Society
Giving nothing away
Published 11 October 2007
Peter Wilby on Labour's odd support for inheritance tax
It happened across the Atlantic, and now it is happening here. Estate tax (equivalent to UK inheritance tax) affected only 2 per cent of the population, was more than a century old and seemed to accord with American traditions that deplore unearned wealth and privilege.
Yet a campaign to abolish it became almost irresistible. President Bush, to wide acclaim, repealed it in 2001.
Here, the abolitionist campaign drew support from the Observer as well as the Express and Telegraph, from the former Labour minister Stephen Byers as well as Tory MPs. When the shadow chancellor, George Osborne, promised to raise the inheritance tax threshold from £300,000 to £1m, it caused, according to opinion pollsters, a sharp swing to the Tories, particularly in marginal seats. Now, Alistair Darling, the Chancellor, has announced that married and civil partnership couples can claim double the £300,000 exemption.
This will cost the Treasury less than you might think, because many couples, through a simple legal device, were already claiming double exemption. The main losers will probably be high-street solicitors, who were getting fees of several hundred pounds a time for drawing up the necessary documents. But opponents of the tax can hardly claim Darling's concession is illusory, as they rarely mentioned the loophole. Rather, the bedrock of their case was that house prices have risen so much that the tax is hitting ordinary families.
How did we get to this point, where a Labour government is easing a tax on the relatively wealthy and encouraging them to hand down their advantages to the next generation? How did abolition become so popular?
The abolitionist campaign, here and in the US, made headway for two main reasons. First, it portrayed inheritance tax as unfair and immoral and called it "death tax". Crucially, the focus switched from beneficiaries scooping an unearned windfall to individuals who had worked and saved throughout their lives and were then pursued for tax beyond the grave. Amazingly, the US campaign got high proportions of the disadvantaged, including African Americans, on board. The tax was particularly unfair to them, ran the argument, because they had to struggle so hard to accumulate wealth and, without an inheritance, their children might slip back into poverty. Here, too, the abolitionists got backing from lower-income groups.
Second, the opponents of inheritance tax used personalised narrative, rather than hard figures and logic. This was easy in the US, where there were no significant exemptions for family firms and farms; stories abounded of children who had worked in a family business all their lives being forced to sell up and put themselves out of work. Here, a family business gets 100 per cent exemption - which explains the high number of family businesses and, according to some, our problem of low productivity.
So British narratives highlighted, for example, children who might be turfed out of the family nest if both parents were to die in an accident, or elderly siblings who live together and fear that, if one dies, the survivor will lose the home.
What Labour couldn't do was to sit on its hands and defend the status quo. That was the mistake of the US Democrats, who waited until the US campaign was too powerful to stop. Ingeniously, Darling has rescued the government by appearing to give away what many people were already taking. But Labour long ago missed opportunities to relaunch and repackage the tax, perhaps thereby raising more revenue. For example, as I proposed here on 28 May, it could have increased the tax - by closing loopholes, freezing exemption levels and introducing a 50 per cent rate for the most valuable estates - and used the money to finance long-term personal care for the elderly. Or it could have adopted a Fabian Society proposal to tax the beneficiaries of estates, treating bequests (above a certain level) as any other income would be treated. This would have encouraged people to spread their wealth, favouring family members who are relatively impecunious.
The past fortnight should be a warning to the government: on tax, it needs to keep a step ahead, and not allow the right to get on the front foot. Not for the first time, a Labour government has been reduced to mounting a defensive operation to protect what ought to be one of the central principles of social democracy.
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