I posted this thread on what I still refer to as Twitter, this morning:
Of all the taxes in the UK that Jeremy Hunt could cut, inheritance tax is easily the most stupid right now. Doing so would save millions for a few already relatively rich people, do nothing for the economy, and increase inequality. A thread….
Inheritance tax is paid by about 27,000 estates of people who have died each year, according to the latest data. That means just 1 out of every 25 estates are subject to an inheritance tax charge.
In other words, inheritance tax is a tax on those who are most wealthy, whether they like to admit it or not. In fact, it is the only wealth tax that we have got.
And what Jeremy Hunt is now considering so strongly that the press is very obviously being briefed about it, is making cuts to the rate of this one and only wealth tax that we really have in the UK.
In the middle of a cost of living crisis when millions upon millions of families, most of them younger, with children, and with incomes that only barely cover their outgoings (if they even do that) are struggling, he is planning to give a bung to some of wealthiest in the country.
And let's be clear, that those who gain are not, of course, the people who have died. They are, after all, no longer with us. They can't enjoy the benefit. So, most commonly, it is their late middle age, usually already well-off, children who do so.
And this, it has to be said, will do nothing for the economy at all. That's because these people will either save what they inherit to boost their pensions - meaning that no new economic activity results from any tax bung they get.
Or, alternatively, they will use this money to buy their own children (the grandchildren of those who died) their own homes - meaning that wealth inequality when it comes to housing and access to it is perpetuated. That is a truly Tory policy, you have to admit.
The return to the economy from giving this tax cut will, in that case, be marginal at best. In fact, growth will be much smaller than the value of the tax cut given. In macroeconomic terms, that means that this cut is a complete waste of money.
It's also economically unjustified. This is despite all the claims that will be made for an inheritance tax cut. The first of these claims will be that everything subject to inheritance tax has already been taxed once already.
That is total nonsense. Inheritance tax is, in part, a tax charge on untaxed capital gains, which are cancelled on death. These gains have not, by definition, been taxed in any other way already.
And nor is the value of most estates made up of previously taxed savings. Most are made up of the value of homes - and these are never otherwise taxed at all.
What is more, most people who die will have paid a fraction of the value of their home at death to buy it - because house prices have gone up so much over time. The value at the time of death will, then, have been very largely untaxed. So there is no double tax there either.
And, let's also be clear - when 80% of UK savings are in tax-incentivised accounts - be they ISAs or pensions - much of the savings accumulated at death will have also arisen in untaxed ways as well.
So, the bleating about the unfairness of inheritance tax is just that: it is bleating by those already privileged who do not want to contribute to the society that gave them all the advantages in life that they have enjoyed, which they do not want to acknowledge.
The issue is bigger than this, though. If the Chancellor really has money to give away in the budget and he chooses to do so by tax cuts when ending much of the unfairness in the benefits system would be a better use of that money, then he has everything wrong about what to do.
For example, the basic personal allowance is frozen this year. It should have gone up by about 10% because of inflation. That increase should have been about £1,250, which would have given a £250 tax cut to most taxpayers in the UK. All 33 million of them.
The cost of that would have been a bit above £8 billion - near enough the same as the cost of abolishing inheritance tax. But the vast majority of those getting that £250 would have spent it straight away, unlike the person getting the gain from inheritance tax, who would have saved it.
The difference is really important. Spending the money keeps it in the economy. Each person's spending is another person's income. It is as simple as that when we think about the economy as a whole.
What that means is that the person getting a £250 income tax cut uses it to boost other people's income - meaning that the recipient of their spending also pays tax on it, as does the next person who gets it, and so on, giving a real boost to us all - and the Exchequer.
Instead, the person enjoying the cut in inheritance tax will almost certainly save it, meaning that there is no boost to the economy at all. It sits like dead money in a bank account somewhere.
And before you argue that the bank will lend it to someone else - that's not what banks do. They do not lend out money deposited with them. Every new loan creates new money, and savers' money is never involved in the process, which the Bank of England has confirmed.
So if you were a Chancellor who wanted to get your economy going by giving it a quick boost, cutting income tax for everyone would work, and cutting inheritance tax would be the worst option available to you.
So, why then is Jeremy Hunt thinking about cutting inheritance tax? It could be that he simply does not know this, which might be possible, but which would be scandalous if true.
Or, it could be that he does not care. He is, in other words, indifferent to the needs of real people and serves only the interests of the rich.
And it could be that he just does what the Telegraph, Mail and Express want him to do, and they all hate inheritance tax.
I am not going to speculate on these options. What I do know is that if Jeremy Hunt cuts inheritance tax he will have proved he is incompetent, biased to the rich, and represents the total indifference of the Tories to the needs of ordinary people, and maybe all three.
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Does any Tory care about people not like them? I doubt it.
Cutting the rate of inheritance tax could make sense if it was combined with measures to eliminate or restrict some of the exemptions. Not least because the effective rate of the tax actually falls for larger estates, because they are better able to diversify into assets – such as businesses, and agricultural land – with a favourable treatment.
