I recently came across a quote that is credited to John Steinbeck: “Socialism has never taken root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”
The same rationale can be used to explain the irrational hatred of inheritance tax (IHT) in the UK. For a tax that hardly anyone pays it is very, very unpopular. It may only be paid by the estate of dead people who have accumulated an awful lot of money – in fact, only about 4% of estates pay it at all – but it is hated far and wide.
A friend of mine points out that it is massively unpopular among her daughter’s friends, who are in their 20s. They love green policies, higher state spending, want a better NHS, a fairer income tax system and more foreign aid, but they just detest IHT.
Inheritance tax is hated because people think they should be able to leave large sums of money to their children, tax-free. They also resent the idea of their successors having to pay tax on the houses they inherit. This is crazy: the majority of people’s wealth is normally tied up in their homes, and homes have risen in value exponentially over the years without anyone being asked to pay capital gains tax. If you had earned that sort of money through work, or by selling shares that had risen in value, you would pay tax. But no one does on their huge property wealth.
When you ask people if this is fair, they all claim their homes were a clever “investment” and not a place to live. This is rubbish. The reality is that people buy homes to live in and feel secure in. Making a profit used to be a small added bonus. Now those profits are so huge that millions of people have to fool themselves into thinking they are all investment geniuses.
Millions of people have got lucky, to a large extent because house building has not kept up with demand. So, as with other “investments”, they should be taxed on their profits. Unfortunately that would be political suicide.
That is why inheritance tax is necessary. Untaxed wealth creation distorts the economy, and ties up hundreds of billions in property assets because they are untaxed.
Quite a few libertarian and free market economists are in favour of inheritance tax, including the daddy of them all, Adam Smith. He was wise enough to see that he lived in a world where wealth was almost entirely inherited. The rich owned land, paid little or no tax on it, and passed their wealth on to their eldest sons.
There was as a result a land-owning, property-obsessed economy based on rent, where entrepreneurship was held back by the refusal of the rich to take risks or invest. The poor’s chances of pulling themselves up were stymied by the fact that millionaires owned all the assets, and the money and hard work went unrewarded. Creating a level playing field is essential not just because it is fair, but because it is economically efficient.
Unfortunately, we live in a world that is rapidly returning to the system that Adam Smith knew. Because inheritance tax is unpopular, and therefore the Tories have it in their sights, along with stamp duty.
Yes, the only tax that people now pay on property is stamp duty when you buy, so that too will have to go. This will be sold as an attempt to bring down house prices or some such pathetic excuse, but it will cost billions and distort the property market further. Prices will actually rise to take account of the fact that taxes have been cut. The beneficiaries will be home builders and homeowners who will sell at even more inflated prices. This is what happened with help to buy which, it is now rumoured, will also be extended.
In short, the Tory Party will spend billions of poor taxpayers’ money in a state-run attempt to increase house price inflation and make the rich richer. The Tufton Street think tanks will cheer them to the rafters because the biggest benefits by far will flow to the wealthiest in society and none whatsoever to the poorest – remember 96% of people will never pay IHT.
This is just a more subtle version of Trussonomics. Jeremy Hunt is not reversing her disastrous measures after all, he is just being more clever than she was in getting them through – to be fair, this is not hard.
Remember Hunt threw a billion pounds or more at the wealthy in his first financial statement by pretending that changes to the pensions system were “targeted at the NHS”. There was a problem with highly paid consultants not wanting to work any more because they had already put too much money in their pension pots, but Hunt lifted the pensions limits for all and sundry, not just NHS workers. Financial advisers have been telling wealthy clients to ram their pension funds with tax-free cash ever since.
Abolishing IHT (or making the allowances so generous that it will, in effect, be abolished) and cutting or abolishing stamp duty will have exactly the same results. Billions will go to the wealthiest, to the housebuilding sector (which donates generously to the Tory Party) and to the children of homeowners.
Meanwhile, income tax is set to rise by the equivalent of 6p in the pound over the coming years. The chancellor has already announced this. He is freezing tax bands until 2028, which will drag an extra 1.7 million poor people into paying income tax, and 1.2 million into paying 40% income tax. In total, it will bring in £50bn a year from the hardworking people of this country who are taxed on their income. Many of those hard-working people will never be able to afford to buy a house.
Now, the plan is to take a large slice of their money and give it to millionaires, while telling ordinary taxpayers they will benefit. It is trickle-down economics, but with a friendly smiling face. It is a total con, an economically damaging con – and unfortunately, it will be a popular con.
Read more from Jonty Bloom at jonty.substack.com
