Sunday, 10 September 2017

But is it now time to Convert IHT into more LVT?

You might think that it is very odd that the next best tax to switch to LVT, let's call it LVT2 would be IHT — InHeritance Tax, which is so detested by Middle Class Daily Mail and Telegraph readers! These Tory-loving newspapers have somehow fallen for the idea that it would be electorally popular to get rid of IHT:
"Indeed, it is striking that before 2010, the Tories had their strongest surge of popularity when George Osborne promised to raise the threshold for IHT to £1 million for married couples (a pledge he won't now fulfil until 2020)."(D Mail 11.4.2016)
 " British families’ inheritance tax bill will this year exceed £4bn for the first time in history, official data shows, as experts warn resentment is building among a record number of middle-class savers now being forced to pay “death duties”. (D Telegraph 2.4.2016) (Tax Payers Alliance behind this campaign. See Owen Jones The Establishment)

There is much to like about IHT or 'Death Taxes' to use the right-winger's way of condemning it. IHT was effectively introduced, against stiff opposition from the landed classes in the House of Lords in Lloyd George's People's Budget of 1909 (which also saw a Bill passed to introduce LVT).

It seems such a reasonable tax to impose. By definition, dead people have no more use for their wealth, and those that inherit have done nothing to earn it.  In a society with wealth so unevenly shared out, and so much kept in the family through inheritance, a little bit of re-distribution seemed entirely justified. This was even more valid when the source of this oftentimes aristocratic wealth was so tainted. Being a royal mistress was one, but seizing the land in the Norman Conquest, an alien invasion force, is difficult to defend, morally. So too were the extensive land enclosure acts which stole the common land from the common people.

The results of IHT were equally gratifying. Large landed estates were broken up and sold off, although the demolition of many stately homes was unfortunate. 
Of course it's easy to see why IHT is so frightening. It comes in a highly visible lump. It is associated with death — after all it used to be called Death Duties! But in a way is fair to burden the inheritors of your wealth just because you were inconsiderate enough to pop your clogs? The mis-begotten Poll Tax was a bit like this, effectively a tax for not being dead.)  
            But as the decades of the last century rolled by, the very rich found many legitimate ways to dodge paying IHT, so that now it has almost become a voluntary tax for super-rich.

These days IHT only hits the fairly rich. As a result the yield from this tax in 2015-16, raised £4.6bn for the Exchequer, which is about half of SDLT. Of course Osborne, the Tory Chancellor has been listening to the self-interested bleating from the fairly rich and has raised the threshold at which IHT starts to be paid. This accounts for a steep drop in revenues. Because of this, very few estates of the deceased pay any IHT at all. In 2012-13 there were 261,384 estates of which only 17,917 paid IHT. This is less than 7% of all estates.
 Not everyone leaves an 'estate' either. There were about half a million deaths in the UK, and only half of those left an estate, so we are talking about a mere 3½ per cent of those passing on who create these IHT liabilities!            

But IHT casts a long shadow, and surprisingly is one of the most detested taxes, according to YouGov (see table). It is gratifying that the next most unpopular tax is SDLT. Whatever technical or philosophical reasons for retaining either of these taxes, there is no doubt that politicians will find it much easier to advocate "Let's abolish Stamp Duty and Death Taxes! and replace them with a small, but useful levy on land values."
            So IHT is deeply unpopular, even dreaded by a large and influential section of the electorate. And for a good reason — it is frightening to think that a big chunk of your 'hard-earned' wealth will be taken away from your children for no other reason than that you die. Ben Chu in the Independent (13.4.2016) explains how his father went to great trouble to transfer ownership of his house to his children, to avoid IHT. To no avail! The estate was not sufficiently large to pay IHT anyway. Ben Chu goes on to explain:

" the economic arguments people use against the tax [IHT] are rather confused. One of the prominent complaints is that it represents a kind of “double taxation”, because people will have acquired assets, such as housing, with income that has already been taxed. But consider who actually is made worse off by inheritance tax – not the deceased, but the recipient. They didn’t earn the money and pay tax on it.    
            Another confusion relates to the issue of inter-generational inequality. Some complain that inheritance tax obstructs the ability of parents to assist their children in getting on the property ladder. Yet transfers of assets between the comfortably off and their children is the single biggest contributor to wealth inequality in the UK. And it is likely to become an even bigger driver in the future, thanks to rising house prices."
The problem of course with inheritance is that the recipients are generally well-off already. There is no trickling down of wealth, only transfers between already rich family members. This is  something that IHT does little to rectify. So instead of IHT, says Chu, quoting an IFS study[1], IHT should be abolished, and a tax on gifts between the living should be implemented, and at a higher rate, too. This is probably an echo of Picketty's call for a world-wide wealth tax to redress the outrageous inequalities in wealth. Gift-taxes, wealth taxes always strike me as airy-fairy idealism, most unlikely to achieve the sort of political backing from the paid-for politicians. Only a distraction?
            You might argue that in a post-LVT world IHT would be even less significant. Although Ben Chu acknowledge that the fear of IHT is caused by rising house prices, he, like so many others have overlooked the real driver, which is land values. If we want to be a bit sanctimonious here we could point out that sitting on a house where the plot value has soared in price is not an example of hard-earned wealth, rather an unearned lucky capture of rent. Since the aim of LVT is eventually to make the price of land close zero, then the value of many estates would shrivel.  
             Instead of advocating an even more unworkable Gift Tax to replace IHT, my idea would be to switch IHT on all domestic properties over to another slice of LVT — I'm calling it LVT2 .  Would that be any better? Replacing a revenue stream of £8 billion SDLT required a ½% rate on LV to give  LVT1. To replace the £4 billion collected in IHT would require  a ¼% rate on LV. Since the vast majority of the middle-classes wealth is in their own homes, (plus their second and third homes!) then this will 'lift out of IHT' the vast majority, leaving only the hyper-rich with IHT to pay. (I'm assuming the same tax-free allowances will still apply to IHT.)
Should we bite the bullet and just do away with IHT altogether? For the small and evadable amount of tax revenue left, total abolition seems the best. (Ok Monsieur Piketty! Come up with a politically feasible tax which just hits the top 1%! No, just as I thought. You wish to remain in your ivory tower of intellectual purity, and not soil your reputation for abstract philosophe.)  
 [In a later posting I will introduce an idea to make LVT even more acceptable to the population at large]     


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