The IFS recently published some work on various options, which could be done on a revenue neutral basis, including restricting APR and BPR, taxing pension entitlements, reforming the nil rate band, and abolishing the CGT uplift.
The argument for this is largely one of fairness among the rather small group of people who actually pay the tax (the wealthiest 1% would pay more, the next 4% a bit less, and most people would still pay nothing). But certainly you’d get more of an immediate economic impact from cutting income tax or NICs.
I have just published some of the options
I would still nit cut the rate
But as I have also suggested, I would put it on a scale and so make it more progressive
See the Taxing Wealth Report
The IFS actually suggested increasing the nil rate band limit, which has remained at £325k since 2009, but abolishing the additional £175k residential nil rate band, on the basis that those owning houses should not get an extra exemption over those with other assets.
If the main nil rate band limit had been indexed, as it used to be, it would be over £400k. The vast majority of estates fall within the nil rate anyway.
I completely agree with your comments, and the inappropriateness of cutting inheritance tax.
The Guardian, yesterday, say’s that the Chancellor has £13 billion “fiscal headroom” to “spend”. I completely agree with your previous comments that this is an utterly fallacious interpretation of macro economics. But, for the sake of argument, let’s run with it and suggest what he might do better with that money.
Various articles suggest there is a problem with paying interest on government debt, for example an article in the Telegraph this morning. Again this is fallacious, but again let’s run with it. And that is due to high interest rates, fallaciously high due to inflation.
So why not use the fiscal headroom to reduce fuel duty and/or VAT? Fuel duty raises about £25billion and VAT about £80 billion. So using £13billion to reduce these would have a significant effect. It would directly reduce inflation. Consequently the BoE should reduce interest rates (even using their warped logic), the Government could reasonably insist that they do. As you have said on several occasions reducing interest rates should happen yesterday. Reducing the interest rate would reduce government interest payments creating further fiscal headroom and something of a virtuous circle. Reducing fuel duty and VAT would immediately feed through into the real economy and again increase fiscal headroom.
Even by the warped and fallacious arguments of neoliberal economics there are much better things to do with £13 billion than to reduce inheritance tax.
You evidence a way of thinking which works
In point of fact, VAT raises around £160 billion each year, and inheritance tax about is £7 billion. Fuel duty is about £25 billion. https://ifs.org.uk/taxlab/taxlab-key-questions/where-does-government-get-its-money
So in broad terms £13 billion might amount to cutting the standard rate of VAT back to say 19% or 18%. But the evidence suggests that most of any reduction in VAT is not passed on to the consumer in lower prices for goods and services, and is instead swallowed up by businesses increasing profits along the supply chain.
My mistake about VAT, it is indeed about £180 billion.
Please do bear in mind that I am arguing as Devil’s advocate, trying to show that even within the fallacious neoliberal paradigm that reducing inheritance tax is a terrible idea.
Ideally, outside the neoliberal paradigm, one might well increase the tax threshold as Richard suggested. Personally I wouldn’t do that. I’d eliminate the tax threshold and replace it with a universal basic income equal to that which a top rate (45%) income tax payer derives from the income tax allowance. That is a UBI of £5656.5 pa (45% of £12570). I can see absolutely no justification for giving a greater tax break to those earning larger salaries. Since that would cost more than £13 billion I’d “pay” for it by reducing/eliminating the upper threshold on NI.
But I am playing Devil’s advocate and trying to stay within the neoliberal paradigm.
You’re probably right that a modest cut in VAT would be absorbed by retailers and not passed on. In which case I might spend the lot on reducing fuel duty. Fuel duty is about £25 billion. So reducing that by £13 billion is a reduction of about 52% (from 53p per litre to 25.4p per litre). From what I can glean fuel constitutes about 10% of CPI (corrections most welcome). So this would reduce CPI by about 5%. That is, it would eliminate inflation entirely (even if my figure for the contribution to CPI is wrong it would still bring inflation down to about the “desired” 2% level).
With inflation dead the BoE should drastically reduce interest rates. This in turn would “free up” 5% to 10% of government revenue used to pay interest. And this would free up money for other uses.
Please don’t shoot the messenger, I stress I am playing Devil’s advocate. I’m trying to highlight how stupid Hunt will be in reducing inheritance tax even by his own warped logic. I guess it also highlights the stupidity of the neoliberal paradigm too.
Of course we should be incouraging fossil fuel use, as Mark Scott has said. However I’m working within the neoliberal paradigm. As an aside I’d say that carrots work better than sticks. So in a non neoliberal world we’d incentivise non-fossil fuels more than petrol.
Oops, sorry. Of course we should NOT be encouraging fossil fuel use.
Tim Kent
“You’re probably right that a modest cut in VAT would be absorbed by retailers and not passed on. In which case I might spend the lot on reducing fuel duty. Fuel duty is about £25 billion.” What makes you think THAT would be passed on and not absorbed by retailers?
“I’d eliminate the tax threshold and replace it with a universal basic income equal to that which a top rate (45%) income tax payer derives from the income tax allowance.”
A 45% income tax payer has a £0 income tax allowance.
