to come.
Progressives look fairly daft, and lose elections, if they
just defend the status quo. There are injustices in
inheritance tax and the ippr proposals on preventing tax avoidance
would be a good start. The Treasury has already closed off a
number of loopholes, helping homeowners keep everything they own in
the hands of their children would be a step backwards. Making
more people economically independent will not just require public
spending and taxation. Ambitious and creative policy proposals
are needed.
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