Sunday, October 14, 2007

Spoilt Brat Tax Abolished

Effectively, inheritance tax has been abolished. What Brown has done is to keep the individual starting point for inheritance tax at £300,000 but to allow couples to automatically transfer this to their partner. It means that, for example, a widow will have a double allowance of £600,000 (rising to £700,000 by 2010). Spoiled brats will inherit £700,000 without paying a penny. Oh happy day.
One argument commonly heard against the tax, is that it involves “double taxing”. There are three reasons why this is not a good argument. Firstly, “double taxing” is not uncommon; every time I pay VAT I pay with income already taxed; inheritance tax is not unique in this respect. Secondly, it simply isn’t true that, in the case of inheritance tax, this is wealth previously taxed. Property price inflation delivers a wholly unearned and unmerited windfall which has nothing to do with hard work and thrift but is about having enough cash to invest in property (which many working class people do not have and so they are excluded from this bonanza) and being lucky enough to be in the right place at the right time. Why should this go untaxed while the actual earned income of school dinner ladies and cleaners is taxed? Thirdly, it is those who inherit, not those who bequeath, who are taxed; and they have not previously been taxed on the wealth which they inherit purely as an accident of birth. It isn’t only the super-rich who benefit from inherited wealth. The middle and upper middle classes do so too; and this widens the gulf between them and those below.
Politaholic would like to keep the tax, and pretty much at £300,000 (or better still, replace it with an annual tax on land values). But I must concede that the pragmatic case for raising the threshold is strong. The tax seems to be resented to an extraordinary exaggerated degree by Middle England for whom, of course, the great God and sole topic of conversation is property values. (The Financial Times on 10/10/07 reported that “a quarter of households in the 30 marginal seats forming the next election battleground are theoretically liable for inheritance tax – a levy paid by just 7 per cent of UK estates”. What is more that is an underestimation since it is based on figures from 2000 and since then house prices have risen dramatically. It is pretty compelling electoral arithmetic). The tax is also easily avoided by the judicial use of trusts and gifts and various other devices (making it, to some extent, a tax on those with less financial nous). What’s more the tax doesn’t really raise much in terms of government revenue. Currently inheritance tax raises about £205 billion (0.5% of tax revenue). It will raise even less now. The Financial Times says that: “Average house prices in Cornwall, Southend, Milton Keynes, Bournemouth, Norfolk, Devon and York have risen to between £200,000 and £250,000, pushing many homes above the £300,000 threshold”. But this is still a fair bit below a million quid, or £700,000 for that matter. Even from a pragmatic point of view, Brown did not have to push the threshold up quite so high; and had he not done so he would have had an opportunity to portray the Tories as the defenders of undeserved privilege, which of course they are. But then, in this matter, so is he.


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