Because you can’t take it with you

by Stephen Tall on August 21, 2006

Stephen Byers’ call in yesterday’s Torygraph for Inheritance Tax to be scrapped might have been better regarded had it not been presented in such a blatantly populist, intellectually empty, and anti-Gordon Brown way:

It would be difficult to overstate the political impact of the abolition of inheritance tax by a Labour Government. It would send out a powerful message as to the political direction the party intends to take.

We know that Tony Blair will stand down at some stage before the next election. The danger for Labour in electoral terms has always been that when he departs from Downing Street, voters will feel that the pragmatic and modernising approach of New Labour has gone with him.

The challenge for his successor is to demonstrate that this is not the case and to show that the party is in touch with the British people. There needs to be a recognition that things move on and that new issues will emerge that will need to be addressed.

(Hmmm – what a relief to know his arguments are rooted in such firm and principled ground…)

It’s a shame that Mr Byers chose to make quite such a poor argument for abolishing Inheritance Tax – because there are cogent reasons in favour of scrapping it, or at least curbing its reach. And none of these involve resorting to the rather desperate branding of Inheritance Tax as the ‘Death Tax’, a ridiculously emotive label favoured by the Republican Party, the Daily Express, and – it now seems – New Labour MPs.

It was one of the Lib Dems’ great elder statesman, Roy Jenkins, who famously remarked: “Inheritance Tax is a levy paid by those who distrust their relatives more than they dislike the Inland Revenue.”

The fact is that, though only 6% of households currently pay Inheritance Tax, you can pretty much guarantee they are not the super-rich – for they will have employed smart accountants to devise cunning ways of avoiding paying their dues long before they have shuffled off this mortal coil.

Those disproportionately liable for Inheritance Tax are the folk who never dreamed their estate at death would be valued at more than £280k, the current threshold. They may not be poor by any absolute definition; but nor are they rich by any relative definition.

More importantly, as an increasing number of people become liable to pay Inheritance Tax, so the incentive to save for old age evaporates – the very opposite of what is needed if this country’s long-term pensions policy is to add up.

The economist’s logical, and revenue-neutral, response to this situation would be two-fold: reduce the rate at which Inheritance Tax is levied, and reduce the threshold at which people are liable to pay it. The net effect of this would be more people paying Inheritance Tax, but a less punitive amount.

The advantages of such a policy are that it raises the tax’s legitimacy, increasing compliance, while encouraging savings. There is an obvious disadvantage: it would be regressive, shifting part of the tax-burden from the well-off to the less well-off – which is why those of us who regard ourselves as progressive politicians have, understandably, left it well alone.

Nor has discontent with Inheritance Tax yet reached a tipping-point, beyond which politicians feel compelled to act (though Council Tax has, and still the Government dithers). But that time will come.

Inheritance Tax strikes me as an imperfect tax: better than income tax (which penalises productive activity), worse than environmental taxes (which penalise destructive consumption). Yes, it should be lower: but the first call on increased revenue from ‘green taxes’ should be to reduce income tax for the low-paid during their working lives, not lessening their taxable liability on death.

In any case – and here I must declare my interest as a professional fund-raiser – Inheritance Tax undoubtedly encourages greater interest in philanthropic giving, as legacy bequests to charity are free of all tax (as are gifts made by the living beneficiaries). It’s amazing how many people take a second look at their will once they discover the alternative is letting Gordon Brown get his hands on their cash.

That great American philanthropist, the steel magnate Andrew Carnegie, viewed such acts with a certain dyspepsia: “men who leave vast sums in this way may fairly be thought men who would not have left it at all, had they been able to take it with them.” Indeed, he was a strong advocate of Inheritance Tax, arguing that “by taxing estates heavily at death the state marks its condemnation of the selfish millionaire’s unworthy life.” He lived by these principles, giving away US$350m during his lifetime.

But, then, it’s probably easier to be sanguine about such matters if you’re still worth US$30m when you die.