Tuesday, 9 October 2007

The politics of inheritance tax

The Chancellor, Alastair Darling, has told the House of Commons that the cut-off point for inheritance tax for couples will rise from £300,000 to £600,000 straight away, rising to £700,000 by 2010.

The Conservatives sees this as an attempt to steal their clothes. Labour claims that they have been working on this and other changes advocated by the Conservatives for some time. They also argue that their proposal has the merit of not benefiting the very well off.

What I am interested in here is not so much the partisan point scoring, or even how one replaces the considerable revenue that will be lost from inheritance tax (which was always one of the main constraints on Labour). Without having looked at the proposals in detail, it appears that some of it will be clawed back by changes in capital gains tax. This will remove some benefits that were given to small businesses by Labour. My entreprenuer daughter, just about to buy a factory for her expanding business, will not be pleased.

I suppose my original take on inheritance tax was that this was an issue that mainly concerned people who were Conservative voters anyway: those who were affected and did not vote Conservative were influenced by other considerations anyway.

As someone who would have been affected by the old threshholds, my attitude was that it was a tax on my estate rather than me and each of our children would get 100k before the tax started to bite. Not that I am a 'Skier' which is the term applied to the older members of the population who are 'Spending the Kids' Inheritance.'

Having read some of the vox pops (which I always find interesting, even if they are not very scientific), I started to get a different take on the issue. It was clear that many people saw this tax as an injustice. In their view they were not wealthy people, but had accumulated wealth because of rising house prices and their own hard work and savings. They felt that in many respects they were being penalised for saving. I can see where they are coming from. Often the problem with taxes of this kind is that the very wealthy are able to find means of evading their full impact.

Sheffield University have a social and spatial inequalities research group: Sheffield . Work done by them and reported in the Financial Times found that at least a quarter of households in the 30 most marginal seats are liable to inheritance tax (at present levied on 7 per cent of UK estates). Moreover, their data is drawn from the 2000 census and since then property prices have more than doubled while the inheritance tax threshhold has increased up to today by less than a third.

Inequality of wealth is growing in Britain and there is some evidence that this does concern voters, hence the issue of non-domiciled residents. Should we bother about this trend at all, which is driven to a large extent by structural changes in the world economy, and which Labour policy measures have done little more than hold in check?

If one looks at a society like Brazil which, like many Latin American countries, has a high Gini coefficient (i.e., is very unequal) it is evident that very serious social tensions and frequent breakdowns of social order result. By accident or design, I found myself in a barrio in Santiago, Chile in a van with some Brazilian colleagues. They were very sniffy about the slums which they said were nowhere as near as bad as those in Brazil. And nearby the Chileans were building modern social housing.

In the 1970s there was something of an obesssion with the distribution of wealth and income in Britain. Very high marginal rates of taxation were counter productive in terms of economic efficiency and raising revenue. But have we gone too far in the other direction? Do we need to look again at these issues?

A colleague remarked to me yesterday that the British public were probably not able to absorb any more taxes: indeed, there is poll evidence that they think that they are paying too much tax, reviving the concerns among those in the median income bands that Mrs Thatcher tapped into so effectively in 1979.

However, how the tax burden is shared out is a different matter and may play out differently. How one would translate that into policy is another matter, as the Liberal Democrats abandoned their proposal for a top rate of 50 per cent. In any case, the issue is more one of wealth than income. Redistribution would not, of course, provide of itself an answer to complex issues of social exclusion. But are there costs associated with the UK becoming significantly more unequal?


Les Abbey said...

In the past when uninterested people said there were no differences between the parties, it wasn't true. Today, with the two main parties in a cat fight for the pinnacle of the centre ground it probably is true, at least as far as economic policies go. It's hard for one party to say that the other is stealing its policies and the government will always have the upper hand in making policies their own.

Roy Hattersley often tells the story of how New Labour party officials and spin doctors wanted him to stop using the word equality. He says that was the beginning of finding himself moved from the right to left of party without actually changing any of his views.

Wyn Grant said...

I think that in the past, particularly in the 1950s and 1960s, differences were not as great as the parties liked to make out, although that changed after 1979. Issues like steel nationalisation made the gap seem bigger than it was. Underlying all this is the consideration that electors (or at least those likely to change their vote) are clustered in the centre.

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