Saturday, 4 July 2015

UK Inheritance tax - why on earth do a lot of people support the proposals even though they shouldn't?

I could write lots of different pieces explaining why the recently leaked inheritance tax changes are economically foolish and make our society less just.

For example, the changes might further heat the dysfunctional housing market—even the rabidly libertarian “Tax Payers Alliance” have queried the wisdom of a policy that gives a tax break to one class of investments—housing. If anything, governments should be doing everything in their power to make housing cheaper not more expensive.

The important fact is that it is reduction of the tax taken on the most obvious of all tax bases – unearned income. And why? To benefit a relatively small number of people who are children of the wealthy.

What I will write instead is about how on earth people will go along with it. Why won’t people be rioting on the streets against a policy that makes no sense in terms of economics or fairness?

Well, the right-wing press such as The Daily Express and Daily Mail have predictably come out very strongly in favour of it. The argument is that people who have paid tax on something shouldn’t have to pay it again, but this is nonsense.

Even an egalitarian such as me would argue that people should be able to keep their property unless it was a matter of national concern that it be taxed or compulsorily purchased. Inheritance tax is not such a tax, however. It is just a crude way to tax beneficiaries in the most convenient way for governments. A more principled approach would be to tax the recipients of bequests but also substantial gifts, as would be done with an accessions tax or my own tax proposals.

If we get rid of the double taxation argument, then, what is left? My theory to explain how the right-wing press can hoodwink its readers into supporting a mad proposal like this is by tapping into a feudalist vein in British thinking.

House ownership is a big part of the recent British psyche (or is it psyschie?) and it represents a major part of many people’s self-identity. They are lords of their suburban castles. British (perhaps English) people buy into the regressive idea of a class system much more than any other country. And what do feudal lords do? They pass their castle onto their children (well, first born male, but the whole edifice breaks down when moving into the modern economic world anyway).

Inheritance tax doesn't even stop anyone from passing their house onto their offspring anyway. Even if the estate did not have the liquid assets to cover the tax this would not stop the squire from taking ownership of the house. They would simply have to pay the difference between the value of the house and the inheritance tax due.

So under the existing (extremely generous) system a widow with one child who dies with only an 800k house to their name at present would have a 60k tax liability. The child would have to find 60k to buy a very expensive house. If they haven’t saved up the money they could just get a mortgage to cover the difference.

No one would provide an intellectual justification for feudalism, but I think that vestiges of this line of thinking are the only reason that people would support the latest IHT changes. Is this really where we are? People supporting terrible policies that almost certainly won’t benefit them or the country as a whole ‘because feudalism’?

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