According to the Times, axing inheritance tax is back on the Tory agenda. It’s a tactic – to boost support in affluent seats and wrong-foot Labour – the party loves to play. In 2007, George Osborne, the then opposition chancellor, pledged to raise the inheritance tax threshold to £1m in a move which helped persuade the Prime Minister, Gordon Brown, to abandon a possible early general election. The pledge was repeated in the 2010 election campaign and duly enacted in 2015.
Britain is an asset rich country. Despite Britain’s dismal economic record, levels of personal wealth have surged. National wealth – a mix of property, business, financial and state assets – stands at almost seven times the size of the economy, up from three times in the 1970s. A towering nine-tenths of this asset pool is privately owned. Much of this wealth surge has been unearned, the product of state-driven asset inflation and widespread corporate extraction. John Stuart Mill called it ‘grow[ing] rich in our sleep’.
Despite this, taxes on wealth (on dividends, capital gains and inheritance) raise less than 4% of all state revenue, while only 4% of UK deaths last year resulted in an inheritance tax charge. Taxing wealth so lightly makes no economic or social sense.
Axing inheritance tax would exacerbate wealth inequality
While Labour once championed the idea of sharing wealth more equally, its current instinct is one of caution. Yet, the question of wealth and how it’s shared is a central determinant of life chances and social and economic resilience. Most of the wealth surge of recent decades has been captured by the few, reversing an earlier long-term trend towards a narrowing wealth gap. Despite a century of democracy, the top tenth of Britons hold nearly a half of private wealth, while the poorest half’s share has never been more than a tenth.
“We can have democracy in this country,” Justice of the American Supreme Court Louis Brandeis declared a century ago, “or we can have great wealth concentrated in the hands of a few, but we can’t have both.”
With half the population missing out, Britain’s system of wealth accumulation and how it is distributed badly fails Brandeis’ test. Wealth already enjoys massive and unmerited tax breaks. Most forms of wealth, such as capital gains on first homes, are exempt from tax. Ending inheritance tax would extend this tax break to those who need it least. Making an already disproportionate tax system even more regressive would be both unfair and, by losing the state around £7bn in revenue, bad economics.
Faced with our regressive tax system, Labour must not be timid
Mrs Thatcher’s promise of a private property-owning democracy for all has been an abject failure. As rates of home ownership have shrunk from a peak of 71%, the homeowning dream has turned sour. The number of first-time buyers today is less than half its mid-1990s rate. The public’s ownership of corporate Britain – worth some £2.2trn – has collapsed from 56% in the 1960s to 12% today. More than a half of shares in the nation’s quoted companies are owned overseas (up from 8% 60 years ago), mostly by giant US asset management companies.
Labour cannot respond to this with timidity. The case for a more progressive tax system that raises more, not less, revenue from Britain’s private asset pool is overwhelming. The current inheritance tax system – which needs reform to tackle avoidance – is a key instrument for weakening the constant reproduction of generational privilege. As the patron saint of economics, Adam Smith, argued three centuries ago: “A power to dispose of estates forever is manifestly absurd.”
Despite question marks about the source and wider impact of today’s towering and lowly-taxed personal fortunes, there is only a muted debate on the way lavishly paid and over-powered corporate leaders and financiers mostly get a free ride from government. Today’s business elite, free of the ‘deserved’/’undeserved’ distinction applied to benefit claimants, enjoys a license to secure an inflated share of national wealth. It’s time to rethink the long emphasis on the virtues of unrestrained private over social property ownership. It’s a model that has delivered a remarkable bonanza for the few but largely at the expense of everyone else.
Labour must make the case for taxes on wealth to be raised
Today’s tearaway fortunes are less the product of a dynamic leap forward than of the accretion of economic power, monopolisation and elite control over scarce resources. Modern corporate practice is too often associated with unproductive activity geared to personal enrichment. Easy money is to be had from corporate extraction. Many large companies have been turned into cash cows for a financial elite through anti-competitive devices, the rigging of financial markets. Keir Starmer’s call for more wealth creation and enterprise will fail unless this extraction is tackled.
Labour should take the lead and make the case that taxes on wealth need to be raised. Such a strategy should include developing new forms of ‘people’s capital’ as a way of narrowing what the economist Roy Harrod called in the 1950s “the unbridgeable gulf” between “oligarchic and democratic wealth”. Such an approach would distribute primary economic gains more equally, strengthen democracy, the economy and wider society and re-allocate resources towards essential needs.