Party like it's 1993

Just when you thought the Tories had not only got over Thatcher but Blair too off they go and bring back John Redwood to scare us all. He's behind a new report from the Competitiveness Council which amongst other things encourages the abolition of inheritance tax. Not surprisingly it's made quite a few headlines.

First the facts, then the rant. In the UK inheritance tax (IHT ) is payable at a rate of 40% on all estates over £300,000 (the nil rate band). The estate incurs the tax rather than the inheritors. So an estate of say £400,000 split evenly between four children incurs tax even though the individual shares may be below the nil rate band. Rising house prices and fiscal drag have seen more estates eligible for IHT in recent years. Still at last count it only affected 10% of estates and raised about £3.2bn - that's just under 1% of the total tax take but more than enough to pay for the work of Department of Environment, Food and Rural Affairs.

Redwood proposes abolishing the tax on the justification that:

many people, who could not in any sense be described as rich, suddenly finding that their family will be liable to pay quite substantial amounts upon their estates.
This is a quite extraordinary statement. Consider someone only just affected by IHT. Say he inherits an estate of £400,000 and will pay 40% of the amount over the nil rate band, leaving him with £360,000. Now we can quibble about the meaning of 'in any sense' and 'rich'. But £360,000 is a full fifteen times the UK median wage of about £23,600. And simply leaving this on deposit (probably not the best use of it) will pull him in £22,500 per year. So for doing absolutely nothing at all he'll pull in close that median wage yet again.

And yes, abolishing inheritance tax would have an opportunity cost. It means higher taxes on wages, consumption or profits. Or reductions in spending. Redwood seems to think opposite, dragging out an argument that sounds quite like it's based on the Laffer Curve. There's good reasons for a tax system that rewards enterprise and lets clever, innovative individuals get rich. But IHT isn't a tax on people who've made a lot of money. It's a tax on people who haven't: their children.

However there are some reasons for reforming IHT. At the moment the same amount of tax is levied whether the estate is split between one or 10 children. A more equitable system would charge tax on the inheritor rather than the estate. But to hold receipts constant this would mean reductions in the nil-rate band. Also, IHT tax is borne disproportionately by the moderately rich. Seriously wealthy people are able to avoid inheritance tax by means of trusts and various offshore instruments. But is this a reason for repealing IHT? Hardly. The super-rich are already able to hide offshore and avoid all sorts of taxes well before their death.

For reasons that continue to elude me inheritance tax seems to provoke a visceral reaction out of all proportion to either it's scope or depth. While no one likes paying tax it seems perverse that people resent paying tax on windfalls more than they do on earnings. Perhaps this comes down to tax salience - essentially the visibility of the tax to the taxpayer. As people never even see their PAYE they don't consider it a loss. While the prospect of a the state taking a chunk of the family home is a much more visible intrusion.

I don't particularly mind vast personal holdings of wealth. However I do think that it capital should be put in the hands of the people best qualified to allocate it. In the long run that's the best way to drive productivity and growth. We should defer to the Sage of Omaha on this one. Three-time father Warren Buffett says that repealing inheritance tax would be like "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics". And remember high IHT usually means low taxes on labour and profits. So if IHT means less lazy wealth-holders and more self-made millionaires then let's keep it.

PS: The resurgence of Redwood isn't the only thing that makes it feel like it's 1993. Ever heard of the EU working time directive? Apparently it's stifling British business. Yawn...........


  1. Tim Worstall Says:

    "However I do think that it capital should be put in the hands of the people best qualified to allocate it."

    So your then follow this with the suggestion that The State should be getting a cut?