When the Chancellor of the Exchequer rises next week to announce a long-awaited cut in inheritance tax, I can confidently predict that the Left will go more or less bananas.
Why THEM, they will shriek.
After all the pain the nation has been through — the chronic pressure on domestic finances — why are we handing government money back to this tiny minority? These are the lucky-sperm club, the relatively rich, people whose parents or grandparents just happened to die leaving estates above a certain value.
Why should THEY have first call on the nation’s generosity?
Inheritance tax, or death duties, is currently paid on only 4 per cent of estates. The tax is set at 40 per cent on assets over £325,000 and takes in a total of about £7.2 billion.
Of all the taxes that afflict the population, it is hardly the most salient or the most widespread in its impact.
Why, the Left will complain, is the Government proposing a pre-election bung — for the very people who can most afford it, mainly homeowners in the South-East? They will have support from some respectable free-market Conservatives.
Chancellor Jeremy Hunt is set to announce a long-awaited cut in inheritance tax next week
It was Adam Smith himself who noted the ‘justice and utility’ of taxes on estates; and there is in theory a good meritocratic argument in favour of inheritance tax. Inheritance, say some conservative thinkers, is like a drug; it saps the moral fibre.
Inherited money weakens the incentive to work; and there are indeed academic studies that seem to show that if a double-income household is hit by a meteorite of dosh, in the form of a legacy, then one of the spouses generally gives up work. The overall effect, therefore, is to rob the economy of human energy.
In the words of the Scottish-born tycoon and philanthropist Andrew Carnegie, ‘the parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and a less worthy life than he otherwise would’.
The critics of inheritance go further. They say the mere knowledge that you are going to leave huge sums behind, untaxed, may also be bad for the parents.
If you think you are going to pass on colossal wealth to your children, it may discourage you from vital parental investment — their educational needs, for instance, or emotional investment of every kind.
All things considered, they say, it is hard to think of a better or more sensible fiscal measure than inheritance tax. Imagine a tax that does not discourage effort. Imagine a tax that does not punish enterprise, or hard work, or investment. Imagine a tax that does not stop you enjoying a single one of the fruits of your labours, by hand or by brain.
Indeed, the tax does not even stop you enjoying the benefits of extra income — such as from the increase in the value of your property — that you have done nothing at all to deserve.
Inheritance tax is the one great anaesthetic tax in the sense that you don’t feel it at all; and why not? Because when you come to pay inheritance tax, you are pushing up the daisies.
You don’t feel a darn thing because you are dead; and since you are dead, the idea that you can be stimulated by a tax cut is totally ridiculous. In the case of many tax cuts, you will see what they call the Laffer Curve — whereby a cut in the rate will produce an increase in the overall yield, because people work harder in the knowledge that they will be united with a larger share of the wealth they create.
Adam Smith noted the ‘justice and utility’ of taxes on estates. But while Andrew Carnegie feared that the eternal cascade of his riches would turn his progeny into a load of wastrels and loafers, I see zero risk of that happening in Britain today
Cutting inheritance tax will do no such thing. Cutting inheritance tax won’t fire up your animal spirits because, sadly, your animal spirits will be extinct.
So why not cut taxes for the living? Why not cut taxes on income and business?
Wouldn’t that be a better and fairer way to encourage growth and investment?
As this column has several times remarked, the smart thing for post-Brexit Britain would be to hoist a giant ‘invest here’ sign by cutting corporation tax to below Irish levels — showing the world that things here are different now. All these points will be made — scornfully — in the days ahead. We Tories will be accused of political opportunism in cutting inheritance tax, and favouring a minority, and so on — and yet our critics will be wrong.
Cutting inheritance tax will at least do something to address an increasing unfairness. I think I technically belong to the last cohort of baby boomers, in that I was born in 1964.
As I look at the younger generations, the Millennials, the Gen Z-ers, I cannot help agreeing with them in their complaints — because there is a sense in which we had it easy.
When I went to university, I had my entire tuition paid for by the state, for four glorious years; and I had my battels* very largely covered by the generosity of Ken Livingstone’s Inner London Education Authority. When I left university, I was able to get a mortgage almost instantly thanks to Nigel Lawson’s Mortgage Interest Relief At Source (MIRAS).
I got my foot on the London property ladder, and I have never looked back.
Contrast young people today: they struggle for years to pay back the cost of their university education, and as for living in their own home — that great Conservative dream has become steadily more and more unattainable.
These young people are not all the scions of tech billionaires. I doubt very much indeed that the younger generation will have their moral fibre sapped — their willingness to work — simply because they stand to benefit from a legacy.
Andrew Carnegie may have feared that the eternal cascade of Carnegie riches would turn his progeny into a load of wastrels and loafers — but I see zero risk of that happening in Britain today.
A little bit more cash from a grandparent’s will: it could make all the difference in the world. It might allow a young couple to put down a deposit on a flat that would be otherwise out of their reach; it might help with the cost of childcare, and allow parents to go out to work. It might be absolutely crucial for exactly the hard-working people who need it most.
Of course, it is true that you won’t — personally — benefit from a cut in the tax on the wealth you leave behind.
But that is precisely why it is a good thing: because the whole point is that the money is not for you and cannot, under any circumstances, be spent or otherwise used by you — because you’re six feet under.
It’s for your hard-pushed posterity — and a cut in inheritance tax is now overdue because of the deep changes that have taken place in society.
We baby boomers had the full-fat pensions; we had the free university; we had the cheap housing.
Those benefits allowed us to accumulate phenomenal wealth, as a generation, and in the name of intergenerational fairness it is right that more of that wealth should now be passed on to our descendants.
Yes, we should cut taxes on income, and effort, and enterprise. But it’s now right to cut inheritance tax as well.
*Battels: A college account for food and accommodation expenses (at Oxford University)
Source: | This article originally belongs to Daily Mail