How not to fund an inheritance tax cut

In his Budget the Chancellor is expected to announce a number of changes to pension tax relief. One of these was foreshadowed in the Conservatives’ Manifesto:

Capture

Pause, for a moment, and wonder at how a narrative is formed. We dis- and then re- aggregate from a bundle of tax measures, matching together cut and rise in a way that shapes the story we wish to tell the electorate. But what, here, is that story?

One narrative, that spelled out in the Manifesto, is that high earners should fund the ability of families to pass their home down a generation.

But another, on which the Manifesto is silent, is that the rewards from working are diminished to increase the rewards from not working. Leave aside the numbers: 332,000 people are expected to earn over £150,000 this tax year (Table 2.1). And they will pay more tax to enlarge the after tax pot available to be shared between the beneficiaries of (fewer than) 43,800 estates. So the rewards from the many will accrue to the few. But what is the story you tell the electorate when you diminish the rewards from work in order to enhance those available to be shared between people whose sole claim to them lies in an accident of birth?

If, as has been widely trailed, George Osborne tomorrow goes beyond these signalled changes to pension tax relief I will write more. Michael Johnson of the Centre for Policy Studies has advanced some radical suggestions in this report, including scrapping up-front pension tax relief. And his suggestions are said to be under serious consideration. However, that CPS report all but ignores the central question of whether such a change would encourage people to save more for their retirement or kick the can further down the road? Consider it in that light and it makes for rather less compelling reading.

Where does Labour go now on Tax?

The Tax Journal asked me to write a piece suggesting what Labour’s tax offer might be going forward. It was published last week and is republished here with kind permission.

Shortly after the election I wrote a piece for the New Statesman picking the bones from Labour’s three key manifesto pledges on tax – the 50p rate, the mansion tax and the changes to the non-dom rules. The 50p rate alone, I argued, failed the basic litmus test for a headline tax measure:  fairness. Days later, Andy Burnham and Yvette Cooper, the leadership front-runners, both announced that they supported a 50p rate.

There are different ways to read that short narrative. Perhaps Labour doesn’t know where it is on tax; perhaps I don’t know where Labour is on tax. Or there may be truth to both. But, call it from the rooftops, what follows is my speculation.

Your task in Opposition is to craft through your tax offer a narrative of who you are and what you’re for – and not for. Shading in the detail will await that day when the electorate tells you it cares. If it does. And it’s not exactly like you have a choice – detailing and selling good tax policy is tough in government. In Opposition, denuded of resource and lacking the soft authority of the Treasury crest, it is, well, harder.

Think of the task before Labour in those terms and you’ll see that it’s early in the electoral cycle for it to be contemplating the tax offer it might put to the electorate in 2020. And anyway: a moment or two, please, for the existential throes traditional to a party restored to opposition.

But when it emerges? With a renewed sense of identity? What then? The answer, of course, depends on what it emerges with. But with that hefty proviso, here are three speculations.

Three speculations

The public focus on corporation tax avoidance will have mystified the Tax Journal’s erudite readership. CT receipts amount to a mere £42bn or 8.8% of total tax receipts, and the so-called tax gap for corporation tax is under £4bn. Of course, the tax gap figure doesn’t capture all that one might describe as avoidance but there’s still a compelling argument that we’ve been looking for money in all the wrong places. Even David Bradbury, the OECD’s head of tax policy and statistics, recently observed that an important driver for the BEPS project was (as he politely put it) a ’broader question about political economy’. So will Labour leave alone?

No. The staying power of the corporate tax avoidance story – and on both sides of the political divide (remember the diverted profits tax) – stems from its position in a bigger narrative around inequality and corporate capture. Without some shift in our understanding of the role business plays in society that narrative – for all its distortions, but its truths too – isn’t going away.

Coming changes in the international corporate tax landscape will speedily make a fool of anyone who descends to detailed speculation as to the shape of a manifesto five years hence. Labour’s offer in the corporate tax arena will also be contingent on how Labour chooses, over time, to respond to the allegation that it was anti-business. But there will remain scope for domestic measures – likely outside the tax code – which nudge business to become better fiscal citizens through embracing transparency and improving corporate governance.

Second, if Labour does harbour serious aspirations at government it will have fiscally to bulk up on inheritance tax reform. Twice in the last decade Labour has offered this glass jaw to the Conservatives and twice they have delivered the electoral uppercut of a rise in inheritance tax thresholds. It is reasonable to expect Labour will have raised its policy guard in advance of 2020. Expect or hope.

I’ve written elsewhere about what that reform might look like: cutting the rate to 20% and part funding the cost by removing some of the hugely expensive and economically counterproductive (there is no economically literate case for the continuation of APR which costs £420m per annum) exemptions. Labour might find surprising allies for such a course: the (Thatcherite) Centre for Policy Studies took up this very idea in a paper titled How to cut inheritance tax published earlier this month.

Third, such a reform might go hand in hand with the bold offer of a promise to look at wealth taxes. A narrative of cutting taxes on the income of successful strivers and replacing it with taxes on fallow wealth might well fit the party mood. Certainly such an approach would mediate more easily between the party’s focus on, and the actual data on, inequality. That data shows broadly static levels of income inequality but, as Piketty points out, continued growth in wealth inequality. Over time, of course, even if income inequality remains static wealth inequality grows.

Could that notion catch the imagination of the party? It could. The mansion tax was a first, faltering footstep towards a wealth tax. And it polled well – even in London where its burden fell.

When I worked with Labour to devise its non-dom proposals my instinct was for a quiet mechanic which maximised the tax take. How might you raise the tax paid by mobile individuals in such a way that they might remain, and others remain inclined to come? In anticipating political criticism, it sought cover in technical incidences of design.But the party had other ideas. Rather than leading with the changes as a revenue raiser, it sold them as a matter of basic fairness: why should wealthy foreigners be taxed more lightly than Middle England? And the party was right: sold as a matter of basic fairness the non-dom proposals were hugely popular across the electorate. Of course, the Conservatives are smart enough not to leave a huge open flank in 2020.

I tell this story only to illustrate that we sometimes underestimate the electorate’s demand for bold steps that enhance fairness. A wealth tax might fit that bill.