The personal allowance is phased out between £100k and roughly £120k. That is why people in that income bracket effectively pay income tax at 60% before falling into the 45% bracket.
I appreciate you may be acting as Devil’s Advocate, but cutting fuel duty is unconscionable in the current climate crisis.
You could say the same of VAT
The Tories betray all the bias that the treasury has betrayed before in ‘the capital order’ – see Clara E. Mattei (2022). It’s basically based on trickle down theory isn’t it? Those saved taxes will apparently trickle down to create the odd job here or there.
It’s a view that sees the rich as the powerhouse of a country’s economic might – not the state – and therefore the rich need to have their wealth preserved from tax, a reward for saving and investing.
It is hard to believe that such thinking still rules policy makers today – but that is only because of the bias of class politics and self interest (we know that tax savings for the rich find their way into party and campaign funding after all – something I’m sure Hunt is aware of – ‘you scratch my back, I’ll scratch yours’).
There is no fact based basis for such thinking. It is entirely ideological.
And so it goes on…………………………
My suggestion might be
1. An above inflation increase for Child Benefit
2. Remove the two child rule from means tested benefits and the benefits cap
3. Bring back a national Council Tax Benefit scheme funded by Central Government
All good
Having just read George Monbiot’s absolutely shocking (and astounding) article in today’s Guardian about the scandalous situation with regard to the chemicals and toxins that are being routinely spread on farmland in sewage sludge, and the government’s role in hiding the Environment Agency’s (EA) 2017 report into this, I’d say that instead of any tax cuts to anybody it might benefit us all if they spent the money strengthening the EA and putting in place legislation to control this as soon as possible (instead of hiding the report and ignoring the issue).
For anyone who hasn’t read the article here’s a flavour (no pun intended) of the issue: ‘A source at the agency tells me it did not investigate sludge from sewage systems receiving heavy industrial loads: the true extent of contamination is likely to be far worse. “Some of the levels,” they tell me, “are horrendous. The human health risks are phenomenal.” In some cases, this contamination would prohibit building houses on the land. “But you can grow crops and raise animals on it for human consumption!”
https://www.theguardian.com/commentisfree/2023/nov/18/cocktail-toxins-poisoning-fields-humans-sewage-sludge-fighting-dirty
Monbiot definitely on the money there
Agreed
But what about a cut in National Insurance contributions rather than Income Tax?
National Insurance = tax on money earned by work
Student loan repayment = tax on money earned through knowledge
Just a thought – let’s use this money to get people off the streets this winter and in long-term accommodation, or care programs for physical, addiction and mental health problems.
A cut in IHT would truly “show their colours”.
Would the media call this out for what it is? In most of the mainstream, unlikely; and even the “balanced” BBC would probably present some typical numbers but leave the critique to someone from the Left of politics who “would say that wouldn’t they?”
An additional exemption I think is available to some of those with IHT-level wealth is the tax-exempt assignment of SIPP pension funds (which the beneficiaries can draw on at the time of their choice, to minimise their later income tax liabilities).
Regarding what to do with the so-called “fiscal headroom”: rather than simple income tax cuts (or raising thresholds) wouldn’t it be better to cut taxes on earned income, ie NI, to start to move towards a more equitable treatment of employment and unearned income – with the aim of eventually unifying tax on income from any source?
See this morning’s post in partial response
Not to mention that many home owners, now in their 60s 70s and above, benefitted from tax relief until 1969 and from the MIRIS scheme until 2000. So they effectively got tax relief on mortgage interest when purchasing a house. We began to purchase our current house taking out a mortgage in 1984. The house was worth about £40k and must be worth well over £300k now. We paid very little tax on the income used to buy the house, so we certainly have not ‘already paid tax’ on the value of the house.
Rather than looking at the £20bn so called headroom for tax cuts how about using it to make a start on tackling the housing crisis.
Councils are sitting on parcels of land, so the cost to build new council houses is the building cost only. So the £50bn could build 150,000 houses a year. Reducing the demand for private rented homes as well as boosting the building sector .
I am sure there will be better ways of spending the money such as ending the two child benefit cap.
Hunt said this today: “…. it is important for a productive, dynamic, fizzing economy that you motivate people to do the work [and] take the risks that we need” (Sky News).
I pinch myself. When did Britain last have a “productive, dynamic, fizzing economy”? This is drivel. Not under this Conservative administration, in its many, protean manifestations, over the last thirteen years of the undiluted economic misery their economic illiteracy and witless management have only made worse; under whatever incapable flop of a PM they have chosen to inflict on the public. Typically, any growth Britain has produced since WWII has been a short-term, irresponsible ‘boom’, followed by the inevitable, spectacular bust; the graph, for those who wish to search, is like shark teeth. Hunt doesn’t produce Budgets; but rather scripts for a fantasy, even Hollywood would reject.
“For why is all around us here
As if some lesser god had made the world,
But had not force to shape it as he would?” (Tennyson)
Agreed
Hunt and the Tories talk utter nonsense
Writing off student debt might lift a burden for many .
Many young people are struggling to get their head above water.
Agreed