Nosemonkey's EUtopia

In search of a European identity

Quick tax question

If you tax too high, the revenue will yield nothing - Ralph Waldo Emerson

As regular readers will know, I’m no economist and don’t pretend to be – which is why I sometimes get all confused.

While I think John Redwood is a bit of a fool for raising the whole scrapping inheritance tax idea again when it still appears to be hugely unpopular, can anyone tell me why allowing people to pass their savings on to their family when they die without the state taking yet another chunk of their hard-earned cash is such an horrific idea?

You’ve slaved away your entire working life, usually having to give somewhere between 20 and 40% of what you make to the government all the way through. Perhaps you’re lucky enough to have been born long enough ago that buying a house was a viable option, and so have a building and a bit of land. Why the hell shouldn’t you be able to just give them to your kids, considering that you’ve already been taxed on the things?

And, for that matter, why is inheritance tax still so unpopular? I could understand it a bit more 20-30 years ago, when class/wealth envy and inequality played so much part in British politics, but considering the combination of the huge boom in house prices in the last fifteen years and Thatcher’s “right to buy” letting a bunch of people pick up their council homes dirt cheap, surely it’s now in the interest of a decent chunk of the population to lobby for inheritance tax to be abolished?

Take my token working class Cockney mate, whose parents bought their council house back in 1983 for £30k. In Islington. It’s now worth 25 times that. Were my mate’s parents to die tomorrow, that means he’d have to find £300,000 to keep the home he grew up in. Thanks to average salaries not having risen anywhere near in line with house prices, it would take him 30 years to save up that amount even if he put half his (gross) salary towards it every month. In other words, less well-off people – especially in this time of extortionate house prices – are more likely to be walloped.

Even if you are one of those outdated lefty types (*waves*) who can ignore the blatant unfairness of the government taxing our children for things that we ourselves have bought because you like to see rich people taxed simply because they’re rich and it serves them right (property is theft, Comrade, and suchlike), the scheme fails. Because all the Duke of Ponsonby has to do is chuck a spare old master at a local art gallery, and the kids are off the hook for another generation.

You see, I simply don’t understand tax.

9 Comments

  1. Hang on: if it’s such a sensible idea, why is John Redwood a fool for raising it?

  2. On the other hand, your token Cockney mate will have just gained a hell of a lot of money simply in virtue of the good luck to have been born to parents who bought their council house and did well out of rising house prices. He’s never paid tax on it, but it’s him that benefits. This whole double-tax thing is fishy anyway; is VAT illegitimate because we’ve already paid income tax? Also, I think the tax only gets levied on the value above the threshold, which I think is about £200k.

  3. Merely because it still seems to be hugely unpopular, for some reason.

    On a semi-related note, I feel rather sorry for Redwood (despite obviously disagreeing with him strongly on a number of issues, not least the EU) – he’s obviously highly intelligent, but seems doomed forever to be a figure of ridicule for non-Tories, and someone to distrust for those loyal Tory types who (mistakenly or otherwise) point to his leadership bid against Major marking the moment that decisively ended their chances of holding on to power.

    Sadly for the Tories, because of this any policy suggestions coming from Redwood are likely to be dismissed out of hand in much the same way those that come from Iain Duncan Smith are.

  4. One of the benefits of inheritence tax (and the reason it has traditionally been high in the US, and especially Japan) is that it ensure that most of the people with money in the economy are actively involved in making the money.

    Essentially, then there are two sides to in:

    1) Inherited money is destructive, because most of the cash in the economy stagnates in places where only the holder of the wealth benefits.

    A stately home is never sold, it’s value is never realised and it only employs a small number of people.

    if the inheriter of that property was forced to sell it (to pay death duty), then the majority of its value is released to the inheriter, and that money is then released back into the economy. Which helps the economy grow.

    2) If you can’t guanentee that you won’t inherit a fortune when the old man pops his clogs, there’s only so long you can pretend to Bertie Wooster and piss it up the wall at the Drones Club.

    You have to get out there, work in the City, make your own personal fortune.

    It means that the wealthy are forced to be entrepreturial (sp?) in order to ensure the continued wealth of their family.

    A society without inheritence tax (particularly a small one with only so much land, like the UK) quickly ends up with much of the wealth in the hands of stuffy, unimaginative aristrocrats.

    Obviously, this only makes sense for the super-rich (and the stagnant, slightly retarded, land-owner portion of it).

    Inheritence tax needs to exist, but it shouldn’t every affect the middle classes. It often takes generations for people to become properly rich, and they shouldn’t be impeded from doing so. I reckon it needs to be at the 4 million mark.

  5. Oh, and I find John Redwood to be REALLY creepy.

    I’m Welsh, and he was the Welsh secretary when I was younger. It was like having a colonial viceroy in charge.

    He clearly hated us.

  6. Scrapping inheritance tax isn’t a bad idea on its own, but when I compare the benefits of cutting inheritance tax with cutting VAT or income tax for example, I cannot see why the Tories would want to cut taxes via scraping inheritance tax. An income tax cut everyone can enjoy wile they are alive, scrapping inheritance tax only caters to the dead and the lucky.

  7. Inheritance tax doesn’t “release value.” What it does do is increase social mobility by pushing those at the top down, and put the wealth that would be there’s to the use of the public.

    If the Tories wanted to cut tax rates, they could abolish corporation taxes, vat, and then raise the tax-free allowance.

  8. One of the major problems with IHT as it currently stands is that it is clearly the case that it now affects a great deal more people than it used to, including large chunks of the not–mega-rich. This may or may not be a good thing, but it happened by stealth, by degrees and without any real debate. Income tax going up or down a penny? Huge debate created. VAT going up or down? Ditto. IHT going steadily up for year after year creating effectively a different tax? Not much, beyond the occasional call for it to be abolished. If those who agree with the principle of IHT want to keep it around, they either need to justify why it now covers a lot more people than it used to, or argue for the threshold to be pushed up.

  9. Your token mate may have to sell the house, but only if while he’s still living there he (a) failed to save up much money from living with mum and dad and (b) has a poor credit rating. Unless (b) is true, then he could always get a mortgage to cover the amount owed in inheritance tax and, if necessary, take in a lodger for a few years until his income increases enough to cover the mortgage. Or, if he wasn’t living there, he could rent out the house and carry on renting his, presumably cheaper, place and pay off the mortgage in no time with the profit.
    Also, unless he was an only child (and according to the ONS, only 35% of children of married couples were only children in 2004), then he’d probably have to either sell the house jointly with his other sibling(s) or pay his other sibling(s) their share of the inheritance to keep living there.
    Also, he wouldn’t have to pay £300k tax. I think it’s 40% over 250k, so he’d be lumbered with a £200k tax bill. A 30-year mortgage on that would work out at about a grand a month.

    Finally, this really doesn’t affect half as many people in this emotive way (selling the house he grew up in) as the Hate Mail would have you think. As I mentioned earlier, families of more than one child will either have to sell the house and split the money or one party will have to pay their siblings a substantial share of the house price (at least half) in order to live there. As of 2004, only 23% of all children are only children (and this proportion has been going up all for years, so it was smaller before), and of those, how many have lived in the same house since they were kids and still have their parents living there? And how many of these are living in the south-east, where it’s more likely to be an issue?
    It’s just a crock ‘cos Mail hacks’ (and their readers’) parents are getting old and they’re greedy bastards (the hacks and the readers). That’s my theory and I’m sticking with it.