I mentioned yesterday that the IFS did not appear to think that wealth was a basis for charging tax. Now I know why. This is what the they say in their report on Taxation of Wealth and Wealth Transfers:
Given that the justification for double taxation is arguable and that inheritance tax currently raises less than £4 billion a year, consideration could be given to abolishing it altogether. Regardless of whether or not a tax on wealth transfers is retained, the current rebasing of assets held at death to market value for capital gains tax purposes should be removed. In other words, capital gains should be taxed at death, although payment could be delayed until the assets are sold. This would make the double taxation implied by inheritance tax (if retained) very explicit, but double taxation is a natural feature of any taxation of wealth holdings or wealth transfers and, if justified in its own right, does not provide a rationale for not fully taxing the income (or capital gain) received by donors. Some design issues such as emigration and immigration, gains on business assets, private residences etc. would need to be resolved if capital gains tax is imposed on death and are discussed in the chapter.
The paper does not advocate the introduction of a regular wealth tax.
So now we know: wealth should not be taxed. Another £4 billion of revenue is lost to the State.
Except it's more than that. Let's be clear: Inheritance Tax is already heavily avoided by the wealthy, but it is still only paid by 7% of estates and despite paranoia on the point, this is unlikely to rise. Current movements in house prices are certainly helping many estates fall out of the tax.
The suggestion that Capital Gains Tax effectively apply on death does not help the middle classes though. First, whilst houses are exempt for Capital Gains Tax many other assets (cash apart, of course) are not. And there's no suggestion of an increased Capital Gains Tax allowance in these cases. So it is those who will have to sell what they inherit that will pay the highest rates of tax under what the IFS proposal - and for some people the level of sale may be quite small before a tax charge hits - certainly much smaller than is the case with Inheritance Tax now. In that case smaller inheritances will pay more and those who can afford to defer sale can avoid tax indefinitely - and by definition those best able to do that will be the wealthy.
It's another case of the Institute for Fiscal Studies moving tax onto those least able to pay it.
So much for it's lack of bias.