Inheritance tax cuts? Give me a break.

A recent Ipsos MORI poll showed that the British public still considers the economy to be the most important issue facing the country, and well it might. The Office for National Statistics’ figures showed, as of the end of 2009, that the UK national debt stood at £950.4bn – equivalent to 68.1% of GDP.

Such huge numbers are hard to comprehend so let’s look at this another way. The UK population currently stands around 61.4m so the debt per person is about £15,500. To pay off our national debt this is the amount of money we need, on average, to recoup per person through spending cuts and tax rises. Note per person, not per taxpayer – if you live in a family of five, your family’s share of the national debt is about £77,500. Sorry, if you just spat your tea all over your keyboard.

Seeing the figures presented like this brings home the scale of the problem facing the next government and one would therefore expect some serious proposals on how such a crucial issue would be addressed. A recent study from the IFS, however, concluded that no party had identified anything like the amount of spending cuts that would be required. The Conservatives had identified 17.7%, Labour 13.1% and the Liberal Democrats 25.9%.

For a moment, imagine a large, struggling, multinational corporation is interviewing for a new CFO. There are three candidates. The company is seriously in debt and as part of the interview process the candidates are asked to show how they would go about tackling it. The answer from all three is essentially, “Use fewer paperclips for a start and I’ll tell you the rest after you give me the job”. This wouldn’t work for a business and it is frustrating that we are forced to accept it for the national economy.

Given our huge debt and the fact that no party has proposed what to do about it, it is abundantly clear that any tax cuts or spending increases would need to be considered with the utmost care. This is why I have been continually baffled throughout the campaign, as to why the Conservative party propose raising the inheritance tax threshold for couples from £700,000 to £2,000,000.

To make it clear, a couple who’s estate is valued at less than £700,000 (that’s the vast majority of us) will have no benefit from this tax cut at all – we’d have paid no inheritance tax anyway. Couples who’s estate is valued between £700,000 and £2,000,000 will receive part of the benefit and couples who’s estate is valued at more than £2,000,000 will receive the full benefit. With debt as it is, tax cuts will be few and far between. If you really want to do one, is this really the section of the population that needs it most?

Last Thursday during the third and final party leaders’ debate, Gordon Brown made a rather labored (sorry) attempt to pin Cameron down on this point. His response was:

“Now, let me answer this question directly about inheritance tax. I believe in this country that if you work hard and you save money and you put aside money and you try and pay down your mortgage on a family home, you shouldn’t have to sell that or give it to the taxman when you die. You should be able to pass it on to your children. It’s the most natural human instinct of all, and I’m afraid these other two parties simply don’t understand that.”

To me, this misses some important points. Firstly if you truly believe this then inheritance tax should surely be abolished completely – Cameron isn’t advocating removal of the tax altogether, just changing the threshold.

Secondly the threshold under current government proposals is already very high – no couple leaving behind an estate of less than £700,000 pays a penny. This tax is not hitting the average person on the street – only those lucky enough to have a large inheritance coming to them anyway.

Which brings me on to my next point. Virtually all taxes have positive and negative effects on the economy. National Insurance for example, whilst raising significant revenue, makes it more expensive for employers to employ their staff. The more expensive it is to employ someone the less incentive an employer has for doing it and it therefore leads to lower employment in the economy. You may think this makes it terrible and we should abolish it. Fine, but then you need to explain where the £90bn it raises should come from instead. The fantastic thing about inheritance tax is that the negative effects are really very small. I am yet to meet someone who faced financial hardship, lost their job or had their house repossessed because they had to pay tax on an inheritance of a million pounds.

Inheritance tax isn’t an ‘optional add-on’; an ‘either/or’ that can just be removed with no other impact anywhere else. As I have already mentioned, we are deeply in debt and any tax cut has to be financed from somewhere else. This means, if you don’t pay tax on your estate after you die, you have to pay it by other means when you’re alive. Wouldn’t you rather enjoy lower taxes now, in the knowledge that should you be lucky enough to have become rich later in life, you can pay it from the wealth you leave behind? I would.

All of this leads me to wonder about what possible motives the Conservatives can have for this tax cut. The Daily Mirror would have us believe that it is all a conspiracy to make David Cameron and George Osborne richer. I fear the truth is much simpler and far more worrying – Cameron and Osborne just don’t understand economics.

RedEaredRabbit