It’s a Leftist myth that abolishing death taxes only helps the rich
Our tax rulebook is so complicated that multi-millionaires can easily find ways to avoid IHT
What a difference a couple of months make. In September, Jeremy Hunt said that reducing the tax burden was virtually impossible. Yesterday, Rishi Sunak announced that the time for tax cuts had finally arrived. If he were so minded, the Chancellor should now have the “fiscal headroom” to abolish inheritance tax (IHT) and still have a good number of billions to play with.
IHT bears many of the features of a bad tax: it’s relatively easy to avoid with adequate planning, raises little revenue and also has the uncomfortable feature of hitting the bereaved when they are likely already to be at a very low ebb. The popular myth around IHT is that it simply penalises the unworthy children of the super-rich. In this caricature of events, we’re merely ensuring that those blessed with highly successful, affluent parents are unable to choose a life of indulgent, unmerited leisure upon their parents’ passing.
The truth is rather different. Our tax rulebook is so complicated that multi-millionaires can easily find ways to avoid IHT. They may not be able to cheat death, but they can use trust funds and other contrivances to swerve tax liabilities. Those who have done reasonably, but not enormously, well for themselves – perhaps owning a decent but not extravagant house, and having a reasonable but not absurd savings portfolio – find it harder to avoid. They don’t have the resources to employ clever accountants and financial advisers.
When the grim reaper comes, the taxman will be following in his wake. And the children – who tend to have less, often much less money than their parents – are made to suffer regardless of their circumstances. No surprise, then, that IHT is unpopular. On a very basic level, many people seem to feel that accruing money to pass onto one’s children is a noble pursuit. Yet the “optics” still point our policymakers towards keeping the tax, for it is deemed unacceptable to be “helping the rich”.
Sadly, this attitude now afflicts our entire tax system. A chancellor cannot put together any sort of tax change without the distributional effect being considered the primary basis by which it should be judged. A tax change that benefits the moderately affluent – or even the wealthy – is feared to be unconscionable unless there are equivalent or greater gains to the poorer parts of society. A package of measures that might assist households in the top third of earnings by, say, £1,000 per annum, but only aids the bottom decile by £100 a year, will be derided as a “giveaway” for the rich.
It sometimes feels as if the main purpose of the tax system is not to raise resources efficiently and fairly for public services while maintaining vital incentives, but rather to move us inch by inch to some fantasy nirvana in which wealth and income gaps have been abolished altogether. Even if a swathe of carve-outs and loopholes allow the wily to dodge the headline rates of tax, the impression must be given that those towards the high end of the salary scale are being asked to do ever more.
Abolishing or lowering IHT won’t supercharge the economy overnight. But it would be a step towards making the tax system simpler and more straightforward. That should be enough of a reason to embrace such a change. But if no such move is forthcoming, it will reinforce the idea that the main preoccupation of politicians is what taxes look like, not what they actually do.
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